Beware Tom Selic (PAGS)

Last week on my podcast I did a deep dive on PagSeguro Digital (ticker: PAGS). A profitable, fast-growing Brazilian FinTech that looks genuinely cheap by almost every metric we run, if you can stomach the Brazil risk.

PagSeguro was born in 2006 as a subsidiary of UOL, one of Brazil's oldest and largest internet service providers (around since 1996). UOL spotted a gap: Brazil's booming e-commerce market had no decent digital payments infrastructure for small merchants, entrepreneurs, and the millions of people living in the favelas with no access to a bank branch.

I've never been to Rio (sounds like an 80s pop hit) but my co-host has, and he says that enormous swaths of the population live in self-contained communities with their own economies, fully functioning markets, and basically zero traditional banking infrastructure. PagSeguro handed those micro-merchants a cheap card reader and said: now you can accept payments. It's the Square model, applied to a country where a huge chunk of the adult population was effectively locked out of the financial system.

Over the next decade and a bit, the company grafted on lending, insurance, investments, full banking services, and rebranded its consumer offering as PagBank. In January 2018 they listed on the New York Stock Exchange, raising 2.3 billion dollars in what was the largest IPO by a Brazilian company on the NYSE since 2011. Shares were priced at $21.50.

At the peak in 2021, PAGS hit $57 a share. Today it's sitting around $10.67. So yeah, it's had a rough few years. A lot of that is just Brazil, frankly. Bolsonaro, political chaos, Lula getting out of jail and becoming president again, Bolsonaro going to jail, and most importantly, interest rates that would make your eyes water.

The (Tom) Selic rate, which is Brazil's equivalent of the Fed funds rate or Australia's RBA cash rate, is currently sitting at 14.75%. For context, Australia is at 4.1% and the US is on hold somewhere around the same. The Selic has been as high as 26.5% back in 2003, briefly dipped to 2% during COVID stimulus in 2021 (which is probably when the stock hit $57, now that I think about it), and has been climbing steadily since. When you're running a digital bank in an environment where Brazilian savers can earn nearly 15% risk-free in government bonds, every product you offer has to clear an incredibly high bar just to be worth the risk.

The business has two distinct revenue drivers at this point.

The first is the original toll booth: payments and merchant services. POS terminals, payment links, e-commerce processing, card acquiring. Merchants pay a fee on every transaction. This is the legacy business.

The second engine is PagBank itself, the full digital bank offering deposits, credit cards, personal loans, insurance, and an in-app marketplace.

One thing that caught my eye: the CEO, Carlos Mauad, has only been in the job since January 1st this year. He came from the COO role and holds a degree in mechatronics engineering, which is basically robotics. How does that fit with a fintech? Your guess is as good as mine, but I'm hoping it has something to do with android ATMs. "Lieutenant Commander Data - cash me up."

Above Mauad sits Ricardo Dutra, who is both the principal executive officer of PagSeguro Digital and the CEO of the UOL Group, which controls a large chunk of the stock (Class A and Class B). So there's a dual-layer leadership structure there. Worth being aware of.

At a price to operating cash flow of just 2.16, the market is pricing this thing like it's about to fall over. But the actual numbers tell a different story. Revenue has grown every single year for the past five years, operating profit has more than quadrupled, and the banking division that spooked the market is now the growth engine.

Is it without risk? Ahh no. Nothing is. That's why we wear seatbelts and helmets. Brazil at 14.75% Selic is a brutal operating environment, and I'm not going to pretend I have deep expertise in Brazilian banking regulation or Real-denominated credit books. What I can say is that the numbers came up strong through our filter, the story checks out on basic inspection, and the price is pricing in a level of doom that the actual financials don't support.

Disclaimer: Not financial advice. I'm just an Australian guy with a spreadsheet who has never been to Brazil. DYOR. I added PAGS to my portfolio last week. It's up a few cents since then.

BTW the last three stocks I've covered are doing nicely:

Eastman Kodak (KODK) +70.6% (since 23/3/2026!)

Pitney Bowes (PBI) +40.1% (30/3/2026)

Commerical Vehicle Group (CVGI) +20.8% (6/4/2026)

Either I'm a genius... or the US markets are totally bonkers right now.