What happened
Shares of Brazilian fintech PagSeguro Digital (PAGS -1.39%) rose Wednesday by as much as 12.4% before settling into a 7% gain as of 2 p.m. ET.
One can chalk up PagSeguro's gains to better-than-expected earnings, which were released on Tuesday afternoon. There was also likely a low bar for the company to clear, as the stock had been beaten down severely over the past six months with Brazil's economy experiencing high inflation and a lack of growth. Despite that, PagSeguro posted solid revenue gains, albeit with muted profit growth as costs rose.
So what
In the fourth quarter, PagSeguro saw exploding growth with total payments volume up 76.4% and revenue up 55%, beating analyst expectations. However, remember that since Brazil is seeing hyperinflation, and PagSeguro makes revenue as a percentage of every payment, its payments business will benefit from rising prices.
On the other hand, PagSeguro is also seeing a huge rise in costs, especially in its lending business. The company's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) rose only 3.4% in the quarter, far lower than the eye-opening revenue figure.
Aside from payment take rates, PagSeguro makes working-capital loans to its merchants, and credit card loans to its customers at PagBank. But to fund those loans, it relies on both deposits and outside funding. Not only is PagSeguro having to invest in increased employees and infrastructure, but its cost of funding those loans is also rising faster than it has been able to hike interest rates to customers.
Image source: Getty Images.
Now what
Given the interest-rate shock Brazil has seen, with its central bank's base rate rising nearly 4,000% over 2021 alone, PagSeguro has been restrained in raising prices to its clients so as not to shock them. That has resulted in strong customer growth and market share gains. The company's total active merchants grew 9.4%, and PagBank users grew 66.2% year over year.
But management is also now beginning to raise rates for both loans and take rates. That could help alleviate some of the profit squeeze. PagSeguro projects about 11.5% year-over-year adjusted (non-GAAP) profit growth next quarter, which would be an improvement over the net profit decline seen last quarter.
After today's performance, PagSeguro trades at roughly 18.6 times this year's earnings estimates. That might seem like a bargain for a company growing its top line by more than 50%, but keep in mind that growth could decelerate, and inflation in Brazil is a big problem. That not only affects PagSeguro's profitability, which is growing slower than revenue, but a weakening real versus the dollar would also pressure the value of PagSeguro's stock for U.S. investors.
Still, this report was promising, showing PagSeguro executing well versus its legacy banking peers in a large market. For those looking at beaten-down international stocks these days, it's a name to put on your buy list.
