PagSeguro Stock: Digital Banking On The Rise (NYSE:PAGS)

As the 5th largest merchant acquirer in Brazil, PagSeguro Digital Ltd. (NYSE:PAGS) diversified into digital banking in 2019 with the launch of PagBank. It experienced robust client and transaction volume growth and had become the second-largest digital banking app in Brazil. Thus, we analyzed its revenue growth opportunity based on its client growth and transaction volume growth to determine the potential revenue contribution to the company.

Client Growth

PagBank Clients	2020	2021	2022F	2023F	2024F	2025F	2026F
PagBank Active Clients	7.9	13.1	18.3	23.5	28.7	33.9	39.1
Growth %		65.8%	39.7%	28.4%	22.1%	18.1%	15.3%

Source: PagSeguro, Khaveen Investments

Since its launch in 2019, PagBank grew its user base to become the second-largest digital banking behind Nubank with 13.1 mln active users at a 65.8% growth rate YoY in 2021. In Q1 2022, the company’s active user base grew by 57% YoY to 14.3 mln. According to Similarweb, PagBank was ranked as the second top digital banking app (excluding incumbent financial institutions) in terms of usage ranking behind Nubank. Based on Sensor Tower, PagBank was tied with C6 and Inter with 1 mln estimated monthly downloads, behind Nubank at 3 mln downloads on Google Play. As of March 2022, based on its annual report, its app had the highest average reviews of 4.8 stars compared to between 3.6 to 4.7 stars for its competitors.

According to a study by Instituto Locomotiva, the unbanked population in Brazil was 34 mln representing 21% of the population. Additionally, an average of 315,000 digital accounts opened per day in 2021 based on idwall. Moreover, it found that 60% of respondents had at least one digital account and 64% also had traditional bank accounts but 75.8% indicated that they were willing to switch to a digital one.

Overall, as the second-largest digital banking app by users in Brazil, we believe PagBank’s high monthly app downloads and highest average reviews support its growth opportunity to continue catering to the vast population in its home market and forecasted its active client growth through 2026 based on its average incremental client growth of 5.2 mln per year in 2021 for a 5-year average growth rate of 24.7%.

Transaction Volume Growth

In addition to its robust client growth, the company also had high transaction volume growth at 191.6% in 2021. This is driven by its growth from Total Payment Volume (TPV) per active user by 75.8% YoY to BRL15,580. Previously in 2021, the company highlighted its expansion of the PagBank ecosystem with the launch of additional features and partnerships.

We have launched additional features to enhance our ecosystems such as investments, insurance, marketplace and other partnerships. We became a complete bank offering the best UX for consumers, micro-merchants and SMBs in Brazil. – Ricardo Dutra, Co-Chief Executive Officer

For example, the company had launched its PagInvest service within its app which boasts 1.3 mln clients in 2021 and experienced an average inflow per client growth of 87% YoY. Furthermore, the company had entered into partnerships with merchants to provide rewards and incentives such as cash backs to PagBank users who pay through the app.

PagBank Clients	2020	2021	2022F	2023F	2024F	2025F	2026F
PagBank TPV per user	8,861	15,580	24,367	35,674	48,659	61,505	71,592
Growth %		75.8%	56.4%	46.4%	36.4%	26.4%	16.4%
PagBank TPV (BRL bln)	70	204.1	446	838	1,397	2,085	2,799
Growth %		191.6%	118.5%	88.0%	66.6%	49.3%	34.3%

Source: PagSeguro, Khaveen Investments

All in all, we believe the company’s focus to expand its PagBank features such as PagInvest and partnerships with merchants could support its transaction volume through higher consumer engagement. Thus, we forecasted its TPV per user growth based on the neo banking transaction volumes forecasts of 56.4% in 2022 according to Statista but tapering down by 10% per year as a conservative estimate, resulting in a total transaction volume average growth rate forecast of 71.3%.

Take Rate

Although the company’s PagBank transaction volume grew by 192% YoY in 2021, its PagBank revenue growth was only 50% as its net take rate had decreased from 0.9% to 0.44% based on our calculation (revenue as % of TPV). According to management from its earnings briefing, this was attributed to the growth of its consumer client base which had lower monetization than its merchant clients.

The cash-in takes a little bit more. They don’t have the automatic cash-in the same way you have for the merchants. They don’t have the same amount of cash-in that we see in the merchant, so that’s why monetization takes a while. – Ricardo Dutra, Co-Chief Executive Officer

PagBank Clients	2020	2021	2022F	2023F	2024F	2025F	2026F
PagBank TPV (BRL bln)	70	204.1	446	838	1,397	2,085	2,799
Growth %		191.6%	118.5%	88.0%	66.6%	49.3%	34.3%
Take Rate	0.9%	0.44%	0.44%	0.76%	1.31%	2.25%	3.88%
PagBank Revenue (BRL bln)	0.6	0.9	2.0	6.4	18.3	46.9	108.5
Growth %		50.0%	118.5%	223.7%	186.8%	157.1%	131.2%

Source: PagSeguro, Khaveen Investments

Additionally, in Q1 2022 its take rate further declined to 0.42% which management attributed to the “macro scenario”. However, management also highlighted its focus on expanding its revenue streams with the launch of new secured loan products in H2 2022. For comparison, market leader Nubank, with more than twice its number of user accounts, had a take rate (revenue as % of purchase volumes) of 3.9% in 2021. Assuming PagBank’s take rate increases to 3.9%, this represents a revenue opportunity of BRL17.3 bln based on our 2022 forecasted TPV. As the company focuses on monetization of the app, we assumed its take rate to increase to 3.9% in 2026 based on Nubank’s take rate at a CAGR of 72.2% from 2023 for total average revenue growth of 163.5%.

Overall, we expect its PagBank segment’s revenue growth to be driven by its take rate as the company introduces new products to increase the monetization of its transaction volumes and projected its average revenue growth of 163.5% assuming its take rate reaches 3.9% based on Nubank by 2026.

Risk: Increasing Competition

According to the IDB, the number of fintech platforms on mobile apps that provides digital banking services in Latin America increased by 114% to 60 in 2021. We believe this highlights the increasing competitive rivalry which could pose a threat to the company’s growth prospects.

Verdict

Revenue	2020	2021	2022F	2023F	2024F	2025F	2026F
PagSeguro	6.1	9.4	12.4	16.4	21.7	28.6	37.8
Growth %	8.9%	54.1%	32.1%	32.1%	32.1%	32.1%	32.1%
PagBank	0.6	0.9	2.0	6.4	18.3	46.9	108.5
Growth %	100.0%	50.0%	118.5%	223.7%	186.8%	157.1%	131.2%
Other	0.1	0.1	0.1	0.1	0.1	0.1	0.1
Growth %		0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
Total	6.8	10.4	14.5	22.9	40.0	75.7	146.5
Growth %		52.9%	39.3%	57.9%	75.0%	89.0%	93.5%

Source: PagSeguro, Khaveen Investments

All in all, we expect the company’s PagBank segment growth to be driven by its robust client base growth at a forecasted average of 24.7% through 2026 as one of the top downloaded digital banking app in Brazil and transaction volume growth at an average of 71.3% with the expansion of its services and features on its app. Additionally, assuming its take rate increases to 3.9% by 2026, we projected its total average revenue growth of 163.5%, higher than its PagSeguro segment (32.1%) and we expect the segment’s revenue contribution to growing above 50% by 2025. Overall, the company has an analyst consensus price target of $26.47, an upside of 113%.