New Products Like Tray's POS And Woz Will Improve Efficiency And Customer Service

Key Takeaways

• Operational leverage, cost control, and product innovation are driving improved margins, earnings, and revenue growth through enhanced efficiency and customer service.
  
• Strong cash flow supports shareholder returns via buybacks and dividends, indicating financial health and potential EPS growth.
  
• Restructuring and competitive pressures may impede Locaweb's revenue growth, as new subscriber acquisition and marketplace competition challenge profitability and expansion efforts.

Catalysts

Offers hosting, software licensing, and technical support services in Brazil.

• Locaweb's operational leverage and strong cost control have significantly increased their margins, by 4.7 percentage points compared to the previous year, which is expected to improve net margins and earnings.
  
• The launch of innovative products—Tray's POS, Wake U, and Woz—as well as ongoing synergistic acquisitions are expected to boost revenue growth and profitability.
  
• The company's customer base has grown by 6.1% year-over-year, with subscription revenue increasing by close to 26%, contributing to sustainable revenue growth.
  
• Locaweb's ability to innovate, particularly through AI solutions like Woz, is aimed at improving efficiency and customer service, which should enhance net margins and earnings.
  
• Shareholder returns via stock buybacks and dividend payments, totaling over R$192 million, indicate strong cash flow and financial health, potentially boosting earnings per share (EPS).

Locaweb Serviços de Internet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Locaweb Serviços de Internet's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.1% today to 12.8% in 3 years time.
• Analysts expect earnings to reach R$215.4 million (and earnings per share of R$0.44) by about March 2028, up from R$14.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, down from 98.5x today. This future PE is lower than the current PE for the BR IT industry at 98.5x.
• Analysts expect the number of shares outstanding to decline by 5.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.75%, as per the Simply Wall St company report.

Locaweb Serviços de Internet Future Earnings Per Share Growth

Risks

• The company's revenue growth might be impacted by the recent restructuring and integration processes, particularly with Squid, which has been a drag on financial performance thus far. Investors may be cautious about the impact on consolidated net revenue growth.
  
• The decrease in new subscriber acquisition, especially for customers with less than R$15,000 in GMV, could signal challenges in sustaining customer growth and organic revenue generation in the future.
  
• The acquisition cycle and associated synergies seem to have prioritized operational and structural integration over rapid expansion, which could potentially limit immediate revenue acceleration and impact profitability margins.
  
• Despite buybacks and dividends, the company's revenue wasn't substantially high, and plans for capital allocation might stress cash flows if market conditions change unfavorably, potentially affecting earnings.
  
• Mercado Livre's entry into the ERP space, catering to smaller, marketplace-specific sellers, could increase competition in one of Locaweb's key market spaces and potentially impact revenue from clients who seek integrated solutions.

Valuation

• The analysts have a consensus price target of R$6.11 for Locaweb Serviços de Internet based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$7.2, and the most bearish reporting a price target of just R$4.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$1.7 billion, earnings will come to R$215.4 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 19.7%.
  
• Given the current share price of R$2.74, the analyst price target of R$6.11 is 55.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.