PagSeguro's New Products Turn Guggenheim Bullish

PagSeguro Digital Ltd PAGS announced a major product expansion Tuesday in financial services.

It's a sign of the company’s rapid transformation into a full-fledged acquiring and financial services platform and significantly boosts PagSeguro's long-term top- and bottom-line prospects, according to Guggenheim Securities.

The Analyst

Jeff Cantwell upgraded PagSeguro Digital from Neutral to Buy and set a $33 price target. 

The Thesis

The new PagSeguro app — PagBank — will begin to offer cash cards and credit cards to merchants and consumers, Cantwell said in the Thursday upgrade note. (See his track record here.) 

The strategy has evolved in the right direction, since the new services are “highly complementary” with PagSeguro’s existing platform, and the move significantly increases the company’s TAM, the analyst said. 

Cantwell quoted data from Brazil’s Central Bank that shows the country’s TAM for banking and cards is $45 billion— and for credit cards, $282 billion.

The product expansion creates a potential revenue opportunity for PagSeguro that is around 14 times greater than the company would have if it continued as only a merchant acquirer, the analyst said. 

PagSeguro's cash card is the primary product among the ones announced this week, Cantwell said. The card could see high adoption in Brazil, given PagSeguro’s strong brand recognition and management’s focus on a largely “greenfield opportunity: the underbanked," he said. 

Guggenheim raised its EPS estimates for 2019 from 4.62 Brazilian reals ($1.15) to 4.67 reals ($1.16); and from 5.93 reals ($1.48) to 6.05 reals ($1.51) for 2020. 

Price Action

PagSeguro shares were trading up more than 8 percent at $30.41 at the time of publication Thursday. 

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