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TIP834: DLocal (DLO): Multibagger Potential with Decade-Long Runway w/ Daniel Mahncke & Shawn O’Malley
· Summarized
Key takeaways
- DLocal is a leading emerging markets payments company, primarily serving large tech firms like Amazon, Spotify, and Uber with integrated API solutions.
- The company benefits from mega trends: the digital transformation of emerging markets and the expansion of global tech giants, leading to rapid TPV growth.
- DLocal’s competitive advantages include extensive geographic footprint, regulatory licenses, sophisticated routing algorithms, and local expertise, which create barriers for newcomers.
- Risks include high customer concentration, potential client in-housing, declining take rates, and competitive pressures from Western incumbents like Stripe and PayPal.
- Management, especially CEO Pedro Arnt, has a strong track record, insider ownership is high, and capital is returned to shareholders via buybacks and dividends.
- Financial outlook suggests long-term intrinsic value with an expected return of around 22%, supported by operational leverage and revenue growth.
- Investors should consider starting with a small position, adding on market declines, due to the stock’s volatility and emerging market risks.
Summary
Introduction and Podcast Purpose
The hosts, Shawn O'Malley and Daniel Mahncke, introduce the show as a platform dedicated to deep dives into investment opportunities, focusing on uncovering intrinsic value in companies. They mention their approach to value investing, their portfolio, and upcoming events like their NYC conference. The opening sets the stage for the detailed analysis of DLocal, an emerging markets payments company.
Company Overview and Business Model of DLocal
The hosts discuss DLocal’s origin in Uruguay, its evolution from AstroPay, and its focus on B2B payments in emerging markets. They detail how DLocal provides integrated payment APIs that simplify cross-border transactions for large tech companies like Amazon, Spotify, and Uber. They explain the complexities of emerging market payment systems, such as local QR codes, UPI, and bank transfers, contrasting them with Western systems like Visa and Mastercard. DLocal’s strategy revolves around managing regulatory challenges, building local infrastructure, and offering comprehensive payment solutions that include local cards, QR codes, and alternative payment methods.
Growth Drivers and Market Trends
The hosts identify two mega trends benefiting DLocal: the digital transformation of emerging markets and the expansion of global tech giants into these regions. They note rapid growth in total payment volume (TPV), especially in e-commerce, on-demand delivery, and remittances. The importance of diverse payment methods and increasing market penetration are highlighted, alongside DLocal’s focus on deepening relationships within existing large merchants to increase transaction volume.
Competitive Landscape and Advantages
Discussion of how DLocal differentiates itself through scale, regulation, and operational network, which creates barriers for competitors. They emphasize the advantages of DLocal’s extensive geographic presence, multiple licenses, and sophisticated routing algorithms that maximize approval rates. The conversation covers potential threats from Western incumbents like Stripe and PayPal, but the hosts argue that DLocal’s localized focus and expertise make it difficult to replicate.
Risks and Challenges: Customer Concentration and Pricing Dynamics
The hosts examine risks related to high customer concentration, particularly dependence on top merchants, and the potential for large clients to bring payment processing in-house. They explore concerns about declining take rates, but note that DLocal has strategies to mitigate this, such as volume discounts, cross-selling multiple payment methods, and leveraging data for better approval rates. The discussion also covers potential disruptions from new payment technologies like stablecoins and regulation changes in countries like Argentina.
Management, Strategy, and Capital Allocation
The episode highlights the quality of DLocal’s leadership, especially CEO Pedro Arnt, who has a long history with the company’s management, and insider ownership. Capital allocation strategies include share buybacks and dividends, with a focus on organic growth rather than acquisition. They discuss the company’s approach to M&A, which has been limited, and the importance of operational leverage.
Financial Metrics and Valuation Outlook
The hosts analyze DLocal’s financial performance based on TPV growth, gross profit margins, and operating leverage. They discuss key metrics such as the ratio of EBIT to gross profit and observe recent trends in revenue diversification. The valuation is calculated with assumptions about TPV growth, margin decline, and operational improvements, suggesting a long-term intrinsic value with a 22% expected annual return, incorporating safety margins and variability scenarios.
Conclusion and Investment Thesis
The hosts summarize that DLocal offers exposure to rising emerging markets and the expansion of global digital companies into these regions. They acknowledge the company’s competitive moat through scale, regulation, and data, though volatility and concentration remain concerns. The recommendation is to start with a small position and increase on market weakness, emphasizing the firm’s long-term growth potential and cash-generating capacity.
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Show notes
Daniel Mahncke and Shawn O’Malley take a deep dive into DLocal (NASDAQ: DLO), the first Uruguayan unicorn and the emerging markets payment provider for companies like Amazon, Uber, Spotify, Netflix, and many more. DLocal is trading at attractive multiples while growing payment volumes at over 70% and printing cash due to high operating leverage and a high-margin business model. That cash is given back to shareholders in the form of dividends and buybacks.
Daniel and Shawn discuss whether the high customer concentration and the declining take rate justify the cheap valuation or whether the market is not understanding the full potential of this emerging market jewel. In the end, Daniel values the business and decides whether DLO deserves a spot in The Intrinsic Value Portfolio.
IN THIS EPISODE YOU’LL LEARN:
(00:00:00) Intro
(00:03:01) How DLO became the leading player in emerging markets
(00:07:14) What makes DLO’s business model stand out
(00:19:08) What two megatrends DLO benefits from
(00:28:18) Whether there is a race to the bottom with take rates
(00:56:10) How DLO compares to Western competition
(01:00:30) How DLocal distributes cash to shareholders
(01:19:00) Valuation discussion of DLO
(01:21:41) Whether DLO is valued attractively
(01:23:19) Whether Shawn and Daniel add DLO to the Intrinsic Value Portfolio
Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences.
BOOKS AND RESOURCES
Join the exclusive The Intrinsic Value Mastermind Community.
Track The Intrinsic Value Portfolio.
Learn more about how to join us in NYC for our Intrinsic Value Conference.
Portfolio Review Submit Tool.
Value Investors Club Pitch on DLO.
Interview with the CEO, Pedro Arnt.
DLocal Investor Relations Podcast.
Founder and CEO Interview by Stratechery.
Check out our previous Intrinsic Value breakdowns: Visa, Amazon, Sea Limited, Mercado Libre, Shopify.
Related books mentioned in the podcast.
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