dLocal Stock Breakdown: Generational Opportunity or Commoditized Business?

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Stock Breakdown

This newsletter is adapted from a recent video Drew Cohen did on dLocal.

dLocal stock is down 72% since IPO, except revenues have since 5x'd, and operating profits are up 3x since.

They now trade at just 19x trailing earnings, with over 20% of the market cap sitting in cash.

What do they do?

They help many global enterprise companies like Uber and Didi and Shopify and Netflix and Spotify power their payments in the Global South, and they have been growing very quickly.

They now have over $55 billion in total payment volume (TPV) and have grown that amount by 75% in the last 12 months.

So what is the problem?

The issue they have been having is take rate compression, which essentially means the amount of money that they collect per payment has been decreasing a lot.

In fact, their take rate has dropped almost 2/3 in just the past 5 years.

And so the investor concern is how much farther can this go?

On the other hand, though, operating profits have consistently grown.

Business Overview.

So in 1 sentence, what dLocal does is they help global enterprises accept payments across what they call the Global South, which essentially is Latin America, Africa, the Middle East, and certain parts of Asia.

They were founded in 2016 in Uruguay.

The founders of this business, before going all in on dLocal, had a different business actually called AstroPay, and this was a consumer-facing payment app.

And very quickly, the thing that they learned was it was very hard to accept and facilitate a lot of different payment options.

And so they sort of pivoted in a way, and instead decided to focus on the B2B opportunity, which is becoming a business that just helps other businesses accept payments.

Part of the problem they were seeing was that even if a consumer had an international credit card, failure rates could be as high as 25% because the card networks would very often just automatically assume that it was a fraudulent transaction.

On top of that though, and the bigger point, is that most people do not have credit cards.

There's all sorts of other local payment methods that people use across all of these different countries that are not standard credit cards, and most companies do not have a standardized way of accepting payments for them.

So that is where dLocal stepped in to help facilitate these payments.

One of their early customers was DiDi, for instance, and the founder actually moved to China, lived there for 2 months to try to win that business, and the pitch is pretty simple.

What most international companies do is they'll go into these countries with their existing payment providers, but very often that's not good enough.

That's the simple pitch then, that dLocal is going to help someone like DiDi accept all of these different local payment options, and the best part is you're only going to have to use 1 simple API to turn on all of these different payment options.

Right now they have over 1,000 of them.

Netflix is one of their customers.

When Netflix comes into Brazil, sure, they'll be able to accept a lot of credit cards, maybe also Pix, which is really popular in Brazil too.

Their existing payment service provider can handle all that, but they won't be able to handle Boleto Bancário, cash vouchers, or PicPay, or other local credit cards that are on local schemes.

What this really does is it increases conversions, which is the big one.

Even if you are using an international credit card, the fail rate is much higher if it's a cross-border transaction than if you let dLocal locally process it, so conversion rates go up even in that case.

Some of the large enterprises that they help include Uber, Didi, SpaceX, Google, Shopify, Tencent, Shein, Microsoft, Netflix, Spotify, Booking, Expedia, MoneyGram, and many others.

With all of these companies, though, comes a lot of customer concentration.

In fact, the top 10 customers are 61% of revenue, so a pretty high amount of revenue concentration, with 2 customers representing over 10% of revenues.

In terms of their geographic mix 75% of revenues come from Latin America, 20% in Africa, 5% in the Middle East and Asia.

dLocal Financials.

The very first number we're going to talk about is called TPV, total payment volume.

What this is, is it's the value of all transactions that flow through dLocal.

In the last quarter, that was $17.7 billion.

Their revenue was $400 million.

So if we take revenue and divide by TPV, we get 2.25%, which is going to be their take rate.

However, most of that money gets remitted out to banks, to card networks, to the merchant acquirer.

So what they actually keep of that is going to be lower.

To get a general sense of that, we'll usually just pick gross profit, because that's taking out almost all of those costs, so it's a pretty good barometer of this.

That gets us to a net take rate of 71 basis points.

This number used to be, in 2021, $2.10.

So this is their net take rate, used to be $2.10, and now it's 71 cents.

Why Take Rate Has Been Under Pressure.

This pressure is really what a lot of investors' concerns are circling around.

They're wondering how much lower they can continue to be pressured.

They do give big volume discounts to enterprises.

On top of that, as payment volume continues to increase, they're going to expect that to also result in lower incremental payment cost.

Having said that, it looks like they're getting closer and closer to an asymptote, which essentially means that they're no longer going to be falling from 210 basis points to 70.

It's going to be much slower, any sort of future declines, because a lot of their biggest customers are getting up against the wall in terms of what you would really be able to expect for the best pricing possible.

How dLocal Makes Money.

They make money in 5 ways and they're all related to payment processing.

1. Payment Processing Fees

2. FX Fees

3. Installment Fees

4. Merchant Advances

5. Chargebacks & Refunds

Payment Processing Fees.

When you process a payment, they charge sometimes a fixed rate and usually also take a percent of the transaction.

That's their payment processing fee.

Foreign Exchange Fees.

This is a very big and important business because it's higher margin.

Essentially what ends up happening is someone pays in pesos, and then you have to convert that to USD, and there's going to be a spread, and they make money off of that spread.

Installment Fees.

Essentially, this is forwarding money to merchants, but there's no credit risk attached to this.

Let's say you're buying a refrigerator, and on your credit card, you could pay this off over 12 installments.

The merchant, though, is not going to want to pay that off over 12 installments.

They're going to want all that money up front.

So dLocal can basically take a little bit of a discount on that, help forward the money to the merchant, and then they're collecting that from the credit card company over the installments.

Merchant Advances.

Basically, before funds officially settle and get remitted, a merchant can get an advance on the funds that are coming.

Chargebacks & Refunds.

The last one is charging for chargebacks and refunds.

There's some other ancillary services they're rolling out.

One of the bigger ones they're doing now is dLocal Merchant of Record.

This makes it a lot easier for a business to open up and operate in a brand-new country without having to go through a lot of regulation and setting up an entity there.

That's going to be a much higher margin service than just getting a regular payment.

They do both what's called pay-ins and payouts.

Right now, about 24% of their payment volume is payouts, and this is actually a really important part of the business too, because this gives them a lot more ability to net local currency without having to actually do a currency exchange.

The top 50 merchants use 12 countries on average.

It's a lot harder to rip someone out when you're using them for multiple countries.

Most enterprises do actually have multiple payment options within a country.

The enterprise is very often doing A/B tests, figuring out who has the best transaction approval rates, who has the best payment acceptance rates, and also who's paying me the less.

They're constantly comparing across multiple options, which does make it kind of a worse business, right?

They don't really have an ability to just hold a rate flat because then that payment's gonna just get routed to someone else.

2024 Contract Reset.

If we're just looking at total revenues of the company, they have $1.35 billion in revenues over the last 12 months, 57% growth.

LTM operating profits of $235 million, only 27% growth.

The reason operating leverage has not fully come through is, one, the take rate being pressured, so basically gross profits are growing slower than revenue.

In 2024, they had negative operating profit growth.

Pedro Arnt just started in the business in 2023.

He was the CFO of Mercado Libre from 2011 to 2023, before he took over as CEO of dLocal.

The founders realized that they weren't the right fit to actually run the business and continue to grow it and to professionalize it.

He started investing and rebuilt a lot of the engineering team.

All of this created more operating expenses.

Simultaneously, and the bigger thing that happened, was a lot of big contracts repriced down.

That's why operating profits actually fell in that year.

Competition.

How much ability do they really have to hold their take rate, or is it going to continue to just slide?

Aren't there a lot of competitors that could just take that payment instead?

Let's group competition into 3 big buckets.

Global Payment Service Providers.

Within the first category of competition, with Stripe and Adyen, they basically lose against dLocal simply because they just don't have the same level of payment options available on their platform, and they just haven't localized to that extent.

Adyen now is going to have Pix because Pix is very popular in Brazil, but there's all these other little payment methods, cash vouchers, local credit cards that aren't going to be accepted by them.

This is an area that these big players just have ignored because it's not big enough to really matter to them, and they have much higher priorities.

The risk is that one payment option becomes big in a country, maybe displacing some of these other small payment options, and then dLocal's moat in that country has been diminished because having this long tail of payment acceptance doesn't matter as much.

Emerging Market Specialists.

Ebanx, very big in Brazil and LatAm.

They only though are in around 20 markets versus dLocal in 60.

On top of that, they don't have a payout enterprise capability that's good.

Having said that, they are one of their bigger competitors, especially in Latin America.

Rapyd is another one.

They did an acquisition of a company called PayU, and they've had some integration issues, some operational issues.

This is a company that's much more acquisition assembled, so you don't have this clean tech platform that dLocal has where it's all cloud-based, 1 API, turn on any market you want.

Nuvei is another one.

They actually are in 52 markets, so almost up to where dLocal is.

They're more of a generalist though than someone that localizes to specific markets.

Regional Champions.

We're going to move into the regional champions, which include first and foremost, Mercado Pago.

They do still have an enterprise offering.

They're very dominant in Latin America.

There are channel conflicts because of their e-commerce operation, so certain clients are just not going to want to sign up with a competitor.

The big thing though is that Mercado Pago isn't set up to really accept payments from an entity with no local presence.

There's going to be a lot of other local regional competitors, Kushki in Latin America, Flutterwave in Africa, and Razorpay in India.

If you are a big global player like Spotify, you don't really want to have to individually integrate with every single one of these local champions in each of these markets.

It's much easier if you can just use dLocal as a backstop for a lot of these markets, and then maybe you pick one other regional player.

It's not winner take all.

In fact, very often an enterprise wants to have an even balance of payments.

They want the ability to route it to different providers.

Economies of Scale Shared.

I think that dLocal is being run really smartly in that they are leaning into this economies of scale shared sort of model, where instead of fighting to try to preserve their take rate.

It is smart to continue to basically lower that take rate and accept lower revenues from these large merchants in order to keep them happy, keep them on your platform, but also push out other potential competitors.

You don't want to be in a situation where you get arrogant with pricing and say, "We're not gonna process that for any less," and then that business moves to a competitor.

If you are still providing someone the best service, you get integrated, and you're not being too arrogant on pricing, you probably can get a little bit better margin than someone who is just purely competing on price.

Where Take Rates Could Settle.

I do think the take rates are going to continue to be pressured, which is actually still one of the bigger risks for them.

I do think most of it is behind them.

They're looking at around a 71 basis point take rate right now.

I would think maybe the absolute floor on just payment processing could be around 40 basis points, although in e-commerce some of those payments are done for 5 to 10 basis points.

On top of that, there is the FX component, which is always going to help boost that margin.

So it's never going to be a straight commoditized payment processor margin so long as you have that FX component.

What they do is they guide to gross profits and they guide to earnings, and they say, "Look at our operating profit, look at our gross profit.

That's what matters, not our take rate."

I think the 2024 data point where all of these contracts reprice lower is kind of what scares people.

I don't think that's very likely anymore, though, because of just how much they've already come down on the take rate.

Risks.

One of the bigger hidden risks I found is that when you are a global enterprise and you open up in a new market, let's say you turn on dLocal to accept all of your payments.

When you do that, you have a significant amount of FX transactions that are going to be higher margin.

If Netflix is in Nigeria, and they don't have a subsidiary there, all of these transactions they're doing are creating FX fees, and those FX fees are higher margin for dLocal.

What ends up happening once a market gets big enough is this global enterprise like Netflix will open up a subsidiary in, say, Nigeria, and at that point, all of these payments that they're processing, they lose that FX component and are now just processed locally.

I actually think that is going to be a notable headwind for them.

If you're looking at cross-border transactions, it has actually been falling.

It was 47% in 2024, it's now 39%.

The other risk and this is more an optical risk, which is that whenever there is a lot of currency destabilization, their FX spreads are probably going to increase, so they're going to make more money.

But then on the currency stabilizing, the FX spreads go back down, and then it looks like they're losing money or revenues are contracting, and so that's been a headwind for them in the past.

Valuation.

Let's now talk about the valuation so we can see how much of this is potentially priced in today.

At a stock price of $13.60, you get a diluted market cap of $4.1 billion, and they have $800 million in cash on hand. That gets us an enterprise value of $3.3 billion.

If we normalize their last 12 months of NOPAT, net profit after tax, I get around $200 million, and I'm using a 20% tax rate on all of this just for simplicity.

That's going to get us to a 16.5 EV/NOPAT multiple.

In dLocal's case, the question really is, are earnings going to continue to grow?

The fear, I think, is that you do get another repricing on some of these big volume contracts, and they don't have very high gross margins, because they do pay out a lot of everything they collect to all these other payment service providers.

I would expect TPV, total payment volume, to continue to grow faster than gross profits, basically a little bit more take rate pressure.

Let's take 2026 total payment volume of $67 billion, and let's grow that for 3 years at 30%.

So in 2029, TPV will then be about $150 billion.

Let’s do 2 scenarios.

One where the take rate compresses to 50bps, one where it stays flat around 70bps.

In the 50bps scenario, I'm going to apply a 15% operating margin.

In the 70bps scenario, I'm going to apply a 20% operating margin.

If you do that, you get a range of $270-$500 million in NOPAT.

I'm going to just throw a 15x multiple on this just so we don't have to argue too much about the multiple.

At 15x, you get $4 billion at the low end of value and $7.5 billion at the high end.

But, and this is an important adjustment, we have to add back the $800 million in cash they currently have, plus the estimated cash they would get over the next 3 years.

In the 50bps scenario, that comes out to around $1.5 billion in cash, including the $800 million they currently have.

In the 70bps scenario, that's going to be about $2 billion in cash.

So the new total valuations you get are $5.5 billion at the low end and $9.5 billion at the higher end.

That gets you to an 8% to 26% annualized return.

How can things be much worse than these ranges?

Just much more take rate pressure than what we're anticipating.

Maybe it hits 40bps. Maybe it goes lower, but I don't think it's likely.

On the other end, maybe we're not being positive enough.

Maybe TPV can grow much quicker.

Maybe they can actually roll out new products and see that take rate go up a little bit, like their new merchant of record product, so upside could be even more.

But ultimately, and as always, it is going to be for you to decide what makes sense for you and whether or not you think this is an interesting opportunity.

For more on dLocal, check out this video below.

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