PagSeguro (NYSE: PAGS) is a Brazilian retail point of service (POS) provider, similar to US companies such as Squarespace. Since its IPO in 2018, PAGS has faced challenges due to premium valuations and macroeconomic factors in both Brazil and the US market. As a result, growth investors have shied away from investing in homegrown companies without a track record of profitability. Despite being seen as a growth stock, PAGS is a disruptive, fast-growing, and low-cost total parts business that has already disrupted the Brazilian payments sector.
Brazil has a dynamic payments industry with high take rates charged by incumbent platforms, namely Cielo, Rede, and Getnet. Meanwhile, PAGS and StoneCo, another payment disruption company, had take rates of around 2.5%. PAGS’ strategy targeted micro-merchants who had no payment processor due to the high prices of incumbents. This enabled PAGS to dominate the segment, with a market share of 10.9% in Q3 2022, up from 7.2% in Q4 2019.
PAGS has been growing at a CAGR of 45% over the past four years, with expected growth of 47% year-on-year in 2022. The company also developed PagBank, a banking and lending platform that is less profitable but has the potential to contribute significantly to the bottom line. With a deposit growth rate of 40%, PagBank is expected to reach profitability within three years.
Despite PagBank being a drag on revenue, PAGS’ payment business itself is undervalued. Assigning a reasonable multiple of 12x would make PAGS 100% more valuable. However, there are risks involved, such as the development of a POS payment ecosystem to compete with incumbents and building out the software suite to provide ancillary services to merchants.
Overall, PAGS is a promising investment given its growth rates, disruptive business model, and potential to dominate the Brazilian payments sector. With the right strategy and management, the company can effectively compete with incumbents and become a significant player in the industry.