PagSeguro, StoneCo stocks tumble after Morgan Stanley downgrades to Underweight

PagSeguro Digital (NYSE:PAGS) stock sank 9.3% and StoneCo (NASDAQ:STNE) stock dropped 7.6% in Thursday premarket trading after Morgan Stanley downgraded both stocks to Underweight, as analyst Jorge Kuri expects 2024 to mark peak growth and profitability for the Brazilian payments sector.

Morgan Stanley believes “the market is missing the challenges brought on by market saturation,” the analyst wrote in a note to clients.

The analyst factored in slower total payment volume growth, price compression, and decreasing operating leverage into EPS estimates for both companies for the next six years. As a result, Kuri slashed EPS by as much as 45%-55% in 20230.

Morgan Stanley’s long-term estimates now stand 50%-60% below consensus.

The downgrades to Underweight “not only speak to [Morgan Stanley’s] concerns on the core payments business, but also to its view that these companies will ultimately be unsuccessful in diversifying fast enough away from payments,” the analyst said.

By contrast, the SA Quant system has a Hold rating on PagSeguro (PAGS) and the average Wall Street rating is Buy.

The SA Quant rating on StoneCo (STNE) is also Hold, while the average SA Analyst rating and average Wall Street rating are both Buy.