After Strong Q2, PagSeguro Stock Still Looks Cheap

Core Viewpoint - Latin American fintechs are gaining investor interest due to their growth potential and attractive valuations, with PagSeguro being highlighted as a notable example despite its risks compared to higher-quality peers like Nu Holdings [1] Financial Performance - PagSeguro reported Q2 revenue of R$4.6 billion, a 19% year-over-year increase, surpassing estimates of R$4.36 billion [2] - The company added 500,000 active clients since Q1 2024, achieving all-time highs in total deposits (R$34.2 billion), TPV (R$124 billion), and Cash-in (R$76.4 billion) [2] - TPV increased by 34% year-over-year, despite a 5% reduction in active merchants, indicating a 42% increase in TPV per active merchant [2][3][4] Credit Portfolio - The credit portfolio reached R$2.9 billion, with 69% in Payroll Loans, 24% in Credit Cards, and 7% in Working Capital, while the NPL90 decreased to 3.2% [6] - The growth in operational indicators supports higher TPV, Cash-in, and credit portfolio, leading to reduced funding costs and increased net income [6] Earnings and Guidance - Net Income (GAAP) for Q2 was R$504 million, a 31% increase from Q2 2023, with diluted EPS at R$1.56, both representing all-time highs [7] - The 2024 guidance was revised upwards, expecting TPV between R$480 billion and R$505 billion and Net Income between R$2.1 billion and R$2.2 billion [7][8] Valuation - PagSeguro's forward P/E ratio is at 11.2x, significantly lower than its 5-year average of 23.6x, indicating an attractive valuation despite a 60% increase in share price over the last year [11][12] - The company is expected to trade between 11x and 15x earnings, reflecting the competitive environment and associated risks [18] Future Outlook - The medium-term outlook remains positive, with revenue expected to grow by 9% in 2025 and 2026, and EPS projected to increase by 16% and 12% respectively [8] - A DCF model suggests a fair price of $1.81 for PAGS stocks, indicating an 8% undervaluation based on conservative growth assumptions [19][20] Conclusion - PagSeguro presents an interesting investment opportunity with strong operational indicators and an attractive valuation, but it is essential to monitor external risks such as macroeconomic conditions and competition [21]