On Tuesday, UBS took a new stance on PagSeguro Digital Ltd. (NYSE:PAGS) stock, reducing its price target from $15.50 to $14.00, while keeping a Buy rating on the stock. The adjustment follows the release of the company's second quarter financial results, which introduced a degree of uncertainty into the investment outlook for PagSeguro. Despite a significant drop in the stock price of approximately 40% since the announcement of the results, UBS sees reasons to maintain a positive view on the stock.
According to the firm, PagSeguro's total payment volume (TPV) showed an acceleration, but this was counterbalanced by a notable decline in take rates and a deceleration in gross profit growth. Additionally, operating leverage was low, casting doubts on future performance. The LMEC segment, which is expected to continue its rapid expansion, is a particular area of concern due to its impact on profitability.
Despite these challenges, UBS believes there are compelling reasons to continue supporting PagSeguro. The company's gross profit is still on an upward trend, which suggests that even though LMECs are less profitable, they contribute positively to earnings. PagSeguro has also demonstrated the capability to manage costs effectively during tough economic periods. Furthermore, UBS anticipates that the recent increase in policy rates will be temporary and that there is potential for funding cost improvements, which could reduce the yield on deposits.
In terms of valuation, PagSeguro is trading at a favorable price, according to UBS. The firm points out that the stock is currently trading at approximately 7 times its projected GAAP earnings for 2025, which is nearly 20% below its two-year average. Additionally, the price-to-book value (PBV) for 2025 is estimated at 0.9 times, making it the cheapest among global payment peers. These valuation metrics contribute to UBS's continued endorsement of PagSeguro as a Buy, despite the recent price target adjustment.
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