dLocal

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 5/5

dLocal is a payment processing platform focused on connecting global merchants with billions of consumers in emerging markets by enabling payments, facilitating transactions, and accelerating growth in these high-potential regions.

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 primary business is enabling cross-border payments for global enterprises, primarily e-commerce and online retailers. They help those companies operate more efficiently and sell their products and services to customers in developing countries.

Business Overview:

Revenue Distribution:

The company’s revenue is mainly derived from fees charged to their clients for processing payments, and it depends on transaction volumes.

  • Revenues are transactional, a percentage of transaction volume. dLocal acts as an intermediary for their clients, facilitating both pay-in and pay-out transactions between merchants and their users, allowing global companies to collect local payment methods from their users in emerging markets.
  • Multiple payment options: dLocal provides local payment options to consumers, such as cash and digital wallets, that often aren’t easily accessible through global payment rails, thus giving a competitive advantage in specific regions. They offer over 700 local payment methods and around 40 different global payment methods.
  • Global reach: The platform allows payment processing in many areas of the world. dLocal is an enabler for companies that intend to operate in these diverse and fast-growing economies. dLocal processes payments in 39 countries, primarily in Latin America, Africa, and Asia.
  • E-commerce Growth: The growth of ecommerce and digital payments is a long term trend, particularly in emerging economies, as middle classes grow and access to the internet spreads.
  • Global Expansion: Global merchants are looking for reliable ways to expand into new markets while consumers prefer local payment methods over global payment methods. dLocal is a key player to help this expansion.
  • Complexity of Payment Systems: The payment ecosystems of emerging economies are complicated, with various local payment methods (from cash to e-wallets) and varying regulatory rules. dLocal simplifies these for global merchants.
  • Increasing Regulatory Scrutiny: The regulatory environment is constantly evolving, increasing pressure on companies to remain compliant and up to date on regulations. Companies like dLocal, with expertise in these fields, are well-positioned to succeed.

Margins:

  • Adjusted EBITDA and Adjusted EBITDA margin have been very positive. Although their cost of services also increased, margins remain above 30%. These metrics reflect dLocal’s ability to control costs while growing revenue.
  • Adjusted EBITDA Margin for Q1 2023 was 39.6%.
  • Adjusted EBITDA Margin for full-year 2022 was 40.6%

Margins and operating efficiency are key features that make dLocal a good business.

Competitive Landscape:

  • Competition exists but not as a threat: dLocal competes with both global and local players, in a fragmented market. DLocal’s primary focus on serving global enterprises with payments in developing nations sets them apart. There is significant value for a company that can provide local payment options to customers.

What Makes DLO Different?

  • Specialized Focus: dLocal differentiates itself by focusing on emerging markets, and they claim to be first to market in many emerging markets they operate in.
  • Comprehensive Payment Methods: The company offers a unique single platform which enables local payins and payouts. That is a competitive advantage over companies who can only offer one payment solution.
  • Established Relationships: The company has developed strong relationships with local financial institutions in each country they operate in, which is crucial for reliable payments.
  • Local Expertise: They leverage local teams who have regional understanding and knowledge to better serve their merchants, making the process more streamlined and efficient.
  • Scale in Emerging Economies: dLocal is uniquely positioned to serve global enterprises by handling high-volume transaction flows for clients. This gives economies of scale and makes it harder for competitors to make meaningful impacts.

dLocal has a first-mover advantage and a large network effect.

Financials:

DLocal has demonstrated strong financial performance, particularly their revenue growth and profitability. However, some concerns have emerged with their debt and cash flow.

  • Revenue Growth: Revenue has been growing at an astounding pace, both organically and from new merchants, showing the increasing adoption of their services.
    • 2022: USD 419 million (57.7% growth YOY)
    • 2021: USD 265 million (63% growth YOY)
    • 2023 Revenue grew 67.2% year over year, reaching $669.6 million, with a 40.6% Adjusted EBITDA margin.

dLocal’s revenue growth is impressive.

  • Profitability: Adjusted EBITDA has been strong and growing, reflecting management’s ability to control expenses and scale efficiently.
    • Adjusted EBITDA: 2023 $382.1 million / 2022 $264.1 million / 2021 $117.9 million.
  • Adjusted EBITDA Margin: 2023 40.6%, 2022 40.0%, 2021 41.3%.
  • Cash Flow:
    • Free cash flow for full-year 2022 was 115.3 million dollars.
    • During 2022 and 2021, net cash used in investing activities included $142.7 and $15.6 million, respectively, for capital expenditure. The business doesn’t appear to be cash intensive, and the investing is focused on maintaining current infrastructure.
    • dLocal does not pay any dividends.
    • There seems to be some volatility in cash flow, so this metric should be followed closely.
  • Capital Structure: The company has almost no debt, using its cash for business growth and acquisitions. At the end of 2022, its total long-term debt was 29.5 million dollars compared to cash and cash equivalents of 448 million dollars.

dLocal is profitable and well managed. They do not yet pay dividends, but have a strong cash flow and low levels of debt.

Recent Concerns and Management Response:

  • Short-Selling Report: Some concerns over the ethics of dLocal’s transactions have been brought by a short seller. However, a lot of those claims appear to be incorrect or exaggerated. The company has reiterated their commitment to transparency and strict legal compliance.
  • Increased Debt: dLocal has increased debt during some acquisitions, so debt levels have to be monitored. However, it is still very low and should not be a major concern.
  • Forex losses: dLocal is very exposed to the effects of currency fluctuations in countries that they operate in and any changes may negatively affect their margins. However, dLocal has said that they have improved the operational framework for managing foreign exchange rates and their future guidance includes these scenarios.
  • Global instability: Given the state of world affairs, with different economic and political situations, the company may face difficulties in growing at a reasonable rate.
  • Regulatory Changes: New or updated financial regulations could adversely affect dLocal and its business.

In general, concerns over accounting irregularities are overblown and are from a single source. There are legitimate risks surrounding debt, global uncertainty, and regulatory risks, so investors must pay attention to these risks. However, management has said they have experience and teams in place to manage such risks.

Moat: 2/5

dLocal possesses a narrow moat. The core of the moat resides in some forms of switching costs and network effects:

  1. Switching Costs:
    • Once a client integrates dLocal’s platform, there is significant switching cost. Changing platforms would mean that the business would need to disrupt established payment systems and undergo a complex and costly integration to other solutions. That creates a dependency that enables dLocal to extract revenue from its clients.
  2. Network Effects:
    • As dLocal gains more market share, the more attractive it becomes to clients due to their increased reach and integration capabilities and more data points to create more insights and higher conversion rates. This effect is especially pronounced in emerging markets, where the company has significant expertise and local connections. However, this network effect is not very strong given they are selling to businesses who are relatively agnostic.

However, some points weaken the moat:

  • Competition: Though they have a first-mover advantage in some economies, competition in payment technologies is intense. Companies such as PayPal, Adyen, and Stripe, all of which have a big established base in developing markets, are increasingly targeting emerging markets.
  • Technological Disruption: The payment technology space is very dynamic, with new payment methods constantly emerging. There’s the possibility of disruptive technology undermining existing infrastructure.
  • Concentrated Clientele: The company’s TPV is highly concentrated among a few large customers, creating some dependence in revenue. The top 10 customers make up 59% of dLocal’s total revenues. If a major client pulls from dLocal, it could substantially affect revenue and growth.
  • Industry Cyclicality: dLocal’s payments volumes can depend on economic conditions in emerging markets, as consumer habits and purchase power are subject to economic cycles, which would introduce more risk to revenue streams.

Understandability: 3/5

DLocal’s business model is moderately complex. It’s not inherently difficult to grasp the concept of payment processing in emerging markets, but the specifics of how they achieve this, including relationships with local providers, cross-border regulations, compliance, and the different types of transaction methods can be challenging. However, the basic idea of enabling payment processing in emerging markets with an easy to use platform for large companies is relatively simple.

Balance Sheet Health: 5/5

DLocal’s balance sheet is very healthy.

  • Low levels of debt: They don’t rely on debt to operate the business and only take on debt in specific situations. Total long-term debt at the end of 2022 was just $29.5 million while they have 448 million in cash.
  • Growing cash pile: Their cash continues to increase, while they keep operating with significant profitability, ensuring future financial stability.
  • Good investment metrics: Their investments in property plant and equipment are relatively small, which shows they do not need substantial capital investment to grow their business.

dLocal is a very financially secure business with a pristine balance sheet and profitability.