DLocal

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

DLocal is a cross-border payment processing platform, primarily focused on emerging markets, connecting global merchants with local payment methods and facilitating cross-border transactions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

DLocal’s business can be best understood as an intermediary, bridging the gap between global merchants (e.g., e-commerce companies, streaming services) and consumers in emerging markets where traditional credit card penetration is lower and local payment methods (e.g., local bank transfers, mobile wallets, cash payments) are more prevalent.

Business Overview

  • Revenue Distribution: DLocal primarily earns revenue through transaction fees charged on each payment processed through their platform. These fees vary by geographic region and payment method. DLocal has a broad geographic scope focusing on Latin America, Africa, and Asia and its growth has come from these regions. The company processes billions of dollars in total payment volume per quarter, showcasing the scale of its operations. However, the latest quarterly earnings showed a decrease in margins of certain types of transaction fee.

DLocal generates revenue on 2 sides of a transaction, from sellers (global merchants) and from the consumers in the markets that the merchants want access to.

  • Industry Trends: The cross-border payments market, particularly in emerging economies, is experiencing significant growth, driven by factors like:
    • E-commerce boom: Increasing e-commerce adoption in emerging markets fuels the need for cross-border payments solutions.
    • Globalisation: Expansion of multinational companies into new markets creates demand for platforms facilitating cross-border transactions.
    • Digital payment adoption: Shift towards digital payments in emerging economies increases the potential of DLocal’s services.
    • Limited international payment options in emerging markets: Many consumers in these markets do not have access to global credit cards which makes their services even more valuable
  • Margins:
    • DLocal operates with high gross margins, typically above 50%, although recent earnings have shown a decline in margins, particularly in some types of cross-border payments. A decrease in margins was noted in Q2 of 2023.
    • EBITDA margins are impressive; however, the net profit margin has been substantially lower due to high operating expenses.
  • Competitive Landscape: The cross-border payment landscape in emerging markets is competitive, with several players vying for market share. Some notable competitors include:
    • Adyen & Stripe: Well-established global players expanding into emerging markets
    • Local payment providers: Existing players in emerging markets with specific expertise in local payment methods. However, most of these do not have the global presence and capabilities of DLocal.
    • Other international players: Competitors that are in a position to scale and compete aggressively as markets become more developed.

Although the overall market for cross-border payments is high-growth, the competitive intensity is also high. DLocal has high profit margins, but this is an indication of high growth potential and there is a very real risk that competition will move in and hurt their profitability.

  • What Makes DLocal Different?:
    • Focus on emerging markets: DLocal specializes in emerging markets, unlike most competitors who focus on developed markets and have a unique perspective on those regions.
    • Extensive local payment network: DLocal boasts an extensive network of local payment options in each region it operates in.
    • Regulatory expertise: DLocal has developed an expertise in navigating complex regulatory frameworks in various emerging markets.
    • Strong local knowledge: The company invests heavily to build a presence on the ground in the countries that it operates.
    • High Growth rates: Despite the difficulties and headwinds the company is facing, the company is growing at great speeds.

Financial Analysis

  • Revenue Growth: DLocal has shown a track record of very high year-over-year revenue growth. However, some signs are beginning to show that the growth of the company may begin to taper a bit, mostly due to macro-economic environment issues.

DLocal’s revenue increased 41% to 187.3 million and their total payment volume went up by 55% YoY. The company also had a net expansion revenue rate of 161%, showing how much they have managed to grow their business with current clients.

  • Profitability: While DLocal’s gross margins are strong, operating expenses, especially sales and marketing and technology, have been significant. They have stated the intent to keep reducing their operating expenses to make their business more efficient.
  • Cash flow: The company continues to be profitable and cash generative. In the latest quarter, the free cash flow was $67 million.
  • Balance Sheet: DLocal’s balance sheet is reasonably healthy with low debt, and a decent amount of cash on hand. They have good liquidity and are not in danger of bankruptcy.

In its latest quarterly report, DLocal had $540M in cash and short-term investments.

  • Recent Concerns and Controversies:
    • DLocal recently experienced a significant drop in its share price due to a short report issued by Muddy Waters. The report alleged several accounting irregularities in the business and a history of overreporting growth.
      • The company responded aggressively to the short report, claiming their findings are false. DLocal stated that their accounts are all in order and they follow all of the GAAP rules and requirements.
      • The incident has shaken investor’s confidence, raising concerns about the credibility and transparency of DLocal’s disclosures.
  • Management Discussion: The management have consistently highlighted that, although it may seem that they are not focused on profitability at first sight, they are investing a lot in technology development and growth expansion to reap the rewards for long-term value creation. While they have promised to improve efficiencies of their business, no timelines have been shared. They are still confident in their business model, and say that that they are investing in the correct business for sustainable growth. The management also noted they had no issues, as noted by Muddy Waters and all their financial books were in order. They have also re-iterated the transparency of their business.

Moat Assessment: 3 / 5

  • Sources of Moat: DLocal benefits from several sources of competitive advantage:
    • Switching costs: By integrating deeply into merchant’s payment systems, DLocal creates a high degree of customer lock-in.
    • Network effects: The value of DLocal’s platform increases as more merchants and payment methods are added to the network, as well as creating a larger presence within existing markets, and expanding to new ones.
    • Intangible assets: DLocal has developed unique technological solutions and a brand name, especially in emerging markets. They are also very knowledgeable about all the financial requirements and rules in each of the markets they serve, something that’s difficult to replicate.

Unlike other payment processing companies, DLocal focuses on connecting companies with users from emerging markets. This has the benefit of higher growth and lower penetration by competitors.

  • Moat Rating: DLocal has a decent moat, but one that is not that wide and should be kept under continuous review because of the potential of disruption and increase of competition. The company’s focus on emerging markets creates a strong position for the company with the unique knowledge needed, but it also carries a lot of risk and could limit the potential for growth.
    • There are concerns over sustainability of the high revenue growth and there are other competitors entering and disrupting the market which could lower their margins. There are also concerns on the management team because they need to prove that their accounting practices are fair and transparent. The company needs to continue to grow its market share, improve its profit margins, and invest heavily in technological innovations to retain its moat.
  • Risks to Moat and Resilience:
    • Increased competition: More competition will likely squeeze their margins and limit future growth. Competitors that are well funded can start to replicate the services that DLocal offer and take market share.
    • Technological disruption: New technologies may emerge that make DLocal’s solutions less relevant.
    • Regulatory changes: Changes in regulatory policies could make it difficult to operate in certain markets. DLocal is operating in many different countries and this risk is real, as certain policies may affect some regions more than others, or can come with some difficult tax consequences.
    • Macroeconomic volatility: Economic downturns in specific markets could reduce transaction volumes and growth, and therefore profitability. Macroeconomic volatility also implies risks of devaluation, inflation, and price controls.
    • Operational Issues: Having been accused of shady accounting practices and misrepresentation by the market, trust may be hard to recover, therefore the management needs to focus on building more trust and transparency in their business.

Understandability: 3 / 5

  • DLocal’s business model is relatively straightforward, operating in the payment processing industry, and by being an intermediary the value that it provides to global merchants and local markets is very easy to understand.
  • However, some of the technical parts of the analysis, such as accounting of their numerous subsidiaries and complex reporting, as well as the differences between GAAP and other accounting standards, can make it less obvious and harder to keep up with the business. They operate in various foreign currencies and they use financial instruments to offset some of the risk, so having a broad knowledge of financial instruments will be necessary to fully understand the business and its true value.
  • Overall, it requires some financial and business expertise but is not too hard to grasp.

Balance Sheet Health: 4 / 5

  • DLocal has a robust balance sheet with a good amount of cash. The cash on hand allows the company to reinvest in its business and expand further.
  • The debt is not too high and the company seems to manage it responsibly. However, the risks associated with the market that DLocal operates in may require some higher cash holdings than in a mature market.
  • They also have a relatively low level of goodwill, so that is not a main consideration in its operations. However, goodwill from any acquisitions will likely increase that amount.
  • The company does not pay dividends; instead it invests money back into its business. Although dividends are a good sign of the companies’ performance and are favored by investors, the strategic outlook at this time for DLocal is more growth-oriented.
  • Overall, it is a well-managed balance sheet.

Conclusion

DLocal is a high-growth company in an industry with plenty of tailwinds, it has a good moat and solid underlying financials. The management continues to express confidence in its long-term value creation. However, the risks are also very real and the recent controversy has certainly damaged the business in the short term. The company should work towards earning the market’s trust back. While this has created a great entry point, it is also important to remember the potential downside that can come along with a company in a complex and fast-growing market. More recent reports are way more important than past ones, and the company’s management should focus on improving the transparency of their reports and earnings.