Morgan Stanley has moved Afya Ltd. (NASDAQ:AFYA) from an Equalweight rating to Underweight and lowered its one-year price target to $16.00 from $17.50. The downgrade rests on a series of structural and financial headwinds that the brokerage says will slow the Brazilian education group's growth and weigh on margins.
Valuation and recent performance
At the time of the call, Afya was trading at a price-to-earnings ratio of 9.48 and reporting gross profit margins of 65%. The company has continued to grow revenue, with InvestingPro data indicating a 14.07% increase over the last twelve months. Despite those headline metrics, Morgan Stanley's note emphasizes that attractive current profitability and valuation do not remove the risks tied to a maturing core medicine undergraduate base.
Key drivers behind the downgrade
- Market maturation - Morgan Stanley pointed to already mature medical undergraduate seats in Afya's footprint, which it expects will translate into slower volume growth going forward.
- Margin pressure from scaling investments - The bank highlighted investments required to scale non-core or adjacent businesses, which are likely to compress overall margins as the company reallocates resources.
- Medicine margin sensitivity - The firm warned that medicine margins could face compression if pricing weakens and a larger share of students transition into internship years that are more cost-intensive.
- Regulatory limits and debt cost - Regulatory constraints on medicine intake and a higher cost of debt following a Softbank debt redemption were cited as additional negative factors.
- Tax cash-flow timing - Morgan Stanley noted the minimum 15% tax rate is already reflected in Afya's profit and loss statements but expects it to begin affecting cash flow in 2026.
While the firm allowed that potential mergers and acquisitions could partially offset some growth pressures, that was presented as a mitigating factor rather than a certainty.
Recent quarterly results and peer analyst moves
Afya posted a stronger-than-expected third quarter for 2025, with earnings per share of $2.08 versus forecasts of $1.76 - an 18.18% beat - and revenue of $928.51 million, slightly above the $924.61 million forecast. Despite this operational beat, other sell-side analysts have also adopted more cautious stances.
- UBS downgraded Afya to Neutral from Buy and lowered its price target to $16.00, citing margin pressure following management's emphasis on investing in innovative technologies.
- JPMorgan moved the rating to Neutral from Overweight and set a $22.00 price target, describing Afya as a well-managed business but expressing a preference for other names in the medical sector for greater predictability.
Outlook
The combination of a mature core education market for medicine, the need to invest to broaden or scale other businesses, regulatory intake constraints, higher debt servicing costs and the timing of tax cash-flow impacts forms the basis for Morgan Stanley's more cautious stance. These factors have led multiple brokerages to temper expectations even as recent quarterly results exceeded consensus. How management balances investment priorities, margin preservation and potential M&A activity will be central to whether these analyst concerns ease or deepen.
Note: The report outlines analyst actions and company-reported metrics. It does not speculate beyond the items detailed above.