DLO - DLocal: A Better Quarter But Watching Margins And Soft Price Action Hold Reiterated

2023-05-22 14:11:37 ET

Summary

• The market has a new look - sector shifts were made, with a handful of companies switching from IT to Financials.
• DLocal may be in a new niche, but its long-term growth outlook still looks good.
• With a lukewarm valuation and lackluster chart, shares remain on hold.
• I outline key price levels to monitor.

The market underwent some cosmetic changes back in March. Several companies once found in the Information Technology sector were moved to the Financial sector. These were mainly transaction processing names and credit card-related firms. Visa ( V ) and Mastercard ( MA ) were the headline stocks. But another company with international exposure outside of the large-cap space was involved.

DLocal Limited ( DLO ) also made the sector switch, but that hasn't changed my outlook. I reiterate my hold rating as we wait for better valuations and price action.

Sector Shifts

According to Bank of America Global Research, DLO is a global payment and technology company that powers both cross-border and local-to-local eCommerce payments for over 330 merchants in 29 emerging market countries through its proprietary, cloud-based platform. DLO enables global merchants to get paid (pay-in) and to make payments (payout) online while enabling merchants to connect with over 600 local payment methods across geographies, all accessible through a single direct API.

The Uruguay-based $4.2 billion market cap Transaction & Payment Processing Services industry company within the Financial sector has negative trailing 12-month GAAP earnings and does not pay a dividend, according to The Wall Street Journal.

DLocal issued Q1 earnings results last week and the bottom-line number of $0.11 was in line with estimates, while a 57% annual revenue climb beat estimates. The firm reported a record-high total payment volume, but its adjusted EBITDA margin dropped about five percentage points from the same period last year. In general, it was an upbeat Q1, even with the YoY margin reduction. 2023 guidance was maintained.

On the bearish side of the ledger, DLO was downgraded following a miss on Q4 estimates back in April. HSBC noted that take rates and margin uncertainty were key risks.

On valuation , analysts at BofA see earnings rising at a fast pace through 2025. Per-share profits are seen climbing from $0.57 this year to nearly $1 over the coming quarters. The Bloomberg consensus forecast is even more sanguine compared to BofA's outlook. Still, no dividends are expected to be paid on the stock even as free cash flow is positive and consistent.

DLocal: Earnings, Valuation, Free Cash Flow Forecasts

With mid-20s earnings multiples, shares are not cheap on the surface, and the elevated EV/EBITDA ratio backs that up. But its forward PEG remains under the sector median. At just 0.91, factoring in growth makes the stock appear less pricey. But with a forward price-to-sales multiple of more than 5.0, it is no bargain, but it is less expensive compared to earlier this year. I reiterate my hold rating, but I am leaning closer to upgrading it.

DLO: Remains Somewhat Expensive, But Improving P/S

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Tuesday, August 22. Before that, volatility could hit around the firm's Investor Day on June 8. Finally, DLocal's buyback program is slated to end on July 31.

Corporate Event Risk Calendar

The Technical Take

With a better valuation today following an upbeat quarter, the chart remains lackluster. Notice in the graph below that DLO gapped down big around its Q4 release. But buyers stepped to the plate, and the November low of $9 held easily. For now, I see support around that April nadir, while the $18 to $19 range is resistance.

Also take a look at the long-term 200-day moving average, which is downward-sloping and comes into play in that zone. The stock attempted to bounce last week, but sellers ruled the day on May 18 after earnings. Overall, not much has changed chart-wise.

DLO: Downtrend Not Proved To Be Done Yet, Watching April Support

The Bottom Line

I reiterate my hold rating. The valuation has gotten better, but the chart remains lackluster. As quarters progress, EPS should be on the rise, making it an ever-growing GARP candidate.

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