Why did PagSeguro suffer a crater today? the motley fool

What happened

Brazilian Fintech Stocks PagSegura Digital (PAGES -23.78%) plunged today, down 19.2% at 12:52 p.m. m. ET

PagSeguro reported earnings this morning, and although the company continued to show solid top-line growth, its margins have compressed quite a bit. That’s because Brazil’s economy has seen really bad inflation and skyrocketing short-term rates, which affects PagSeguro’s cost base. With investors now focusing more on profitability and pricing power as interest rates rise, the result was not what they expected.

And that

At first glance, PagSeguro’s results did not seem bad at all. After all, revenue was up 66% (in Brazilian reais) thanks to total payment volume growth of 60%. Additionally, the payment processor has been steadily increasing its PagBank offering, which accepts deposits and lends money to both its business customers and consumers. Deposits increased 124% and loans 166% during the first quarter. PagSeguro’s market share in the Brazilian payment space even increased from 8.9% to 10.6% over the past year.

So what was the problem? To a large extent, it is about interest rates or financing costs. If you think the US has an inflation and interest rate problem, then you should check out Brazil! Its key central bank rate, or short-term deposit rate, has risen from a low of 2% during the pandemic to a whopping 12.75% today, with most of that increase occurring since the last summer.

As a result, PagSeguro’s financial costs soared 1,300% over the past year, depressing profits. Total non-GAAP (adjusted) net income only increased 14%, with adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the payments segment only growing 20%, and PagBank actually reported a worsening of EBITDA losses.

While still profitable overall, the margin squeeze seems to show that PagSeguro cannot pass on all of its higher costs to its merchants, so it may lack pricing power to offset inflation.

Now what

Although this is an ugly day for PagSeguro, it may be an opportunity for investors. After today’s drop, the stock is only trading about 13 times this year’s earnings estimates. While the macroeconomic environment is certainly bleak now, it may not always be so.

Still, if you invest, PagSeguro belongs to the high-risk and highest-potential part of your portfolio. Brazilian inflation relative to the US dollar could affect the value of PagSeguro earnings for foreign investors; furthermore, Brazil has a consequential presidential election later this year, between the current far-right administration and its leftist rival. The result could have unpredictable consequences for companies in Brazil.

PagSeguro belongs on your watch list after its 67% drop in the last 12 months. However, investors need to understand the Brazilian economic and political climate before diving in.

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