By Anirban Mahanti
dLocal from Uruguay DLO specializes in payment processing for global merchants operating in emerging markets. The company operates in 39 countries in Latin America, the Middle East, Africa and Asia Pacific. dLocal’s “One dLocal” platform enables global businesses to accept payments, send “payouts” and settle funds worldwide without the need for multiple payment providers and methods. In other words, dLocal can be a one-stop payment shop for multinationals in emerging markets.
Why should investors consider dLocal?
There are many reasons, but I would broadly categorize them into Opportunity, Business Model, Profitability, and Valuation.
First, emerging markets include some of the fastest growing economies in the world. Together they make up 50% of global GDP. Ignoring these countries is no longer an option. However, payment rails, consumer preferences and regulations vary in these countries, making it a challenge for multinational companies. A company like dLocal that addresses these issues across multiple markets through an easy-to-use platform is likely to be very attractive to global traders.
Second, payments as a business model have many attractive properties. Payment companies are like “tollbooths” that charge a fee (a toll) for transactions that flow down their payment highway. A by-product of this build-up is operational leverage at scale. Basically, there are upfront costs for setting up the infrastructure. Once everything is set up, each incremental transaction flowing through the platform brings additional revenue with little to no cost. At scale, payments can be hugely profitable as a business, as evidenced by the sky-high free cash flow margin of stalwarts like MasterCard MA and visa v.
dLocal is a young company, far from the scale of a MasterCard or Visa. However, dLocal is growing quickly and profitably. Recently reported third-quarter 2022 earnings had total payment volume (TPV) of $2.7 billion, up 51% year over year. The company had revenue of $112 million for the quarter, up 63% year over year, with Adjusted EBITDA up 58% year over year to $42 million.
Part of the company’s success lies in its ability to acquire and grow customers over time while maintaining a relatively low churn rate. Take rate, which is revenue as a percentage of TPV, has also remained relatively stable over time.
With an aggregate payment processing rate of $10 billion, dLocal has barely scratched the surface of its mammoth opportunity. Management believes the addressable market in terms of payment processing volume is $1 trillion. Instead of focusing on such big numbers, it might be more reasonable to expect continued high growth in payment processing volume over the medium term. With steady execution, the company should achieve an annual payment processing rate of $100 over the next decade and still have the opportunity to grow rapidly.
The company’s IPO in June 2021 cost the shares $21. The stock had a run up to the high $60 and is now trading close to its IPO price. The company’s execution since its IPO has been solid, but dLocal, like its other growth stocks, has come under pressure.
With trailing 12-month earnings per share (EPS) of $0.37, dLocal is currently selling for 60 times trailing earnings. This may not sound like a good deal at first glance, but it could be attractive if the company can continue to grow its TPV, maintain its take rate (i.e. revenue as a percentage of TPV) and benefit from its capital-poor business model, to generate outsized earnings growth.
About the author: Anirban Mahanti is Lead Advisor for 7investing. Prior to 7investing, Anirban spent more than 5 years at The Motley Fool’s Australian subsidiary in a variety of roles, including Director of Research and lead founding advisor to the market-leading small-cap ASX stock picks newsletter, Extreme Opportunities. You can follow Anirban on Twitter Click this link.