(Bloomberg) -- Shares in Brazilian fintechs StoneCo Ltd. and Pagseguro Digital Ltd., known as PagBank, tumble in New York after Morgan Stanley downgraded both stocks and slashed their earnings forecasts, warning that Brazil’s digital payments market had “likely reached saturation.”
Strategists led by Jorge Kuri cut the stocks to underweight from equalweight, saying the fast growth of Pix, the central bank’s instant-payment app, and the dominance of digital banks like Nubank could put significant pressure on growth.
Brazil is “on the brink of becoming the first economy worldwide to achieve saturation in digital payments,” the strategists wrote in a note. “We think 2024 will mark peak growth and profitability for Brazil payments.”
Attempts by the two companies to diversify into banking, credit and software are unlikely to have a significant impact on earnings. For instance, PagBank, Pagseguro’s digital banking unit, has been slow to monetize its large client base, which Kuri attributes partly due to the unsuccessful roll-out of unsecured credit.
“Even with high-double-digit growth rates going forward, these new verticals cannot offset the decline in the core payments business due to their relatively small size,” the strategists wrote.
Morgan Stanley slashed their earnings per share estimates for the next six years for both companies, reducing the forecast for PagSeguro in 2030 by 56%, and for Stone by 46%.
At the same time, the strategists reduced Pagseguro’s price target to $6.50 and Stone’s to $7, below analysts’ average of $15.47 and $17.01, respectively.
PagSeguro shares slid as much as 12%, while StoneCo tumbled as much as 13% — both hitting their lowest intraday levels since November 2023.
“We think incumbents were relatively complacent about market share losses in the past due to the industry’s rapid expansion, which still allowed for solid revenue growth,” the strategists wrote. “However, in a slowing industry, continued market share losses can lead to negative growth.”
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