The shares of this tech company were recently upgraded to ‘Positive’ by Susquehanna, who cited the company’s ‘hypergrowth’ and raised its price target to $41.
PagSeguro Digital Ltd. (PAGS)
From Cabot Emerging Markets Investor
In the past couple of decades, U.S. shoppers have noticed that traditional cash registers are going the way of the dinosaurs in favor of credit card modems. And in just the past five years, give or take, more and more merchants have been using a little dongle on their cellphones or tablets to swipe cards as Square powered a revolution in point-of-sale (POS) payment options.
That payment revolution has gone international, with Paypal fighting it out in Brazil with local vendors like MercadoPago (which is MercadoLibre’s payment arm) in the online arena. Square is also aiming for a piece of the international payment pie, targeting the dedicated device market by virtually giving away its dongles and making its money primarily from transaction fees.
But an upstart Brazilian company, PagSeguro Digital Ltd. (PAGS) (which translates roughly to “secure pay”), has been quietly and quickly gaining an advantage on both its international and Brazilian competition, producing wildly rapid growth in the process.
PagSeguro is a creation of Brazilian media group Universo Online, which is in turn owned by Grupo Filha, a media conglomerate that owns the top newspaper in Brazil. Universo is also ranked as the biggest internet portal in Brazil, with 50 million unique visitors and almost seven billion-page views per month.
PagSeguro was formed in 2006 to provide a financial services platform and grew quickly, taking over BrPay, an electronic payment company, soon after. The company had more than 12 million registered users by 2010 and grew further by acquiring a fraud prevention company and partnering with Nokia on a unique Near Field Communication technology that allows two cell phones to communicate securely when in proximity. And in 2013, PagSeguro launched its MINI credit- and debit-card reader, a hand-held device that uses wi-fi.
The target customer for the MINI system is a small company with no website or e-commerce presence. PagSeguro’s technology and alliances with banks give buyers and sellers a number of options for completing sales, and (importantly) the company guarantees the validity of sales and settles disputes.
PagSeguro’s revenue growth has been meteoric, with double-digit growth from Q2 2015 through Q3 2016 and triple-digit growth in the five subsequent quarters. Earnings growth has been at triple-digit rates since Q2 2016 with the most recent quarters showing 367% (Q3 2017) and 350% (in Q4) bottom line gains. (Fourth quarter results were reported on March 9.) After-tax profit margins have been growing quickly and have topped 20% in the two most-recent quarters. And the good times should continue to roll—analysts are estimating 2018 earnings growth at 111% and 41% in 2019.
PAGS is still just a baby, having come public on January 24 in an IPO that pulled in $2.3 billion. The stock hit 30 a couple of days after its IPO, then dipped to 27 on February 6, which is about as much of a post-IPO droop as we’ve seen so far.
The stock ripped to near 38 on March 12, but was back below 33—and right on its 25-day moving average—on Monday before bouncing again. A stock this young can be expected to exhibit considerable volatility, but there’s no mistaking investors’ enthusiasm for this strong story.
The Big Idea here is that Brazil, while it’s not as big a market as China, is still early in its integration of online purchases and payments into its economy. PagSeguro offers smaller businesses a secure way to make sales and get payments. And it’s likely that as the company grows, it will begin to offer bookkeeping, data-mining and financing services in imitation of Square’s evolution.
The word “disruptive” gets tossed around a lot these days, applied to companies that have come up with a marginal improvement to existing products or services. But PagSeguro’s business proposition is proving genuinely disruptive to existing Brazilian payment practices. And it will both promote and benefit from the further rollout of online commerce in that country. We’re buying a half-sized position for the portfolio tomorrow, and will look to average up should the stock get off to a good start and our Emerging Markets Timer flashes a green light. BUY A HALF.
Paul Goodwin, Cabot Emerging Markets Investor, www.cabotwealth.com, 978-745-5532, March 22, 2018