DLO - DLocal: Q2 Earnings Impress Profitable Gem In Emerging Markets

2023-08-16 03:19:43 ET

Summary

• DLocal stands out as an emerging market payments disruptor, offering a simplified and efficient online payments experience for global enterprise merchants.
• The recent Q2 results marked a turning point, reinvigorating investor confidence due to a reacceleration of revenue growth rates.
• Valued at 19x next year's EBITDA, DLocal's profitability, growth potential, and unique market position make it an appealing investment opportunity.

Investment Thesis

DLocal ( DLO ) is a Uruguay-based fintech and international payments startup. Its founders hold approximately 40% of the company, meaning that they have $2 billion worth of equity in the company, including its 30% premarket jump.

DLocal was a crowd favorite with investors. It was seen as an opportunity to get exposure to emerging countries, particularly the fast-growing Nigerian economy, that investors would have otherwise struggled to get exposure to.

However, DLocal then proceeded to sell off together with many other fast-growing companies in the past several years. From its highs, the stock fell more than 70% over the past couple of years, as investors' affection for the business waned.

Investors cheered its results, but it wasn't really anything dramatically new. It was more a reiteration and delivery of what it had already set out to do earlier in 2023.

If I was to point to one reason why investors turned so bullish on the stock, it would be that Q2 saw its revenue growth rates reaccelerating.

I argue that paying 19x next year's EBITDA is an attractive multiple for investors, a valuation that includes the premarket pop.

Why DLocal? Why Now?

DLocal is a technology company that specializes in providing cross-border payment solutions and payment processing services for businesses operating in emerging markets.

It's a facilitator of online commerce in emerging markets. Its suite of products includes pay-in and pay-out solutions, local-to-local capabilities, and marketplace integration.

DLocal is dedicated to simplifying and transforming the online payments landscape in emerging markets through its One DLocal model. This process allows global enterprise merchants to receive payments (pay-in) and make payments (pay-out) online using a single API (essentially an app). DLocal's platform caters to cross-border and local-to-local transactions, enhancing acceptance and conversion rates.

Typically, payment solution platforms have horrible profits , even if they succeed in effortlessly growing their revenues, their growth rates tend not to last, as their businesses are mostly commoditized away.

Revenue Growth Rates Continue to Impress

And yet, as you can see above, DLocal's revenue growth rates had been consistently decelerating and started to finally bottom out in Q1 2023.

However, for investors, despite management reaffirming its full-year guidance back in Q1 2023, at the time, investors were still skeptical over DLocal's prospects. And even though management once more reaffirmed its full-year guidance together with its Q2 results , investors this time offered the company the benefit of the doubt.

After all, the fact that DLocal beat with such ease analysts' revenue estimates has clearly supported the bull case, sending shorts into hiding. But on top of that, observe above the fact the size of the beat is the highest going back several quarters.

Moreover, with DLocal's H1 2023 now in the rearview mirror, the remainder of 2023 will be up against much easier comparables. Therefore, if DLocal was able to deliver high-50s% against those tough comparables with last year's H1, this implies that management guidance for the full year 2023 to grow by 50% should be reached with ease.

This is one part of the bull case, next, we'll discuss the second aspect that's exciting investors.

Profitability Profile, Best in Class

Before we go much further, it's worthwhile noting that DLocal has a very strong balance sheet, with no meaningful debt. In fact, consider that nearly 10% of its market cap is made up of cash at around $500 million.

Meaning that this profitable business is not only well-positioned to thrive but the business is being prudently managed. Needless to say, a clean balance sheet together with a profitable business opens up a lot of doors for M&A active and other consequential investments.

Now, we'll turn to discuss the best aspect that will get investors excited about DLocal, its underlying profitability.

DLocal reaffirms that it will see around $220 million of EBITDA at the high end of its profitability this year. Since we are so close to the end of 2023, we should start to form an opinion on 2024.

Assuming DLocal's EBITDA grows by 30% in 2024, something that looks achievable, this would see DLocal's EBITDA reaching around $290 million.

This leaves DLocal priced today at 19x next year's EBITDA. Admittedly, this is not the cheapest valuation out there. But the fact that DLocal's growth rates appear, for now, to grow demonstrably higher than 30% CAGR supports my thesis that paying about 19x next year's EBITDA is a reasonable entry point.

What's more, the business today is not being operated to maximize profitability. After all, management is doing all it can to grow market share and is investing in this endeavor.

However, in time, when the underlying business matures, DLocal should be able to get its EBITDA over gross profits higher than 75%, compared with 74% reported in Q2. In other words, DLocal is clearly highly profitable already, and it doesn't take too much imagination to see its profitability improving further.

The Bottom Line

DLocal (DLO), a Uruguayan fintech and international payments startup, caught investors' attention as a gateway to emerging economies like Nigeria.

The reacceleration of revenue growth rates was a significant driver of bullish sentiment, that saw its shares jump premarket.

Paying 19x next year's EBITDA is cheap. DLocal's unique value proposition lies in its One DLocal model, simplifying online payments in emerging markets.

With strong profitability and a robust balance sheet, DLocal is poised for growth and potentially attractive acquisition opportunities. Its underlying profitability and growth potential make the valuation compelling, especially as its focus shifts toward maximizing profitability in the future.

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