Description

SUMMARY OVERVIEW

The payments sector is benefitting from numerous secular tailwinds, including the cash to card conversion, ecommerce growth and consumer adoption of digital financial services, as well as a cyclical recovery of consumer spending from COVID. While the market has generously re-rated many payments/fintech stocks that are on the right side of digital acceleration in 2020 – Square, Stone, Paypal, Adyen and Afterpay, to name a few – PAGS hasn’t benefitted to nearly the same degree.

Looking forward, I believe the PAGS secular and recovery story is as attractive as the aforementioned list. Specifically, I believe PAGS is well-positioned to see durable 35-40%+ growth in the near-term and 25%+ growth longer-term driven by a) penetration of the micro-merchant base in Brazil driving compounded growth well in excess of GDP, b) continued cash to card conversion and e-commerce penetration from current low levels compared to the rest of the world and c) the growth of PagBank, a digital neobank, which will solidify its merchant acquiring business and accrete value on incremental consumer spending that is currently not reflected in shares.

INVESTMENT HIGHLIGHTS / RISKS

Investment Highligh

1. PAGS is a leading Brazilian fintech player democratizing payment acceptance and digital banking, growing 35%+ with ~25%+ net margins

2. PAGS has continued runway to capture share within the micro-merchant acquiring market where it has a competitive advantage relative to incumbents, driving outsized growth relative to the market

3. Benefitting from structural tailwinds in the Brazilian market, specifically a) low e-commerce penetration (~5% vs 20%+ in US/UK/China), b) low card penetration (~35% vs US mid/high 40s and UK mid 60s), c) adoption of POS systems from micro-merchants (80% of micro-merchants never accepted cards pre-PAGS) and d) a large, unbanked population (~55-60m Brazilians, or ~30% of the population vs 5-10% of the US population)PagBank is a nascent but fast-growing business attacking a large TAM with significant valuation potential (which is currently not appreciated within the stock price) given where other neobank comps have traded,

4. Earnings power masked within the business given a) pandemic headwinds and b) investments into PagBank

Risks

1.       Macro / emerging market risk

a.       Mitigant: The Brazilian economy has been healthy and the Brazilian Real is as weak relative to the USD as its been in the last 20 years

2.       Regulation – specifically around prepayment of installments, settlement periods and other initiatives around capping MDRs (interchange caps, Pix payments, etc.)

a.       Mitigant: Discussed in detail below – but we believe these are meaningful risks, but don’t believe anything is imminent (with the caveat that regulatory policy, particularly in EM, is unpredictable). I also believe that the valuation embeds the regulatory risk

3.       Competition – Stone/Cielo/Rede moving down into the micro-merchant space, NuBank and Pago for PagBank

a.       Mitigant: For the acquiring business, I believe that PAGS has emerged as a winner in the micro-merchant space in a similar way SQ has in the US. Our view is that Stone is likely to remain focused on its core SMB market, while Cielo/Rede are poor competitors that don’t have the capabilities to compete

4.       UOL coming to market with secondary

a.       Mitigant: Came to market last October (~5% of PAGS’s shares), and PAGS likely represents a significant portion of Luis Frias’s wealth

5.       Governance considerations – Cayman-registered entity

BUSINESS OVERVIEW

Succinctly, PAGS is the Brazilian Square. While some nuances which I will describe, there’s a lot of similarities between the two companies.

PagSeguro was founded in 2006 as a subsidiary of Universo Online (UOL), an internet conglomerate that reaches 90% of the Brazilian population and one of the most trafficked sites behind Facebook and Google. Pagseguro was founded to serve as the payment infrastructure to address the concern around trust and security around ecommerce transactions, in a similar fashion that led to Paypal’s founding within eBay.

MERCHANT ACQUIRING

In 2013, PAGS pivoted the business away from being an online wallet and into their core micro-merchant acquiring business that it’s known for today. They sold Square-like mobile-POS devices at significantly lower costs than Cielo and Rede (Cielo/Rede rented their hardware, and the cost for a PAGS device cost about 3-4 months of rental fees of Cielo/Rede).

It’s important to understand the history of the Brazilian financial sector – up until 2010, the acquiring industry was a duopoly with Cielo and Rede. Cielo was backed by a consortium of banks and was the exclusive acquirer for Visa transactions, while Rede was backed by another consortium of banks and was the exclusive acquirer for Mastercard transactions. In 2010, the Central Bank in an effort to promote more competition, eliminated these exclusive arrangements and opened up the market to more competition. While large enterprises were generally served by Cielo/Rede, there was an opportunity to address the SME and micro-merchant segment, which represented ~50% of the market. The two large acquirers still have significant share at 70% - however have continued to cede share to upstarts PAGS and Stone.

PAGS immediately focused on the micro-merchant segment (e.g. dentist, barber, landscaper, hot dog vendor, etc.) given its negligence by the larger acquirers. Management has called out 12-13m such merchants, of which PAGS has ~6.7m as customers today. Notably, 80% of these merchants previously did not accept credit cards prior to PAGS. Unlike the larger acquirers and Stone, who focuses on the mid-market, PAGS goes to market largely through an online, self-serve system with frictionless onboarding, with a highly efficient customer acquisition.

There are two secular tailwinds to consider within the Brazilian market. First, ecommerce still only represents ~5% of total retail sales (vs ~20% in the US, mid-20s in China and high 20s in the UK). ~15% of PAGS TPV is ecommerce, and they have roughly a ~15% market share. They recently acquired Wirecard MOIP to enhance their online business. Secondly, card penetration in Brazil today is 34%, below the US in the mid/high 40s and UK around ~70%. More notably, management has said that ~15% of TPV for their merchants are done via card relative to larger merchants who do as much as 50-70% of their volumes via card, suggesting significant runway to go.

EARNINGS ALGORITHM

Top-Down:

PCE in Brazil should continue to grow MSD coming out of COVID, while card expenditure growth has been growing roughly ~2.5x PCE in the mid-teens as the cash to card shift accelerates by taking 3-5% share each year. Given its lower penetration rates vs other developed markets and COVID as an accelerant, I would expect mid-teens growth in card expenditure within the industry to continue over the next 3-5 years as card penetration levels approach levels seen in developed markets. Notably, this secular tailwind should be stronger in the down market where PAGS operates, where 80% of merchants previously never accepted cards and card penetration amongst their clients is only 15% - this should helps PAGS sustain high 20s to low 30s growth for the next 3-5 years.

Bottoms-Up:

The revenue algo for the acquiring business is relatively straight forward – merchants x TPV per merchant x MDR. PAGS has ~6.7m active merchants on its platform today, and they’ve called out 12-14m micro-merchants in the market. They’ve been adding ~1.5m+ merchants per year, and have reiterated that expectation for 2021. TPV per merchant has been growing L/MSD; however, their card transactions still only represent ~15% of volumes for their merchants, suggesting an opportunity for acceleration, driving high 20s / low 30s TPV growth over the next 3-5 years.

Take rate compression has occurred within Brazil driven by a) competition and b) mix shift as debit outgrows credit. For the acquiring business, I expect take rate compression to continue as competition remains and the industry mixes towards less favorable transaction types (debit and Pix, a new digital payment method that will displace debit with even lower margins), yielding gross and net acquiring revenue growth in the low/mid 20s.

Installment prepayment financial revenues (which have typically yielded ~1.5% of TPV) are layered on top and should grow in-line with TPV more or less, although have regulatory risk (more described below). The consolidated business does low/mid 30s EBITDA margins on a reported basis (however most other payments companies report net not gross revs, so on an apples/apples basis its closer to 42%) – better than the low/mid 20s margins of the US acquirers (pre-M&A). However, if you back out the high margin prepayment revenue, the core acquiring business today is relatively breakeven.

Cielo’s core acquiring business operates at around ~16% margins, significantly higher than the LSD EBITDA margins that PAGS and STNE’s core acquiring business does. Before the pandemic and investments in PagBank, PAGS’s core acquiring business was doing close to ~8-10%; low double digit margins should be achievable with time, as lower net MDRs should be offset by scale economics.

ONLINE/ECOMMERCE

E-commerce remains under-penetrated within Brazil at ~5% of total retail sales (vs ~20% in the US, mid-20s in China and high 20s in the UK). Stone has bigger exposure to online/e-commerce – reportedly ~51% market share within e-commerce compared to mid-teens for PAGS. Since the pandemic, both have reported e-commerce TPV growth ~70%+, and both were growing high teens in 1Q pre-pandemic.

Stone (after MELI) remains the more direct way of investing behind the theme of ecommerce penetration given its market share, positioning with SMB merchants and % of TPV that comes from e-commerce; however, PAGS continues to have meaningful share of online/ecommerce and recently acquired Wirecard MOIP to further penetrate its presence within e-commerce and online, which should continue to be a tailwind for the business going forward.

REGULATION

Additionally, there are two anomalies specific to the Brazilian market. First, installment financing is highly prevalent in many (credit) transactions within Brazil. Secondly, the default is that cash is settled 30 days post-transaction (vs 2-3 days in most other markets).

This manifests itself in the pricing scheme below – PAGS typically charges higher for prepayment of installment receivables, which generates the bulk of its profitability, as well as for the early settlement of funds to merchants (e.g. 0.75-1.5% for early settlement vs D+30).

Acquiring is a scale business given the thin margins in the industry – credit MDRs (~2.25% are on par with the US (~2.18%), necessitating scale amongst acquirers to offset the fixed costs. However, given the existing duopoly that existed pre-2010, and the Central Bank’s desire to push towards increasing competition within the market, the challenger acquirers (PAGS and Stone) have been able to improve their economics by charging prepayment for installment financing as well as early settlement dates. These financing fees are critical for the challengers to survive and thrive given their relative lack of scale to Cielo and Rede – in 2020, PAGS will do R$2.2bn of financial income and R$2.3bn of EBITDA.

Persistent fears of regulation have clouded the industry on potential legislation that would call for the realignment of settlement days and prevalence of consumer installments to be more aligned with Western standards seen in the US and UK. Such regulatory changes would have profound impacts in the Brazilian financial sector and acquiring business.

30-Day Settlement Periods: The 30-day settlement is a byproduct of the high inflation days in Brazil’s past. The argument for the regulators to bring forward the merchant settlement date to D+2 from D+30 is obvious – merchants would get funds faster and/or pay a lower discount which would in theory be passed onto consumers. The argument against changing the settlement period is similar to that of the Durbin Act in the US – by reducing debit interchange fees for banks, the banks had to raise credit card and interest rates while cutting back on loyalty programs; ultimately, banks pass on the costs that they incur back over to consumers, which has been empirically proven in the US 10 years post the Durbin Agreement.

A change in the settlement periods would likely have a big impact for the banks and acquirers. The banks would likely see a ~6-7% impact to NI with a change in settlement periods since their current two-day floats (they’re paid by consumers on D+26 and pay acquirers D+28) would become a -25 day float (would have to pay acquirers D+1 and paid by consumers D+26). For the acquirers – they generally charge ~80bps excess on MDRs for D+14 settlement, and ~180bps excess for D+0 settlement. I don’t know how much of credit transactions (which are ~60% of total TPV) is prepaid, however Cielo reports that ~15% of TPV is typically prepaid; Cielo’s merchants are less likely to significantly discount and pre-fund their working capital since they’re much larger (as opposed to PAGS’s customer base).

There are a few mitigants worth noting:

·         Base MDRs could be raised to offset the losses for the acquirers/issuers

·         The regulators have been slow to push the changes in settlement period for a few reasons:

o   The Central Bank’s objective is to promote competition in the acquiring space (which is still 70% dominated by Cielo/Rede) in order to increase card penetration which is lagging in the world. Changing the settlement period is likely to disproportionately affect PAGS/Stone (25-40% impact to NI vs 10-20% for Cielo/Rede), reducing competition which is a stated objective for the Central Bank

o   Additionally, as seen with banks in the US, the costs incurred by the banks and acquirers are likely to get passed through (to some degree) back over to merchants and consumers (who today benefit from interest-free installment financing)

All this said, it’s quite likely that it’s a matter of when and not if that the settlement period is re-aligned with global standards. It seems less likely it would happen in the near-term, however it’s difficult to ascertain that with any degree of precision – and if that is the case, is a risk that’s priced in to the current multiple.

Prepayment of installments: As mentioned above, the acquirers generate significant MDRs from the pre-payment of installments. Again, the rationale to move away from installments is somewhat straightforward – the acquirers/issuers discount the prepayment of installments significantly, which disproportionately hits smaller merchants than bigger merchants. That said, unlike the issue with settlement periods, the consumer is a big beneficiary of interest-free installment payments – its prevalence is ubiquitous, and its removal is likely to trigger a short-term recession that hits consumer confidence, a task that no political figure is eager to make.

Again, the prepayment of installments is critical for PAGS and Stone to survive and grow – nearly all of PAGS’s EBITDA can be ascribed by these prepayment revenues. In addition to hurting the consumer, the Central Bank would likely significantly impair the smaller acquirers much more than Cielo/Rede – which would hurt their stated objective of promoting competition within the payments space.

Debit interchange caps: Like the US with the Durbin Agreement, interchange on debit cards has been regulated; in the US, interchange is capped at 65bps for any issuer that has >$10bn assets, while the interchange is capped at 81bps in Brazil.

PagBank

PagBank is PAGS’s neobank that was launched in May 2019. To understand the rise of neobanks, it’s helpful to understand the rise in the US. Digital banks, known as “neobanks”, have proliferated on the scene over the past 10 years. In the US, neobanks such as Cash App (Square) and Chime have taken off after the Durbin Agreement to serve the needs of the un- and under-banked. The Durbin Agreement as part of Dodd-Frank capped debit interchange that large banks with assets >$10bn can charge with the intention of driving savings for merchants and consumers. The unintended consequence, however, were banks offsetting the lost interchange revenues elsewhere in their business, such as higher credit card fees, lower cash-back/royalty rewards, etc. There has been a massive rise in neobanks since, with >60 in the US, who have looked to focus on the lower-income who traditionally were under-served and/or un-banked. Neobanks, by being mobile/digital-first, and not capped by the 0.65% debit cap imposed by larger banks by the Durbin Agreement, have been able to reinvest into a better experience for customers, including a simpler app, lower fees, better customer experience and better rewards.

Square has laid out a ~$63bn TAM for Cash App. Cash App initially launched in Oct 2013 as a P2P transfer app similar to Venmo; however, given P2P apps don’t monetize that well (yet), Cash App eventually pivoted into a quasi-neobank and to focus on digital banking for the un- and under-banked. Cash App offers a range of digital banking services – Instant Deposit (charge a fee for instantly depositing funds to bank account), Cash Card (credit card where they charge interchange), Boost rewards (loyalty program), ATM withdrawls, interest income on deposits, savings/checking account, etc.

Despite launching in 2013, Cash App only had 7m users in 2017. However, given broader digital tailwinds that we’re seeing, as well as Cash App’s shifting focus to digital banking, growth, adoption and engagement has meaningfully accelerated at Square and is arguably the more exciting part of the story. Since 2017, the user base has gone up nearly ~5x and monetization per user has gone up ~3x, leading to revs that are up ~15x over the past 3 years.

Cash App has been a significant driver of Square’s stock price performance this year. For perspective, SQ is a $95bn market cap, which would imply a ~$45bn valuation for Cash App; Cash App reported ~$345m of gross profit in 3Q20, up 212% yoy, or $1.4bn run-rate; if Cash App does ~$2bn in gross profit in 2021, would imply a ~20-22.5x gross profit multiple for Cash App.

The under-served and un-banked population in Brazil is significantly greater than the US, reportedly as high as 50-60m (out of a population of 210m). PAGS launched PagBank in May 2019 since many of their ~6.7m merchants didn’t have a bank account. 18 months later, PagBank has ~7m customers, an impressive accomplishment given the length of time it’s taken Cash App to scale. While the intention of PagBank was to address the banking needs of its (mainly) un-banked merchant base – PagBank has showed early signs of consumer adoption outside of its merchant base. Of the ~6.7m PagBank users, ~1/3 are consumers (that aren’t a PAGS merchant client), or ~2.2m, which roughly doubled in the past quarter itself. To date, PAGS has already gotten ~60% of their merchant base on PagBank.

Similar to SQ, PagBank has outlined a R$461bn (~$87bn) TAM within payments, ~17x the TAM of its core merchant business. The core products and services of PagBank are similar to Cash App – deposit account, credit card, micro-lending, bill pay, instant deposit, investing, insurance and loyalty rewards. PagBank today tends to be more merchant-focused – their lending products today are catered towards merchants and not consumers, products/services for payroll, etc. However, they will look to expand and cater more towards consumers over the next 12 months. Sellside estimates that ~80% of the revenues for PagBank and Cash App come from spending – interchange on credit transactions, bill pay, instant deposit / wire transfers, etc., and the other 20% from lending (which they keep the capital on their B/S).

As of 3Q20, they currently monetize its user base around ~$15/yr, while Cash App runs closer to $40. There’s an argument to be made that a Brazil neobank should monetize lower than a US peer (lower per capita income); however, on the flip side, given PAGS’s more merchant-centric focus, there’s an argument to be made that merchants should monetize better than consumers. That said, given the large TAM, and the runway in monetization, I believe PagBank should have room for growth. Management has guided PagBank revs to be ~30% of total by FY24.

Again, I get confidence in our LT EBIT estimates which appear conservative – if you factor in the financing of receivables (and assume its 100% margin) and that PagBank can ultimately get to 20% contribution margins (vs Cash App being close to ~80% gross profit margins), it implies a ~7% margin for the acquiring business (while Cielo is more than double that at current volumes today). That said, there’s risk to the durability of the financing revenue stream (more discussed below) as well as PagBank execution (also discussed below), so I believe conservatism is appropriate.

While the PagBank/Cash App analogy is easy and obvious to make, the key difference between the two is that Cash App was in the market early with a strong brand name given its P2P roots which gave it a significant advantage. PagBank, meanwhile, is much younger and competes with NuBank, a Brazilian neobank backed by Sequoia/Tiger/DST that was valued at $10bn in 2019 (and likely significantly higher today). NuBank has 25m customers and is already a dominant player within Brazil (and Latam generally) and may limit PagBank’s growth; that said, PagBank has posted very strong early numbers and has shown good signs of product-market fit, and the US market has shown that the market is large enough for multiple winners (e.g. 60 neobanks, Chime and Cash App both succeeding, etc.). At today’s prices, I don’t believe full value is being ascribed to PagBank.

Stone and Pago Competition

As previously mentioned, in addition to Cielo/Rede (the sleepy incumbents that are losing significant share), PAGS competes with Stone and Pago in the merchant acquiring business (and with NuBank and to a lesser extent Pago with PagBank).

As shown by the numbers below, Stone focuses on a larger customer – more of an SMB customer than a micro-merchant. Their strategy is different from PAGS in that a) the sales cycle and go-to-market generally appears to be more “software-like”, in that they have distributed sales teams (dubbed Hubs) that go out and sell to customers, b) the integration of their payments solutions is operationally more complex (vs PAGS onboarding self-serve), c) because STNE focuses on a larger customer, they tend to have more of an online presence (which is why Stone’s exposure to e-commerce is greater) and d) Stone pursues a strategy similar to Square/Stripe by offering additional software to their merchants after landing the acquiring business. For example, they will typically expand with software around inventory management, payroll disbursement, staffing, etc., and recently bought Linx, a Brazilian software business specializing in retail management. The deal is highly strategy and should help Stone’s strategy in becoming a full end-to-end software provider to its core merchants.

Notably, Stone’s growth strategy has generally been predicated around further capturing wallet share from its SMB base by bundling more software solutions to its merchants rather than moving down-market; however, monitoring Stone’s strategy and any future down-market move is important and could be negative for PAGS in the future. PAGS themselves remains focused on the micro-merchant space (particularly given the white space still available), however seem to be showing signs of moving up-market (acquired Wirecard MOIP, which has a merchant base that resembles Stone’s customer base).

Stone’s performance since the end of 2019 has significantly deviated from PAGS and is driven by a few reasons. First, Stone has the backing of Berkshire and is generally perceived to have a better management team (PAGS also dealing with perception issues given Oct ’19 negative pre-announce and secondary by UOL). Second, given its larger merchant focus, growth was relatively more resilient than the more sensitive micro-merchant. Third, Stone is more tethered to online/ecommerce growth, so is a relatively bigger net beneficiary than PAGS. Lastly, Stone’s software-centric strategy (e.g. land with payments/acquiring and expand to other software services) really started to gain traction this year, highlighted by their strategic acquisition of Linx (for >$1bn).

Pago is MELI’s payments business, which consists of its e-wallet and mPOS business. Pago leverages the distribution advantage of MELI’s marketplace for its e-wallet and mPOS systems – however they generally tend to have more success with merchants that sell on MELI.

UOL Relationship

UOL is one of Brazil’s largest digital conglomerates, with ~90% of Brazil’s population accessing its websites (think of it as the Yahoo of Brazil). Luiz Frias is the founder and Chairman of UOL.

As previously mentioned, PAGS was born and has grown within UOL before going public in 2018. The relationship today has very little strategic dependence other than its common ownership. UOL owns ~45% of the economic and 89% of the voting in PAGS, which in turn is controlled by FolhaPar, a vehicle for Luis Frias, the Chairman of PAGS. Also of note is that PAGS Digital, the entity that shareholders invest in, is incorporated in the Cayman Islands so comes with a different set of shareholder protections and governance.

The chart below highlights the shareholder structure – note the %’s are outdated and at the time of the IPO (UOL owns 45% today).

Additionally, UOL and PAGS have a number of related party transactions, including:

·         Back-office cost-sharing agreements (8% of PAGS’s total expenses)

·         Advertising commitment to UOL at market rates

·         Can lend cash to UOL at market interest rates (no incident of this happening post-ipo)

Valuation

PAGS has historically been a P/E and has traded in a wide band, anywhere from 20x to 40x forward. PAGS has traded in a wide band for a number of reasons; while the growth opportunity is attractive (as it is for many fintech/payment companies), and the PagBank roadmap is compelling, competition, regulation, execution issues and the presence of UOL (and the concerns of a secondary) have weighed on the stock time to time.

I think there’s a few ways to look at the valuation of PAGS. First would be to simply look at how it’s traded historically – as mentioned, the stock has traded at a wide range from 20x-40x and is trading towards the highs of its historical range. While useful, I don’t believe looking at historical multiple ranges is necessarily highly informative of valuation given the structural changes created by COVID and the potential of PagBank, which still small but has quite a bit of potential. Lastly, I believe the pandemic and investments into PagBank are masking the true earnings power of the business.

Stone has significantly re-rated in 2020 for the reasons mentioned above – broad enthusiasm for e-commerce/digital payments and Stone’s software-centric strategy. As mentioned, PAGS to some degree still has lingering concerns around the UOL relationship, and valuation aside Stone is a cleaner story (better management team, more e-commerce exposure, larger software sell-in opportunity, better competitive positioning, etc.).

Meanwhile, SQ’s valuation and stock price has significantly re-rated not only in 2020 but over the past few years as the merchant acquiring growth has proven to be quite durable (enabled by secular tailwinds, shifts up-market and selling additional software services) as well as the traction and momentum of Cash App, which again based on some estimates is worth roughly half of SQ’s $95bn EV. The SQ playbook has many similarities to PAGS’s strategy – granted with a few, but significant, differences (e.g. Brazil a more competitive market, regulatory risk, NuBank potentially limiting the growth of PagBank, etc.).

While PAGS has historically been a P/E stock, I believe that valuation framework by itself is limiting of the upside potential that exists as a result of PagBank. Looking at PAGS on a SOTP basis deserves some caution but consideration – caution because nobody looks at valuation this way (particularly because the disclosure isn’t provided to support such a valuation framework), however useful since acquiring, prepayment and PagBank are very different from one another given risks and growth outlook.

I believe 30x EBIT is an appropriately conservative base case valuation for the acquiring business. The US acquirers grow M/HSD and trade near ~18-20x EBIT, while Cielo grows MSD and trades at 14x EBIT. A 30x multiple is a justified premium for an acquiring business that grows high 20s / low 30s, but also embeds conservatism given a) lack of scale vs US acquirers / Cielo, b) EM risk, c) regulatory risk (caps on interchange / settlement periods) and d) competition (e.g. with Stone if they move down-market and MELI).

The financing business is an attractive business today (grows with TPV and high margin), however likely deserves a discounted valuation given concerns around its long-term sustainability with regulatory risks. For the financing cash flows, I base our valuation on a DCF. Our base case valuation of ~$7.9bn implies that PAGS generates prepayment revenues for 9 years with no terminal value; our upside assumes 11 years, while our downside assumes no terminal value beyond 4 years. Given the importance of prepayment revenues, any sensitivity around the durability of this revenue stream is key to the downside case.

Lastly, the valuation for PagBank requires more art than science. There’s a few ways to look at valuation; the first way is making our estimates, applying a multiple on EBIT and discounting back to 2021. This is admittedly very non-precise given the nascent nature of the business. The second is looking at the valuations of other neobanks globally – the list below highlights that most neobanks have been valued at approximately ~$500-$1500 per customer at the time of their fundraising. Note – the NuBank valuation and estimated customer count is based on their mid-2019 fundraising.

Our base case essentially assumes a value of ~$750-$1000 per customer, between the valuations of the US neobanks and the European neobanks, but in-line with NuBank. Our view is that PagBank deserves credit for a) its current growth (e.g. user base is currently growing 200%) and b) TAM (the under- and un-banked population of Brazil is greater than developed markets where the banking system is more built out). That said, I try not to get ahead of myself in the valuation given the business is still young today (and thus has execution risk), and the competitive dynamics at play (e.g. NuBank already a market leader with 25m customers). With that said, I think PagBank presents as an interesting upside node where the valuation is reasonable at current levels.

Overall, I believe PAGS to be a compelling risk/reward. I assume the multiple stabilizes in the mid/high 30s given re-accelerating growth driven by PagBank and upside to estimates which is a reflection of the business returning back to pre-pandemic earnings power (although somewhat offset by deteriorating take rate economics). 

Catalyst

1. PagBank continuing to scale

2. Earnings