Dlocal: The Once-celebrated Fintech Underdog

Dlocal is currently an unwanted fintech with 100% potential upside.

While the market does not put the spotlight on it yet, this company is reset with a new and credible management team.

1.What Does DLocal Do?​
​
DLocal is like a digital payment bridge, helping big global companies collect payments and make payouts in emerging markets. Think of them as a translator for money - they make it easy for companies like Amazon or Spotify to accept local payment methods in countries where people might not use international credit cards.

2. Why DLocal Matters ?

Firstly, most people in emerging markets don't have credit cards.

Secondly, local payment methods are complex and different in each country.

Thirdly, large companies want to sell globally but struggle with local payments.

As a Fintech in Payment processing sector, with the focus in the emerging markets such as Latin America , Africa and Asia, Dlocal is uniquely positioned to solve these everyday issues.

This service makes it easy for businesses to reach different markets through just one connection, so they don’t need separate setups for each country. It also takes care of all local rules and licences, so businesses don’t have to worry about legal issues in each place. Plus, it allows businesses to both receive payments and send money, making it a simple all-in-one solution for handling payments around the world.
​

3.How big is the Market Opportunity (Total Addressable Market)?

According to statista:
​Total transaction value in the Digital Payments market is projected to reach US$17.72tn in 2024.

Total transaction value is expected to show an annual growth rate (CAGR 2024-2029) of 15.71% resulting in a projected total amount of US$36.75tn by 2029.

DLocal’s playground is a massive one, the total addressable market (TAM) for payments in emerging markets is over $1 trillion. They’ve barely scratched the surface, with less than 1% of this market currently tapped.

Several big trends are fueling this potential. First, e-commerce is booming in these markets, with more people shopping online than ever before. Then there’s the digital transformation wave, as businesses shift from paperwork to digital solutions.

Finally, cross-border trade is becoming the new norm, making it easier for customers to buy from other countries. All this points to a market with serious momentum, ready for DLocal to step in and make their mark.
​

4. Are the finances growing ?​
​

1.Dlocal’s revenue is growing at about 33% yoy and a cagr of 76%.

​
​

​
​

2. Free cashflow and its margin

Whenever they expand into a new country, they would need to grow their capabilities to serve their new merchants and every time Dlocal goes through an investment capex cycle, the customers get stickier due to ease on the regulatory process.

Here’s the intention and evidence from the past few transcript calls for 2023:

​
​

​
​

​
​

​
​

​
​

​
​

3. Looking at the TPV, they have clearly been growing as well.

Why is TPV an important metric ?
The more merchant they onboard, the more transactions take place and the more processing fees Dlocal earn as a revenue.

​
​

​
​

​
​

​
​

4. Take Rate​
​
DLocal’s revenue structure is driven by a blend of fees that together form its total “take rate” of approximately 3-4%. This includes processing fees of around 2-3%, charged on each transaction. Additionally, DLocal earns from FX spread fees, which contribute 0.5-1%, reflecting the currency exchange margin on cross-border payments. Finally, value-added services—such as advanced data insights and fraud prevention—contribute an additional 0.3-0.5%, rounding out the total take rate.

Note that Dlocal doesn't publish their take rate in the slides, we take 707.6m from the revenue divided by the TPV of $17,667.4m which works out to be ~ 4% for 2023.

This is essentially how much revenue earned is directly contributed by the total payment volume.
​
​

​
​

​
​

​
​

5. Expansion in other countries

6. Financial Health

DLocal demonstrates strong financial health, with a solid cash position of $670 million, a debt-to-equity ratio of 0x, and a current ratio of 1.5, indicating ample liquidity and no reliance on debt.

Key Challenges

1. Market Risks

DLocal faces several risks inherent to its markets, including currency volatility that can impact profitability, regulatory changes across regions that require constant adaptation, political instability that could disrupt business, and economic uncertainties that may affect consumer spending and transaction volumes.

2. Competitive Risks

DLocal also contends with significant competitive risks. The potential entry of big tech companies into emerging market payments could intensify competition. Local competitors often have an advantage with established networks and local knowledge. Additionally, pricing pressure from both global and regional players could impact DLocal’s margins, while technology disruption in the fintech space requires continuous innovation to stay relevant.

Yes, it's true that there’s a renegotiation that took place earlier this year with the biggest merchant but the context is they are helping the merchant to scale and capture market share. Once the merchant acquires clients and bigger transactions are flowing through, they renegotiate the take rate since TPV has gone up significantly.
​

3. Muddy Water Short Allegations

Back in Nov 2022 , Muddy water released a research into why they are short on Dlocal and punishes Dlocal for its accounting practices and reporting.

​
​

Refuted by Dlocal and its management, they did share buy back.

​
​

4. Management Shake up

Currently, the new CEO and CFO are people who are experienced in their field. Notably, CEO Pedro Arnt who was the CFO at Mercado Libre for more than 12 years. These moves are from damage control by what we have seen in the past two years. I would like to see the execution from the management more on growing new businesses rather than capital allocation such as share buybacks.​
​

​
​

Investment Case - Key Differentiators

1. Superior Unit Economics

Take Rate: 1.7x industry average compared against paypal

​
​

​
​

2. Growth Premium Justification

DLocal’s growth potential supports its premium valuation. While the total addressable market (TAM) penetration is still below 1% (compared to 5-10% for peers), it highlights an untapped opportunity. DLocal is present in 40+ countries, far surpassing peers with 20-30 countries, and maintains a strong client retention rate of 150%, notably higher than the 110-120% typical of the industry.

3. Competitive Moat Metrics

DLocal’s competitive advantages are reinforced by its extensive banking relationships, with over 300 partnerships compared to 50-100 for peers. It also supports a vast network of 900+ payment methods, significantly more than the 200-300 offered by competitors. Additionally, DLocal holds regulatory licenses in 40+ countries, far outpacing the typical 10-20 held by peers, solidifying its position as a trusted provider in emerging markets.
​
​Here’s the countries that Adyen is in:

During the Q2 2024 earnings call, the analyst asked, What's your Moat ? Given there is an attractive revenue pool , why wouldn't Adyen and stripe come after ?​
​

Here’s what the CEO , Pedro Arnt replied:

Direct Competitors​
Here’s what I understand about the competitions:
​
When comparing DLocal to similar companies, it stands out with a unique mix of advantages: it’s growing faster than Adyen, has higher margins than PayPal, boasts a stronger competitive moat than most regional players, and is more geographically diversified than PagSeguro or Stone. With these strengths in mind, DLocal’s current valuation offers a compelling entry point for long-term investors, particularly given its potential to sustain growth rates above 30% while boosting margins through operating leverage.
​

Strategic Initiatives (2023-2024)

1. Geographic Expansion

DLocal has been steadily expanding its reach, entering new markets across Southeast Asia, advancing its footprint in Africa, and laying the groundwork for entry into the Middle East.

2. Product Development

The company has focused on enhancing its offerings with improved pay-in/pay-out capabilities, working capital solutions to support client cash flow, and a robust data analytics platform to provide valuable insights.

3. Technology Investment

DLocal continues to strengthen its technological backbone with API improvements for smoother integrations, advanced fraud prevention measures to secure transactions, and infrastructure scaling to handle increasing demand across markets.
​

What kind of merchants are they focusing on ?

Tier Zero clients are large, enterprise-level customers.
​
By partnering with these high-volume clients, DLocal can quickly gain market penetration and establish strong banking relationships that enhance regulatory credibility, making it easier to expand. Although these clients typically bring lower margins, they contribute significant, predictable revenue and often commit to long-term contracts. Their scale enables DLocal to refine its technology infrastructure and improve risk management, building the company’s ability to handle large, complex transactions effectively.

To attract and retain Tier Zero clients, DLocal’s merchant acquisition strategy involves targeted efforts like a direct sales team that builds C-level relationships and offers customized solutions. The company also provides dedicated support through account managers and technical integration teams, ensuring a smooth setup and ongoing assistance tailored to enterprise needs. This approach not only strengthens client relationships but also creates cross-selling opportunities, adding value to these partnerships and reinforcing DLocal’s foothold in the markets they serve.

Dlocal's flywheel effect:

Take a look at the flywheel Dlocal is creating for their merchants:

​
​

Here’s how the flywheel is changing as they combat lower take rates, they have to either open new markets, which take times and resources or introduce more value added services once the merchant have successfully gained a foothold in the market.

​
​

Valuation as at 12th Nov 2024:

The current valuation represents an attractive entry point for long-term investors, especially considering the company's potential to maintain 30%+ growth rates while expanding margins through operating leverage.

I have lowered the growth rate to 20% and keep a more disciplined approach to the FCF margin at 20%.

From all the information I have concluded, , I had initiated a position in DLocal at an average price of $8.71.
​

Dlocal is expected to report earnings on 11/13/2024 after market close.
​

If you enjoyed this article , please subscribe to my newsletter and to get more updates.