Lower Pricing And Margin Pressures Will Challenge Distance Learning Expansion Yet Long-Term Demand Should Endure

Catalysts

About Vitru

Vitru operates a large scale higher education platform in Brazil with a focus on distance learning, hybrid programs and medical education.

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

• While the continued shift toward distance and hybrid higher education in Brazil supports Vitru's near 10 percent growth in the digital student base, the company may struggle to sustain this trajectory as competitive pricing pressure intensifies and erodes average tickets, weighing on revenue growth and potentially compressing EBITDA margins.
• Although the company is benefiting from a structural move toward lifelong learning and continuing education, execution risks in scaling these offerings and integrating new programs could limit the expected double digit underlying growth, tempering the contribution to consolidated revenue and delaying incremental margin gains.
• While demographic and economic demand for affordable online degrees should favor Vitru's large distance learning network, the deliberate strategy of lowering prices to drive accessibility exposes the business to a prolonged period of weaker pricing power, which could offset volume gains and cap improvements in net income.
• Despite regulatory changes creating an opening for better quality hybrid and on campus offerings, the required multi year investments in hubs, curriculum and compliance may outpace incremental cash inflows, which would pressure free cash flow and slow deleveraging beyond the current 2 times EBITDA target.
• While process digitalization and improved collections are currently supporting higher cash conversion, the initial low hanging gains in working capital optimization may already be captured, which could limit further reductions in days sales outstanding and keep future free cash flow and earnings growth closer to mid single digits.

Assumptions

This narrative explores a more pessimistic perspective on Vitru 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 Vitru's revenue will grow by 13.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.0% today to 22.2% in 3 years time.
• The bearish analysts expect earnings to reach R$656.5 million (and earnings per share of R$54.03) by about December 2028, up from R$60.0 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 499.2x on those 2028 earnings, up from 27.2x today. This future PE is greater than the current PE for the US Consumer Services industry at 16.6x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.82%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The deliberate strategy of lowering average ticket by 4.1% to drive accessibility in a structurally competitive online and hybrid education market could become entrenched, leading to persistent pricing pressure that outpaces volume growth and ultimately constrains revenue and net margin expansion over the long term, reducing earnings growth potential.
• The sector’s high fixed cost base, combined with management’s admission that 2025 revenue is running below the original budget, implies that even modest demand slowdowns or weaker intake cycles could trigger operational deleveraging, putting sustained pressure on EBITDA margins and limiting future profit growth.
• While the new regulatory framework is framed as an opportunity, required multi year investments in hubs, physical infrastructure, curriculum and hybrid course adjustments, together with uncertainty around student behavior in this new model, could raise capital intensity and execution risk, weakening free cash flow and slowing deleveraging, which would cap upside in net income.
• Working capital gains are already described as having captured the low hanging fruit, meaning that any normalization in collections, days sales outstanding or PDD provisioning as the student base scales could reduce the currently elevated 58 percent cash conversion rate and 32.9 percent free cash flow growth, undermining the sustainability of current earnings and cash flow trends.

Valuation

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

• The assumed bearish price target for Vitru is $16.81, which represents up to two standard deviations below the consensus price target of $20.75. This valuation is based on what can be assumed as the expectations of Vitru'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 $25.0, and the most bearish reporting a price target of just $16.81.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be R$3.0 billion, earnings will come to R$656.5 million, and it would be trading on a PE ratio of 499.2x, assuming you use a discount rate of 14.8%.
  
• Given the current share price of $9.07, the analyst price target of $16.81 is 46.0% 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.