TOTS3: Upcoming Linx Acquisition And Techfin Developments Will Support Balanced Outlook

Key Takeaways

• Integration of acquisitions and sector-specific solutions are boosting cross-sell opportunities and expanding customer reach, strengthening TOTVS' position in core markets.
  
• Investments in cloud, Techfin, and AI solutions, along with robust M&A activity, are driving higher-margin recurring revenues and improving earnings stability.
  
• Rising competition, sector reliance, integration challenges, and regulatory pressures threaten TOTVS's revenue stability, profitability, and long-term earnings reliability.

Catalysts

Develops and sells management software, and productivity and collaboration platforms in Brazil and internationally.

• The announced acquisition and expected integration of Linx is poised to expand TOTVS' vertical expertise and customer reach in retail, positioning the company to capitalize on growing demand for sector-specific and integrated enterprise software solutions. This should translate into increased revenue growth and enhanced cross-sell opportunities.
  
• Ongoing digitalization trends driven by regulatory changes-especially the Brazilian tax reform-are creating complexities that accelerate business modernization, increasing demand for TOTVS' cloud and SaaS solutions. This trend is likely to help increase management SaaS revenue and expand recurring revenue streams.
  
• Expansion and upcoming launches within the Techfin segment, including optimized funding structures and new digital financial products, are expected to diversify revenue and drive higher margin recurring revenues, supporting both topline and margin growth.
  
• Significant investments in cloud migration, product portfolio expansion (such as Tax Intelligence and sector-focused AI solutions), and a strong rebound in customer retention highlight operational leverage and should continue to lift EBITDA and net margins.
  
• Continued progress in multiproduct strategies (e.g., RD Station's migration and recovery of renewal rates) and a robust M&A pipeline further enhance customer stickiness and cross-sell potential, supporting long-term recurring revenue growth and improved earnings visibility.

TOTVS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TOTVS's revenue will grow by 15.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.2% today to 16.7% in 3 years time.
• Analysts expect earnings to reach R$1.5 billion (and earnings per share of R$2.29) by about September 2028, up from R$860.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.2x on those 2028 earnings, up from 28.6x today. This future PE is greater than the current PE for the BR Software industry at 28.6x.
• Analysts expect the number of shares outstanding to decline by 0.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.86%, as per the Simply Wall St company report.

TOTVS Future Earnings Per Share Growth

Risks

• Intensifying competition from both global SaaS/ERP giants and aggressive entrants targeting Latin America could threaten TOTVS's market share and pressure pricing, especially as integration and product launches (e.g., post-Linx acquisition) take time to deliver on promised synergies-potentially impacting long-term revenue growth.
  
• Heavy reliance on the Brazilian SMB segment for growth creates exposure to macroeconomic downturns and volatility in that sector; business closures or weakened technology spending among these clients could cause outsized fluctuations in TOTVS's recurring revenue base and earnings.
  
• Ongoing and future required investments in cloud infrastructure, R&D, and acquisition integration (such as with Linx and Techfin product launches) may erode net margins if monetization or operational efficiencies from these investments lag expectations, impacting profitability.
  
• Execution risks associated with frequent M&A (Dimensa spin-off, Linx acquisition, Techfin JV, etc.) raise the potential for integration delays, cultural friction, or goodwill impairment, which could depress book value and reduce earnings reliability over the long term.
  
• The long, complex transition to new tax regulations in Brazil and increased regulatory scrutiny (including on Techfin financial operations) could increase compliance costs and operational complexities at TOTVS, impacting both margin stability and future earnings visibility.

Valuation

• The analysts have a consensus price target of R$46.3 for TOTVS 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$55.0, and the most bearish reporting a price target of just R$33.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$8.7 billion, earnings will come to R$1.5 billion, and it would be trading on a PE ratio of 32.2x, assuming you use a discount rate of 20.9%.
• Given the current share price of R$41.91, the analyst price target of R$46.3 is 9.5% 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.