PagSeguro (PAGS +5.15%) surged in Friday trading after its Thursday, Nov. 11 earnings report. The stock rose 4% as the report topped revenue and earnings estimates.
However, the stock had fallen in late September and October over concerns that a proposed rule change could curtail one of its primary revenue sources. Now, investors have to decide whether the post-earnings surge in the stock is a temporary bump or whether it points to a resumption of growth for the fintech stock.
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PagSeguro's Q3 earnings
For the third quarter, PagSeguro reported revenue of almost 2.8 billion reals ($513 million), beating consensus Wall Street estimates of $483 million. This represented a 56% increase from year-ago levels as consolidated payment volume of 126 billion reals surged 86% over the same period.
From that volume, the company generated non-GAAP (adjusted) net income of 419 million reals ($77 million). This amounted to 1.26 reals ($0.23) per diluted share, ahead of the analyst consensus of $0.19 per share. That profit increased by 26% as a massive surge in operating costs weighed on profitability.
This report and the subsequent stock price increase are welcome news for a stock that has fallen by nearly 40% this year. The drop began in late September when the Brazilian central bank proposed capping interchange fees on prepaid cards to 0.5%. While the company did not outline the percentage of revenue derived from prepaid cards, one analyst estimated a 4% reduction in revenue if the central bank enacts this rule.
This recent drop has taken the company's P/E ratio down to 53. While it has not suffered as much as StoneCo (STNE +2.62%), which sells for 40 times earnings, it has fallen from a 90 P/E ratio earlier in the year.
The state of PagSeguro
Some investors may also not understand PagSeguro's role in Brazilian fintech. At first glance, it may appear similar to StoneCo or MercadoLibre's (MELI +1.42%) fintech business, Mercado Pago. However, PagSeguro appears to have become the Latin American version of PayPal Holdings (PYPL 0.51%). Like PayPal, it enables small enterprises to send and receive cash online, either through dozens of bank relationships or via its own bank-less infrastructure. That makes it somewhat different from StoneCo, which primarily serves larger enterprises, and from PayPal which requires a bank account.
Moreover, Brazil remains a cash-based society where a large percentage of the population holds neither a bank account nor a credit card. This limits the use of PayPal in Brazil, opening up a large portion of the market to companies like PagSeguro to provide fintech services.
Also, according to Market Data Forecast, the Latin American fintech market has grown from less than $50 million in 2015 to $2.1 billion in 2021. This places PagSeguro in the middle of a fast-growing market.
Still, the proposed fee cap by Brazil's central bank is not the only challenge. On Oct. 27, the FBI raided the Florida office of PAX Global, the Chinese manufacturer of PagSeguro's and StoneCo's point-of-sale (POS) terminals. This crisis prompted Viceroy Research to urge investors to short both PagSeguro and StoneCo. Nonetheless, PagSeguro's post-earnings bump has resulted in the stock recovering almost all of the losses suffered after Viceroy made that call.
Should I consider PagSeguro?
PagSeguro continues to face challenges, and both network security and the regulatory environment will remain ongoing concerns. However, with the stock down significantly, PagSeguro's challenges may have offered investors a huge long-term opportunity. Since the latest earnings numbers attest to the rising need and fast-growing demand for fintech services in Brazil, the company's current challenges may slow PagSeguro, but they probably will not stop its upward long-term growth trajectory.
