Linx S.A. Grows Revenue But Pandemic Clouds Gather

Summary

• Linx S.A. went public in June 2019, raising $308 million.
• The company provides businesses with a variety of software and hardware products for point-of-sale and e-commerce uses.
• LINX has grown impressively but that growth is now is serious question with the effects of the Covid19 pandemic on its customer base.
• My bias on the stock is Neutral.
• Looking for more stock ideas like this one? Get them exclusively at IPO Edge. Get started today »

Quick Take

Linx S.A. (NYSE:LINX) went public in June 2019, raising approximately $308 million.

The firm provides a range of point-of-sale and e-commerce software and products to businesses in Latin America.

LINX is growing revenue and gross profit while retaining net profitability. However, the lack of communication, the delay in filing its annual report and the effects of the Covid19 pandemic on its Brazil and other operations means my bias on the stock is Neutral.

Company

São Paulo, Brazil-based Linx was founded in 1985 to provide software services to retailers in Latin America, including payment services, business, and point of sale or point of service [POS] management solutions, and e-commerce services.

Management is headed by CEO Alberto Menache, who has been with the firm since 1991 and is also a member of the board of directors of Arco Platform.

Linx has developed an integrated software platform for retailers of all sizes that offers business management tools, payment solutions, e-commerce as well as omni-channel applications, including mobility, customer relationship management, enterprise resource planning, receipt and payment processing, and connectivity solutions, among others.

Below is a brief overview video of Linx Analytics:

Source: Linx

The firm’s core product line - Linx Core - provides retailers with integrated business management software solutions.

Linx Digital represents an e-commerce platform, designed to improve an omni-channel purchasing experience for both parties - essentially allowing retailers to interact with clients through a variety of channels, including physical stores, mobile applications, and the Internet.

Linx Pay Hub offers payment processing solutions that work closely with its Linx Core and Linx Digital product lines.

Below is an overview graphic of the company’s product lines:

Source: Company registration statement

Management states that its platforms have achieved a 41.3% market share in Brazil for 2017, according to a 2018 International Data Corporation [IDC] survey.

Linx anticipates launching additional features in 2019, including a QR code acceptance solution at cash registers that replaces debit cards as well as a digital wallet for retailers that do not want a checking account.

Market

According to a 2018 market research report by PagBrasil, Brazil is the fourth largest internet market globally, with 140 million Internet users out of a total population of over 207 million.

Brazil’s e-commerce market was valued at $12.25 billion (BRL 47.7 billion) in 2017, an 8% increase year-over-year, and is projected to grow by 12% in 2018 to BRL 60 billion.

Data from Euromonitor Internacional indicates that Brazil represents about 42% of all business to consumer [B2C] e-commerce in Latin America, as illustrated by the graphic below:

Source: PagBrasil

Recent Performance

Linx’ topline revenue by quarter has grown unevenly but Q4 2019’s results were 17.4% higher than the same period in 2018, as the chart shows here:

Gross profit by quarter has also been uneven but trending upward:

Operating income by quarter has been positive, however Q4 2019’s results were 11.5% below that of the same quarter in 2018:

Earnings per share (Diluted) have diminished but remained at least equal to or above breakeven:

Source for chart data: Seeking Alpha

Since its IPO, LINX’s stock price has fallen 57.3 percent vs. the U.S. Software index’ rise of 19.8 percent and the overall U.S. market’s fall of 3.8 percent, as the chart below indicates:

Source: Simply Wall Street

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure	Amount
Market Capitalization	$669,010,000
Enterprise Value	$715,990,000
Price / Sales	3.25
Enterprise Value / Sales	3.65
Enterprise Value / EBITDA	22.89
Free Cash Flow [TTM]	-$96,650,000
Revenue Growth Rate	14.97%
Earnings Per Share [FWD]	$0.05

Click to enlarge

Source: Company Financials

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming the above generous DCF parameters, the firm’s shares would be valued at approximately $2.08 versus the current price of $3.73, indicating they are potentially currently overvalued, with the given earnings, growth and discount rate assumptions of the DCF.

Commentary

In its most recent form 6-K, management relied on an SEC order allowing companies affected by the Covid19 pandemic to delay the filing of its annual report for the year ended December 31, 2019.

The firm is headquartered in Sao Paulo, Brazil, which has been hit by the pandemic in recent weeks.

Additionally, management highlighted the potential for customer disruptions on its core businesses, effectively warning on forward financial results without saying as much.

The Brazilian economy, where the firm is active in its operations, has suffered from multiple economic, political and now health crises in recent years, so it is unfortunate that economic activity will be negatively affected yet again from conditions outside management’s control.

Without guidance, investors don’t know what management’s plans are to respond to the crisis.

As to its financial results, Linx had been performing relatively positively since its IPO debut, growing revenue and gross profit while retaining positive operating and net results.

For its stock, my DCF with generous assumptions shows it is still potentially overvalued at its current level.

Given the lack of management communication, the rising infection rates of the Covid19 virus in Brazil and the apparent high price of the stock, my bias on the stock is Neutral at its current level.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[BuckingTheTrend]

I'm no expert, but I tend to believe that COVID-19 fears will accelerate the digitization of the brazilian retailers. I also see this partnership with Mercado Libre positively : ri.linx.com.br/...

I recently entered the stock and plan to increase my position gradually.

[The Brazil Hustle]

If I am not wrong the June 2019 thing was a follow on . It was public in Brazil already .

[Lost-at-sea]

Just to add, somebody just bought 46,875 shares in the aftermarket at 3.59
Which is .10 above the close.

[Lost-at-sea]

Jefferies has a very recent April 1st $5 price target on it.
You have a $2 target. Why such radically price targets?
I mean we are talking 250% difference! Should the Jefferies analyst be fired?