AI Advances And Brazil Instability Will Shrink Traditional Demand

Key Takeaways

• Rapid growth of AI-powered and online education threatens Afya's traditional offerings, increasing competition and risking erosion of market share and pricing power.
  
• Macroeconomic instability, demographic shifts, and rising regulatory pressures in Brazil constrain enrollment growth and could compress margins and profitability.
  
• Strong execution in education, strategic diversification, and disciplined financial management are positioning Afya for sustained growth, profitability, and resilience in the Brazilian healthcare market.

Catalysts

Operates as a medical education group in Brazil.

• The accelerating global adoption of AI-powered and online medical education platforms is set to reduce demand for traditional campus-based offerings, presenting a substantial threat to Afya's core undergraduate segment and likely eroding future tuition revenue and top-line growth.
  
• Persistent macroeconomic volatility in Brazil, including currency instability, inflation, and potential reductions in public/private funding, may undermine student affordability and put sustained pressure on Afya's tuition pricing power, directly impacting revenue growth, net margins, and long-term earnings stability.
  
• Brazil's demographic shifts-specifically a slowing population growth rate and changes in youth cohorts-threaten to cap the long-term addressable market for medical students, eventually stalling Afya's historical enrollment growth and constraining revenue expansion over time.
  
• Escalating regulatory scrutiny and frequent changes in medical education requirements are likely to force costly curriculum updates and capital expenditures, tightening net margins and raising the risk of margin contraction in the years ahead.
  
• The continued emergence of accredited online competitors and international medical education partnerships will increase competition for Brazilian students, weaken Afya's traditional market share, and challenge its ability to maintain robust ARPU and pricing, putting further pressure on future profitability and overall earnings growth.

Afya Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Afya compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Afya's revenue will grow by 5.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 19.6% today to 23.9% in 3 years time.
• The bearish analysts expect earnings to reach R$1.0 billion (and earnings per share of R$11.49) by about August 2028, up from R$694.2 million today. The analysts are largely in agreement about this estimate.
• 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 9.7x on those 2028 earnings, down from 10.6x today. This future PE is lower than the current PE for the US Consumer Services industry at 19.1x.
• Analysts expect the number of shares outstanding to grow by 0.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.12%, as per the Simply Wall St company report.

Afya Future Earnings Per Share Growth

Risks

• Afya continues to deliver strong enrollment growth and high occupancy across its undergraduate medical programs, supported by structural tailwinds like Brazil's physician shortage, which should underpin long-term revenue and cash flow growth.
  
• Operational leverage from ongoing integrations, centralization of shared services, and maturation of recent campus and acquisition investments is driving expansion in EBITDA and gross margins, indicating improving profitability and strong earnings momentum.
  
• The company's diversification into continuing education, medical practice solutions, and digital health services is accelerating revenue growth and broadening Afya's addressable market, helping enhance average revenue per user and future net income.
  
• A disciplined capital allocation strategy featuring significant share repurchases and a conservative balance sheet, with declining net debt levels and robust operational cash conversion, is poised to support shareholder returns and future EPS growth.
  
• Long-term secular trends including rising healthcare awareness, an expanding middle class, and favorable government policy focus on medical training combine with Afya's sector leadership to support sustainable volume and pricing power, which should structurally benefit future revenues and earnings.

Valuation

• The assumed bearish price target for Afya is $14.42, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Afya'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 $25.62, and the most bearish reporting a price target of just $14.42.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be R$4.2 billion, earnings will come to R$1.0 billion, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 11.1%.
  
• Given the current share price of $15.06, the bearish analyst price target of $14.42 is 4.4% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.