Slowing Subscriber Additions And High Leverage Will Pressure Long Term Earnings Outlook

Catalysts

About Desktop

Desktop operates a regional broadband and telecommunications platform focused on high speed connectivity for households and businesses in the state of São Paulo, Brazil.

What are the underlying business or industry changes driving this perspective?

• Slowing household net additions in a maturing fiber market, combined with management explicitly prioritizing cash generation over network expansion, could cap subscriber growth and limit future net revenue acceleration.
• Greater selectivity in CapEx and reliance on reuse of customer equipment, while supportive of short term cash flow, risks underinvestment in network quality and coverage, which may erode pricing power and pressure top line growth over time.
• Rising dependence on digital channels and the self service app to drive efficiency may deliver diminishing returns, particularly if competitors match these capabilities, compressing Desktop's cost advantage and stalling further EBITDA margin gains.
• Expansion into B2B contracts such as public school connectivity exposes the company to contract renewal risk, government budget constraints and tighter pricing, which could weigh on average revenue per user and compress net margins as the mix shifts.
• High leverage anchored in long term debentures, even with recent repricing, leaves earnings more vulnerable to prolonged elevated interest rates or refinancing frictions, potentially curbing earnings growth despite resilient operating cash flow.

Assumptions

This narrative explores a more pessimistic perspective on Desktop compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Desktop's revenue will grow by 8.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.1% today to 24.2% in 3 years time.
• The bearish analysts expect earnings to reach R$368.8 million (and earnings per share of R$1.01) by about December 2028, up from R$73.2 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as R$792.0 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 4.0x on those 2028 earnings, down from 26.2x today. This future PE is lower than the current PE for the BR Telecom industry at 17.4x.
• The bearish analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.49%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Desktop is consistently growing its customer base and network penetration in a large, underpenetrated state level market, evidenced by 8% year on year net revenue growth and 8% growth in connected homes, which could underpin sustained top line expansion and support a higher share price through stronger revenue.
• Structural efficiency gains, including digital sales now representing more than half of volumes and over half of customers using a highly rated self service app, are lifting adjusted EBITDA margins to a record 53% since 2020, which may prove durable and drive ongoing margin expansion and earnings growth.
• The company is deliberately prioritizing cash generation and disciplined capital allocation, with operating cash flow converting at 92% of adjusted EBITDA and FCO plus adjusted CapEx up 187% year on year, which strengthens financial resilience and could support higher valuation multiples through improved free cash flow and net income.
• Expansion into B2B and public sector connectivity, including contracts to serve more than 75,000 public school students, diversifies the revenue base and may add more stable, higher value relationships, which could enhance average revenue per user and support higher net margins and earnings over the long term.
• Ongoing liability management, exemplified by the BRL 800 million debenture issue that extends maturities and lowers spreads over CDI, reduces refinancing and interest cost risks, which can gradually lift profitability via lower financial expenses and support a stronger trajectory for net income.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Desktop is R$7.3, which represents up to two standard deviations below the consensus price target of R$12.83. This valuation is based on what can be assumed as the expectations of Desktop's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$20.0, and the most bearish reporting a price target of just R$7.3.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be R$1.5 billion, earnings will come to R$368.8 million, and it would be trading on a PE ratio of 4.0x, assuming you use a discount rate of 19.5%.
  
• Given the current share price of R$16.56, the analyst price target of R$7.3 is 126.8% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.