DLO - DLocal: Shares Stretched On Valuation Despite Robust Growth Bearish Downtrend In Place

2023-03-06 14:24:41 ET

Summary

• DLocal was the target of a short position by Muddy Waters last year.
• The move was refuted and DLO issued a share buyback in a quasi-response.
• Shares remain in a bearish downtrend with a high price-to-sales ratio.

Short sellers have had a field day in the last year, and DLocal (DLO) was the supposed target of a bearish report from an investment firm in November last year. Shares have stabilized somewhat, and a stock buyback plan was a vote of confidence. But I see the stock as still not a GARP name yet nor is the chart appealing.

According to Bank of America Global Research, founded in 2016, DLocal 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 $4.5 billion market cap IT Services industry company within the Information Technology sector trades at a high 42.3 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal.

Back in November, the stock missed analysts’ earnings estimates and revenues came in light. Shares moved lower but a bigger drop was in the offing. Muddy Waters came out with a short position in the stock just two days after the Q3 report, and DLO fell by a stunning 50%. But DLO refuted claims cited in the asset management firm's report. What's more, DLO came out with a stock buyback plan in December, and shares rose into year-end. BofA saw this repurchase plan as a bullish sign and reissued a buy recommendation on the stock.

While DLO has geographic concentration, its customers are some of the biggest companies in the world. Key risks include increasing payment processing competition and some management changes lately that could make the strategic outlook tough to execute.

On valuation , analysts at BofA see earnings rising sharply this year and next. While not paying any dividends, the firm does generate decent free cash flow. Both its operating and GAAP P/E ratios are high right now, but robust growth and high profitability should lead to lower valuations should the stock price remain where it is.

Its forward PEG ratio is a low 0.74, well below the sector median, but its price-to-sales ratio using forecasted numbers is high at 10.7. Overall, this high growth, low earnings name has a lot of uncertainty, and the majority of its valuation remains are not yet indicative of a buy. I would like the stock if it traded closer to 7x forward sales, but a double-digit ratio is stretched.

DLocal: Earnings, Valuation, Free Cash Flow Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2022 earnings date of Tuesday, March 14 AMC. The firm’s buyback program is also slated to end on July 13 this year.

Corporate Event Risk Calendar

The Options Angle

Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) show a $0.11 consensus EPS forecast which would be a modest increase from $0.08 of per-share profits earned in the same period a year ago. The stock has beaten bottom-line estimates in all but one quarter in its brief history, though that miss came last quarter.

Shares often trade in a wild range post-earnings with many double-digit percentage moves. This time, the options market has priced in a tamer 6.6% earnings-related stock price swing. I would be a buyer of options premium at that price but be sure to check out the liquidity of such options on this foreign name.

DLO: Low Implied Volatility Indicated, But Monitor Options Liquidity

The Technical Take

You can see the high-volume plunge around the Muddy Waters short position report on the chart. A rebound to $18 was met with selling – that is near the low from before the Q3 report and the Muddy Waters short call. So, it’s an important price point. I’d avoid the stock until it climbs back above $18, but then it also has the falling 200-day moving average to deal with.

On the downside, there could be weak support near $15 while a high amount of volume by price is seen in the $10 to $15 range which should cushion big downside. Overall, the trend is lower, so I would avoid the stock, though the move late last year looks like a capitulation low.

DLO: Protracted Downtrend, Possible Capitulation Low In November

The Bottom Line

I am a hold on DLO as its valuation has come in but could still fall further before looking attractive as a growth stock. The chart also has issues with key resistance near $18.

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