dLocal (DLO)

Investment Analysis Clubs Saul’s Investing Discussions
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Hi everyone, I have been a lurker here for a while, and this is my first post. I think this company has been mentioned occasionally in this board but hasn’t had any formal thread yet. So I created one for everyone to discuss.

The company is dLocal (Ticker: DLO). It is a young Uruguay company that IPOed in June and had its first earning call in August, reported an impressive growth at 186% YoY.
DLocal powers local payments for global merchants to sell their services in emerging markets across Asia, Africa, Latin America. Now they are operating in 30 different countries already, and this number will keep growing.
There are a lot of things to love about this company:

  1. It is growing really fast. Its revenue increased by 46% QoQ in the most recent earning report

         Q2-21 Q1-21 Q4-20 Q3-20 Q2-20 Q1-20
Revenue   59   40.3   35.0  31    20.7  18
QoQ%      **46%**   15%   13%   50%   15% 
YoY%      **186%**  124%

The total payment volume. They grew their TPV from 0 in 2016 to $2B in 2020. Last quarter, they reported $1.5B TPV already, 3/4 of the whole 2020 number.


         Q2-21 Q1-21 Q4-20 Q3-20 Q2-20 Q1-20
TPV ($M) 1456   926   757   572   348   388
QoQ%      **57%**   22%   32%   64%   -10% 
YoY%      **318%**  139%
  1. Despite growing really fast, this company is already profitable with a whopping 44% Adjusted EBITDA margin, increased from 40% last year. Yes, it’s earning margin. They are a cash-generating machine already. The margin has stayed consistently at around 40-44% in the last 5 quarters.
  2. As a result, it has a healthy cash/debt ratio.
  3. The TAM is huge. They claimed that the total addressable TPV in countries they serve (excluding China) is $1.2 Trillion. Needless to say, they haven’t touched a fingertip of the market.
  4. Their customers have plenty of big names, including Microsoft, Netflix, Amazon, Didi, Spotify, etc.
  5. Their Net-retention-rate was 196% last quarter, increased from 186% from the previous quarter. Outstanding number.

Risks:

  1. Concentration risk: Top 10 customers accounted for 62% of its revenue
  2. Expensive: The company is valued at $16B or 98 EV/S
  3. Competition: Of course, plenty of companies could jump into those markets and compete with DLocal. However, DLocal’s head-start might give them a significant advantage in this competition. Currently, their take rate is 4%, way higher than other companies like Paypal (2%), indicating they can charge customers more than their competitors (if any). However, this number is in a downtrend (the last 6 quarters: 4% - 4.35% - 4.62% - 5.42% - 5.93% - 4.64%)
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Dlocal (DLO) Q2 2023
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One of the big things missing from this discussion is the actual revenue. It is easy to grow dramatically at very low revenue levels … gets a lot harder when the prior comparative is itself high.

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I was in DLO and exited due to a comment from @XMFPennywise a couple months ago that made me question the management team.

Upon further research I found this interview from TMF:
https://www.fool.com/investing/2021/08/19/dlocal-what-invest…

Not sure if it’s behind a paywall, so I’ll just pick a couple quotes that stood out:

“This is a business that has a lot of the tell-tail red flags of a questionable management team. One of them being the fact that there’s a decent amount of insider transactions. Essentially the company making deals with other businesses for which the insiders, whether that be directors or management, have a financial stake. Nearly 5% of the total payment volume that DLocal committed to last year, did go through local processors, for which directors had an ownership stake.”

“virtually, the entire management team comes from a separate business called AstroPay, that they also founded out of Uruguay. AstroPay is a payment processing service, theoretically competitive, but they are really focused on serving industries that in the jurisdictions in which they’re operating are questionable at best and are legal at worst. These include online gambling and adult entertainment. They own controlling stakes in both of these competitive businesses, but it almost feels that they just carved out the legal part of AstroPay’s business and turned it into DLocal to try to separate the two.”

“I also see competitive risk here. The two companies (Astropay/DLocal), as part of this carve-out agreement, has basically it’s one big non-compete agreement in 2018 that expires sometime this year. DLocal cites this exploration as a competition risk.”"

“It’s almost like they’re setting that up here as just an ingenious scheme. We separate out the legal business. We have a three-year non-compete, and then we have both businesses able to hit the same legal markets if we need to, so we can’t lose, buddies, pass the beer. Unfortunately, you’re not sitting at the table with them. This was something that, boy, gave me pause.”

Daws (no position in DLO)

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Nearly 5% of the total payment volume that DLocal committed to last year, did go through local processors, for which directors had an ownership stake."

Ok there might be some red flags here but if you’re worried about a 5% exposure to related transactions when they are growing at 186% YoY, then I really don’t think this is an economic issue to be concerned by.

Ant

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@Ant

“Ok there might be some red flags here but if you’re worried about a 5% exposure to related transactions when they are growing at 186% YoY, then I really don’t think this is an economic issue to be concerned by.”

I 100% agree this is not an economic issue. I initially invested in this company, following the numbers, which appear great. But in addition to the numbers, I need to have confidence in the management. In this case, there were enough question marks and red flags with management for me to divest my interest and watch from the sidelines.

Best of luck to you!

Daws

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