This Fintech Stock is a Winner

Brit Ryle

Posted March 11, 2024

Brazilian online bank PagSeguro (NASDAQ: PAGS) looks like a winner. 

Banks are typically the most sound way to invest in emerging economies. It’s a pretty basic formula: as GDP rises and more people join the middle class, all aspects of banking will rise too – deposit accounts, lending, credit cards, payment processing, etc.

As emerging economies go, Brazil’s is pretty stable. Massive oil reserves, world-leading agriculture, and the second-largest population (215 million) in the western hemisphere. Brazil has one of the highest urbanization rates in the world. 

This helps explain why Warren Buffett owns a stake in two different Brazilian banks – Nu Holdings (NYSE: NU) and StoneCo (NASDAQ: STNE). Nu Holdings is more of a traditional deposit account-oriented bank – debit cards, lending, brokerage services, and insurance. 

StoneCo, on the other hand, is one of the new breed of fintech companies that focuses on digital payments, e-commerce, and Point of Sale (POS) support for small businesses. 

And if you look around, there are several more ways to invest in Brazils’ growing financial needs. Of course, e-commerce giant MercadoLibre (NASDAQ: MELI) has a presence in Brazil. You’ll also find XP (NYSE: XP) and Uruguay’s DLocal (NYSE: DLO)…

I think PagSeguro will be the best-performing stock among all of them. And I’ll tell you why…

First off, PAGS has already outperformed all its e-commerce/fintech competitors since this rally started in November: 

Maybe it’s cheating, but I’ll bet on the lead horse. 

Second, PagSeguro does not offer unsecured loans. Unsecured loans can be a great way to boost revenue unless you don’t get paid back. Like StoneCo, which lost hundreds of millions on bad loans in 2022. 

PAGS doesn’t need to take on risk to grow. It has 6.5 million customers, giving it nearly 15% share of the market. In its last quarterly report, Total Payment Volume was up 21% over the previous year. GAAP net income was up 20%, too.

Lastly, the company has cash. Apparently, there wasn’t an earnings conference call after the company reported full-year 2023 earnings reported on February 29, 2024. BUT – for the previous quarter reported on November 17, 2023, PagSeguro reported $2.3 billion in net cash. Now, we’re talking about a company that carries a $4.3 billion market valuation. And it has more than half its total valuation in cash. That’s good…

When an analyst asked if they were going to pay a dividend or buyback shares with all that cash, the CEO said that a new share buyback program was already being discussed.

As of November 2023, PagSeguro had bought back around 9 million shares from its $300 million buyback program that started in 2018. Another buyback program is likely to be announced soon.

With a forward P/E of 11 PAGS is cheap. Analysts estimate 20% earnings growth over the next year. Throw in a new share buyback program, it’s a good bet this stock goes higher.

Briton Ryle
Chief Investment Strategist
Pro Trader Today