Shrinking Margins And Subscription Dependence Will Undermine Long Term Prospects

Catalysts

About Vasta Platform

Vasta Platform provides education content and services to schools in Brazil, with a focus on subscription learning systems and complementary solutions.

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

• Growing reliance on premium learning systems and bilingual franchises such as Start Angle could expose Vasta to saturation in higher income segments. This may cap subscription revenue growth and pressure the 89.3% revenue share from subscriptions if demand in these niches slows.
• Faster growth in complementary solutions that require higher payments to product owners may structurally cap gross margin. If this mix continues to tilt toward these products, adjusted EBITDA margin near 28.4% could face sustained compression.
• Expanding B2G exposure through additional municipalities and contracts like the State of Pará may increase dependence on public sector budgets and procurement cycles. This can introduce lumpiness into net revenue and add volatility to earnings.
• Plans to open 8 new Start Angle units and support more than 50 franchise contracts in the next cycle will likely require ongoing marketing and expansion expense. This could keep commercial costs near 19% of revenue and limit further improvement in net margins even if revenue rises.
• Investment in AI based personalized learning tools and individualized educational plans will add product development and implementation costs. If adoption by schools lags expectations, the return on this spend could be modest and weigh on future earnings growth.

Assumptions

This narrative explores a more pessimistic perspective on Vasta Platform 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 Vasta Platform's revenue will grow by 14.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 28.1% today to 3.9% in 3 years time.
• The bearish analysts expect earnings to reach R$99.0 million (and earnings per share of R$1.1) by about January 2029, down from R$488.3 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 19.5x on those 2029 earnings, up from 4.4x today. This future PE is greater than the current PE for the US Consumer Services industry at 17.3x.
• The bearish analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.28%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Subscription revenue for the 2025 sales cycle reached R$1.552b and represented 89.3% of net revenue, with 14.3% growth compared to the previous cycle. If schools keep renewing and upgrading learning systems at this pace, revenue could remain resilient rather than weaken, supporting both top line and adjusted EBITDA.
• Complementary solutions grew 25.3% year over year and non subscription revenue in the cycle reached R$119m, helped by Start Angle ESL and Anglo pre university courses. If this broader ecosystem keeps attracting more students, it could add incremental revenue and partly offset any pressure on margins.
• Free cash flow in the 2025 sales cycle reached R$316m and free cash flow to EBITDA conversion reached 64%, with management targeting about 50% for the fiscal year. If the company continues to collect earlier and keep payment discipline, stronger cash generation could support earnings quality and reduce financing risk.
• Net debt fell to R$863m with leverage at 1.75x last 12 months adjusted EBITDA, down from 2.32x in Q3 2024. If deleveraging continues, lower interest expense and a stronger balance sheet could support net profit and reduce downside risk in stressed periods.
• The company is expanding bilingual education through Start Angle, with 6 operational units, more than 50 contracts and a pipeline of over 300 prospects, and it plans to launch 8 new units. If demand for premium bilingual education in Brazil stays firm, this segment could add incremental revenue and potentially support net margins over the long term.

Valuation

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

• The assumed bearish price target for Vasta Platform is $3.21, which represents up to two standard deviations below the consensus price target of $4.53. This valuation is based on what can be assumed as the expectations of Vasta Platform'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 $6.39, and the most bearish reporting a price target of just $3.21.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be R$2.6 billion, earnings will come to R$99.0 million, and it would be trading on a PE ratio of 19.5x, assuming you use a discount rate of 11.3%.
  
• Given the current share price of $4.9, the analyst price target of $3.21 is 53.0% lower.
  
• 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.