DLocal

Moat: 2.5/5

Understandability: 4/5

Balance Sheet Health: 4/5

A global payment processing platform connecting global merchants with local payment methods in emerging markets.

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 facilitates cross-border payments, enabling international businesses to reach customers in regions with complex payment infrastructures, particularly emerging markets.

Business Overview:

DLocal operates as a payment processing platform, acting as an intermediary between global merchants and local payment methods in emerging markets. This means they handle the complexities of local payment methods, such as credit cards, bank transfers, digital wallets, and cash payments, enabling international businesses to accept local payments seamlessly. They are not a payment facilitator, they are the payment processor, which means they take risk. Think of them as the payment rails for international merchants in Latam, Africa, and Asia.

  • Revenue Distribution: DLocal primarily generates revenue through fees on payment transactions. These fees vary depending on the payment method, the country, and the type of client. Their revenue comes from processing fees from global merchants in order to sell to consumers in emerging markets.
  • Industry Trends:
    • E-commerce Growth in Emerging Markets: E-commerce is experiencing rapid growth in emerging markets. As internet access and mobile phone usage increase, more consumers are opting to shop online, thereby increasing demand for payment processing solutions in these areas.
    • Increased Regulatory Scrutiny: Regulatory changes in the financial services sector, especially regarding cross-border payments, are becoming more frequent and could affect the cost and ease of processing transactions. DLocal needs to remain adaptable in the face of these ever-changing regulations.
    • Adoption of Diverse Payment Methods: Emerging markets often have a patchwork of unique and varied payment methods. Global merchants need to provide customers with access to all of these payment methods if they want to reach a larger client base.
    • Growing Preference for Local Payment Methods: In many emerging markets, consumers prefer paying through local payment options they know and trust. This makes payment processing more complex and important for cross-border businesses in order to acquire these customers.
  • Margins:
  • DLocal generates higher margins from payment processing as they scale their platform and increase their volume. In general, for the past year, the company has gross profit margins above 50%, indicating a potentially strong pricing power within the industry.
  • Net income margins are typically much lower than their gross profit margins because they need to continually invest in R&D for their platform, as well as paying for employees and operational costs. This is typical for technology companies that are rapidly expanding.
  • Competitive Landscape:
    • The industry is competitive with several global and local payment processors vying for market share. Competition mainly comes from other large companies like Adyen and Checkout, but some smaller players are also present. Competitor differentiation usually centers around the geographic coverage, payment methods offered, ease of integration, pricing, reliability, and customer support.
    • Local payment processors often have the advantage of knowing the local market better. They might offer lower pricing. DLocal has an advantage in that their platform can integrate with global merchants seamlessly, they need to win over each local provider.
  • What Makes DLocal Different:
    • Emerging Market Focus: DLocal’s dedicated focus on emerging markets gives them specialized knowledge and expertise in these complex regions. A competitor operating in the developed market may be too slow to adapt and integrate new local payment systems.
    • Single Platform Integration: DLocal offers a single platform for merchants, making it simple for them to integrate with several local payment options. This platform helps in centralizing payments and reconciliation.

    • End-to-End Solution: Unlike payment facilitators, DLocal manages all aspects of the payment process (it is the payment processor), from acquiring funds to paying them out to the merchant. This creates a higher value offering for merchants and can increase switching costs.

    • Recent Issues
      • DLocal is currently under scrutiny after a short report was released by Muddy Waters Capital. While the stock initially dropped by 50% after the announcement, it has partially recovered to a 30% drop. The short report alleges, among other things, inaccurate accounting data from 2020, when the company was valued much lower. The company’s CFO has denied that the company has a significant risk, and the report has been classified as misleading by DLocal’s board members and the company in general.

Moat Assessment: 2.5 / 5

DLocal possesses some characteristics of a moat, but they are not particularly strong or entrenched.

  • Network Effects (Partial): There is a partial network effect. As more global merchants join DLocal, it gives more options for consumers to use the platform and vice versa. More payment options leads to a wider variety of consumer demand that attracts more merchants.
  • Switching Costs (Moderate): Once a merchant integrates with DLocal, the switching costs may be quite high because it takes a lot of work to integrate with another processor. Also, moving to another provider could lead to potentially losing data, which is crucial for their operations.
  • Intangible Assets (Moderate): DLocal has developed expertise in handling complex payment methods of emerging markets. The data and technology knowledge accumulated over time, are a barrier to entry for other competitors looking to immediately scale up.
  • Cost Advantage (Limited): They do not appear to possess a distinct cost advantage that would allow them to offer services at a lower cost than their competitors, except for potentially economies of scale.

These factors, especially switching costs and knowledge of complex local markets, provide a decent barrier to entry. It is unlikely that smaller competitors will be able to penetrate the market, however, larger companies with already-established infrastructure are a threat to its business. This is why we rate the moat at a 2.5.

Moat Risks:

  • Technological Disruption: The payment processing industry is rapidly evolving. New payment methods and technologies could render DLocal’s platform less competitive if it isn’t updated quickly enough.
  • Regulatory Risks: The company has to comply with countless different regulations from all of the areas it operates in, which are everchanging. As a result, the company must put significant resources into adapting to those regulations.
  • Competition: Competition is a real risk for DLocal, as the company needs to compete with well-established and well-capitalized players.

Business Resilience:

  • Geographic Diversification: DLocal’s presence in multiple emerging markets provides some degree of resilience to economic downturns or regulatory changes in individual countries.
  • Scalability: DLocal is scalable as a payment processing business. It takes more investment at the start to set up a stable and secure platform. Afterwards, they can process more transactions with only some small incremental costs.

Financial Analysis: DLocal has demonstrated a great ability for rapidly growing its revenue and volume. Its financials indicate high growth potential but it’s important to review the balance sheet and how the company is allocating capital.

  • Revenue Growth: DLocal has been expanding revenues, especially during 2021-2022. For 2023, the growth has slowed down, however, is still positive overall (78% year over year increase).
  • Profitability:
    • Gross profit margins have been stable and are generally strong over time. However, given the nature of payment processing, gross profit margins could potentially shrink as competition rises.
    • Net profit margins have also been consistently improving, albeit at a much lower rate than revenue growth, as DLocal is investing heavily in operations.
  • Cash Flow: DLocal’s operating cash flow has consistently grown in the past few years, indicating positive operating performance. However, free cash flow is slightly negative due to continued investments.
  • Balance Sheet:
    • Debt levels are relatively low and primarily comprise long term debt, which is a positive signal.
    • DLocal has a strong cash and marketable securities position which ensures they can continue to run operations.

Understandability Assessment: 4 / 5

The business of DLocal is easy to understand at the highest level-connecting merchants and consumers for the payment transaction. However, the detailed inner workings involving international banking regulations, security, and different types of payments, do add some complexity to the business. However, their business model is clearly defined and thus earns a 4 out of 5 in understanding.

Balance Sheet Health: 4 / 5

DLocal’s balance sheet is in good shape, having a large amount of cash and securities on hand compared to their debt obligations. However, since they are a younger and high-growth company, they haven’t yet proven they can maintain profitability over the long run. Thus, the balance sheet gets a 4 out of 5.