DLO - DLocal Looks Fully Valued But Merits Close Watching

2023-08-09 12:45:42 ET

Summary

• DLocal went public in June 2021, raising $618 million and provides payment technologies for firms expanding into emerging markets.
• The stock may be fully valued at its current level of $13.00 per share according to my discounted cash flow calculation.
• DLocal's recent financial trends show continued revenue growth and an uptick in operating income, so the stock is worth putting on a watch list.

A Quick Take On DLocal

DLocal ( DLO ) went public in June 2021, raising approximately $618 million in gross proceeds from an upsized IPO that priced at $21.00 per share.

The firm provides payment technologies for firms seeking to expand into emerging markets.

I previously wrote about DLocal with a Buy outlook in August 2022.

However, my discounted cash flow calculation indicates the stock may be fully valued at its present level of around $13.00.per share.

I'm Neutral [Hold] on DLO for the near term, but the stock is worth putting on a watch list.

DLocal Overview And Market

Montevideo, Uruguay-based DLocal was founded to develop a platform of technologies and APIs to enable companies to accept payments and conduct their financial activities in emerging markets such as those of Latin America, Africa, and Asia.

Management is headed by Chief Executive Officer Sebastian Kanovich, who has been with the firm since 2016 and was previously CEO of AstroPay.

The company's primary offerings include:

• DLocal API.

• Fraud management tools.

• Compliance.

• Merchant dashboard.

• Marketplace service.

The firm seeks relationships with cross-border oriented firms via its dedicated sales and marketing team and through a third-party sales force and partners.

The company's cloud platform can provide cross-border and local-to-local transactions in dozens of countries via over 600 payment methods.

According to a 2020 market research report by Juniper Research, the global market for B2B cross-border payments was an estimated $27 trillion in 2020 and is expected to reach $35 trillion by 2022.

This represents a forecast growth of 30% over the time period.

The main drivers for this expected growth are growth in instant payments, where funds settle in 10 seconds or less.

Also, blockchain-based services have significant potential but require additional development to achieve their ultimate value.

Major competitive or other industry participants include:

• AstroPay.

• Directa24.

• Adyen.

• Others.

DLocal's Recent Financial Trends

• Total revenue by quarter has continued to grow quickly; Operating income by quarter has increased recently.

• Gross profit margin by quarter has trended lower in recent quarters; Selling, G&A expenses as a percentage of total revenue by quarter have also moved lower more recently.

• Earnings per share (Diluted) have been more volatile recently:

(All data in the above charts is GAAP).

In the past 12 months, DLO's stock price has fallen 55.6% vs. that of the iShares Expanded Technology-Software ETF's ( IGV ) rise of 13.09%, as the chart indicates below:

For the balance sheet , the firm ended the quarter with $518.2 million in cash, equivalents, trading asset securities, and no debt.

Over the trailing twelve months, free cash flow was an impressive $162.1 million, during which capital expenditures were $1.0 million. The company paid $9.0 million in stock-based compensation in the last four quarters, the second-highest trailing twelve-month figure in the last eleven quarters.

Valuation And Other Metrics For DLocal

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm's projected growth and earnings:

Assuming generous DCF parameters, the firm's shares would be valued at approximately $12.74 versus the current price of $13.15, indicating they are potentially currently fully valued, with the given earnings, growth, and discount rate assumptions of the DCF.

Commentary On DLocal

In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023's results, management highlighted its focus on 'delivering profitable growth' as opposed to growth at all costs.

The company's net revenue retention rate was a very high 147%. This was due to the organic growth of its merchant base, 'and our ability to continue bringing them to new countries, products, payment methods and increased share of wallet.'

Total revenue for Q1 2023 rose by 56.9% YoY, while gross profit margin fell by 4.8%.

Selling, G&A expenses as a percentage of revenue dropped by 1.2% year-over-year, and operating income increased by an impressive 39.5%.

The company's financial position is strong, with substantial liquidity, no debt, and strong free cash flow generation.

Looking ahead, management guided 2023 revenue growth to $630 million at the midpoint, or a 50.4% annual growth rate.

If achieved, this would represent a reduction in revenue growth versus 2022's growth rate of 71.58% over 2021, indicating a flattening though still high growth trajectory.

From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I'm most interested in the frequency of potentially negative terms, so management or analyst questions cited 'Macro' once, 'Drop' once, and 'Volatil[e][ity]' once.

Analysts questioned company leadership about its operational growth in Nigeria. Management said the country has significant capital controls and various restrictions, which serve to make the firm's services all the more important. They see significant growth opportunities there.

Regarding valuation, my discounted cash flow calculation, assuming a 15% CAGR over ten years, indicates the stock may be fully valued at its current level of around $13.15.

However, the stock has been beaten down over the past year and may be making a bottom at its current price.

If so, and if the company surprises to the upside on growth and/or earnings, the stock could move up in response.

For now, I'm Neutral [Hold] on DLO, but the stock is worth putting on a watch list.

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