DLocal, a new invest and investigate!
$2B company that could 3x?
While I've been happy with reducing the number of companies in my portfolio, I've recently been exploring a new name that has the potential to fit my long-duration growth portfolio and is currently trading at what seems to be a very very good value to enter and investigate further.
That name is D-Local, who offer a one-stop shop payment processing solution in emerging markets from Latin America through Africa and Asia.
What interests me is that they've managed to grow their Total Payment Volume (TPV) at an astounding 92% CAGR over the past 6 years. This has been coupled with strong earnings, gross profit dollars, and EBITDA growth. The company is profitable and growing.
Payment processing is a very sticky business. Think Visa, MasterCard, Stripe, and Adyen - all businesses that are outstanding. Being able to purchase a share in such a business when it's still in its early innings is exciting and leaves plenty of room for multiple years of growth. This is why this could fit my long-duration growth portfolio. D-Local is currently trading at around 13 times NTM adj. EBITDA, which is forecast to grow 25% this year, making the valuation very appealing.
What else appeals to me about this company in the research I've done so far?
An excellent management team (based on industry consensus). The company has brought in a long-time CFO from MercadoLibre, the largest e-commerce company in Latin America. According to all appearances, this is a company that has been executing extremely well for the past eight years since its founding.
The valuation is very appealing, the total addressable market is very appealing, and the stickiness of the business is appealing. Once a merchant uses you, especially across multiple emerging markets, it's hard to imagine them switching. They have the best companies in the world as their customers, including Amazon, Google, Spotify, and Facebook, giving credence to them as a leader in these markets and credibility to the value of their solution.
The company has taken a huge beating since coming public in 2021. Recently, after delivering Q4 2024 results and giving their forecast for 2025, the company dropped another 20 to 25%. It seems clear that the market is not favoring a few things about this business. While TPV volume has been growing incredibly fast, the take rate of the company has gone down dramatically from 1.4% last year to roughly 1.1% in Q4, and is forecast to drop even further. So while TPV has grown, net income and adjusted EBITDA hasn’t grown nearly as quickly.
For context, In developed markets, take rates for payment processing companies such as Visa, MasterCard, Stripe, and Adyen are much lower, in the 15 to 30 basis points range. If D-Local suffers a similar compression over time, that would put the company's business model under significant strain until they reach scale. Payment processing is really a volume game; it doesn't make sense until you reach hundreds of billions in TPV, and that's when you really start hitting leverage on your operating expenses. The take rate coming down has been a red flag for investors, mainly because it could be signifying that D-Local's market position might not be as strong as first thought.
Secondly, the company has been investing dramatically over 2024, expanding its headcount, which has also pressured its operating margin.
Together, these seem to be why the company is trading at such a low valuation. Anyway you look at it, 13x Adj. EBITDA for a company growing at 25% seems very low, even considering that this is a volatile emerging markets play.
There are a few reasons why I'm not making this yet a core position; and that this is an invest and investigate.
I want to investigate the margin story more in depth and the longer-term operating profile for this company if they reach the global volume of payments that they should.
Competition is also something that is on my mind: Who is the main competition for D-Local? What is the impact of cryptocurrency and stablecoins on their space? The whole fintech landscape is one that I am not familiar with enough, and building up a circle of competence in this space will require time.
I also want to do further research on management in terms of measuring their promises versus their execution and learn more about the future growth initiatives of the company.
Lastly, I want to understand if there’s something else the market is thinking that I’m missing.
It seems clear to me that the TAM is immense, and that the Global South and emerging markets are a huge and untapped market. If you reach that entrenched position of being the Visa and MasterCard, that is just a fabulous business to be in.
Dlocal is a volatile relatively small cap, only partially in my circle of competence, that I’ve only started researching, so I’ll start with a 1% position size. As I continue my research and answer my questions I’ll consider adding.
On take rates — Stripe / Adyen have 15-30 bps in developed markets.
Take rate is really the biggest question e.g where is the floor and the insight I would offer is that 50% of revenues are cross border with FX spread. V/MA charge 100 bps FX fees which is the most significant competition to DLO (international acquiring) and I think DLO can maintain most of this spread because they are circumventing international acquiring fees by using local acquiring so merchants end up paying less even with DLO FX fees.
In the other, 50% of revenues for local to local transactions I think you can see the 15-30 bps you are mentioning their competitors charge in developed markets.
That should net out to like .6-.8 longer term as something like a floor and then you can kind of reverse engineer gross profit and EBITDA from there based on TPV growth.
DYODD but this is just what I have found on this topic which is the most important piece of this thesis outside of growth in TPV.
On competition — the largest competition is international acquiring/credit cards and the biggest direct competitor is a private company called EBANX but DLO has more scale.