Fintech
dLocal: A diversified fintech for emerging markets
Approximately 85% of the world’s population lives in what are commonly referred to as “emerging markets”. This giant ecosystem contains 158 countries, all distinctly different places to operate. The fifth largest country in the world, Pakistan, is very different from the sixth largest, Nigeria. Both represent nearly half a billion customers.
If you are the owner of a large multinational brand, it makes sense to sell your products in as many jurisdictions as possible. In each country you will need to accept and process payments using your preferred payment methods. Understanding each culture from scratch would be a nightmare. Why not find someone who has already built a payments platform that supports the world’s largest emerging markets? This is dLocal (DLO).
Our unique direct API payments platform enables global businesses to reach billions of customers, accept payments, send payments and settle funds in emerging markets.
Credit: dLocal
Short end of the stick
Several years ago, dLocal shares were beaten and battered after a brief report accused them of various indiscretions, something we talked about in a piece aptly titled: “dStock premises demolished by a short report.” After two independent investigations and after existing major shareholders increased their investments, we have finished that there probably wasn’t much merit in the report. dLocal’s client list includes names like Amazon, Microsoft, Uber, Meta, and Spotify. Companies of this caliber are likely to scrutinize service providers, especially for anything related to finance.
With growth continuing unabated, it appears these brief accusations are now behind the company. A nail in the grave of the short thesis was the announcement of the previous one MercadoLibre CFO Pedro Arnt left his employer of 25 years to join dLocal as co-CEO. Leaving an $88 billion e-commerce company to join a $4 billion payments company requires a leap of faith, and DLO shares surged as much as 49% on the news. Three months after Arnt joined, dLocal’s chief financial officer resigned. Today, Arnt is the sole CEO and last month hired a new CFO who spent 30 years at General Electric. If there was some accounting mess going on, it was probably discovered, rectified and buried with the departure of the old CFO.
Metric key
A tenured executive like Arnt knows the importance of KPIs, and his company now provides three for which investors will receive guidance. (TPV stands for Ttotal Ppayment vlight.)
The company says, “we are including TPV guidance this year, as we believe this is the most relevant operating metric for the company and the clearest indicator of market share.” This is because TPV simply measures the amount of money flowing through the dLocal platform for which it takes a cut – also called a “withdrawal rate” in industry parlance – and this becomes the company’s revenue. In 2023, dLocal saw $17.7 billion flow through its platform, raising $650 million in revenue, an acquisition rate of approximately 3.7% (down from 3.96% in the year previous). By not providing revenue guidance, the company does not have to commit to a target acquisition rate, although we can expect it to continue to decline according to the statement below.
Our expectations for TPV and gross profit assume an increased mix from “Tier 0” merchants as we continue to enhance those global relationships, driving incremental TPV and wallet share from the world’s leading technology companies, but at lower withdrawal rates.
Credit: Nanalyze
The bigger dLocal gets, the more it can afford to lower prices to potentially capture more market share, as long as it continues to grow volume at a strong pace. As for the second metric for which we are provided guidance, “gross margin”, it is not expected to grow as fast as TPV, indicating cost pressures. The third metric, “Adjusted EBITDA,” indicates the company’s expected profitability. Our focus is on TPV as a proxy for market share gained. Last year dLocal reported positive operating cash flows of $166 million, bringing its cash balance to $326 million. If they can maintain this trajectory, raising capital will become a thing of the past, unless, of course, they look to grow through the mergers and acquisitions that the CEO talked about in the last earnings call.
We will continue to look at three potential vectors; one is commercial distribution; the other is product innovation; and the third is geographic footprint. Ideally, we will combine all three of these.
Q4-2023 Local Earnings Call
Growth of emerging markets
One use case stands out in dLocal’s 2023 deck. An unnamed “global Internet satellite service provider” needed a quick and easy way to expand into LATAM, APAC, and EMEA with the goal of “becoming a public utility” in every locale. Using dLocal, they integrated 11 countries in one go, launching them all at the same time in less than a month. The unnamed client is now planning to launch in over 20 countries using the dLocal platform. The following tweet buried in the dLocal 2023 investor deck indicates that Starlink is a customer, and likely the one the use case was referring to.
The irony is that the more people connect to the Internet via Starlink, the larger the potential customer base becomes for companies using the dLocal solution. When we look at TPV growth in each location, we see countries like Brazil, Mexico, and Nigeria experiencing extraordinary growth, driving dLocal’s revenue growth to 55% last year.
Some of the world’s largest companies believe these markets are the low-hanging fruit when it comes to selling goods and services to 85% of the world’s population. Diversification of revenue across all markets will help dLocal weather the inevitable storms that will arise in these volatile and unpredictable environments.
Assessment
When a company becomes profitable, it can benefit from different valuation methods such as the price-to-earnings ratio. Even if dLocal is profitable, we will still use ours Ssimple vassessment Raction (SVR) so that we can examine its relative evaluation over time. The last time we added stock was with an SVR of 5.6, lower than our catalog average of 6.3. Here is how dLocal’s SVR has performed over the last year.
With a current SVR around 5, dLocal appears to be reasonably priced considering the tremendous growth they have experienced and the opportunities that lie ahead. The company plans to invest heavily this year and increase headcount by around 50% (mostly in engineering), which means they are likely working on being able to scale and address a population of 2 billion potential customers a which are sold to 600 merchants and growing.
In the past, people in emerging markets had to jump through hoops to purchase products and services that developed markets enjoy. VPNs, prepaid cards, virtual phone numbers, and virtual addresses are all methods you no longer need to use. dLocal’s platform is solving pain points on both sides of the transaction, and some of the world’s largest companies can’t seem to get enough of it.
Conclusion
dLocal now serves 5 of the 6 largest technology companies in the world. A net retention rate of 150% means that existing customers are using their platform more every year. A tenured leader at the helm helps alleviate any remaining concerns that emerge from the brief report. It all looks good on paper, but experience tells us that this volatile stock will overwhelm investors regardless of how “fair” we might think it is. Just when you’re convinced you’ve found the perfect growth stock, company-specific risk thwarts your plan. With earnings just days away, let’s hope dLocal’s growth streak continues.