DLocal: High Quality Growth At 30% Discount To Fair Value!

Stellar business, stellar growth yet abysmal stock performance. The market remains overly pessimistic despite the signs of progress which creates a big opportunity for investors.

The best businesses are those that are both inflation and recession-proof.

These businesses may experience successive cycles of rapid and slow growth. Some years they grow 20%, others they grow 6%, but they grow regularly over the long term.

Those businesses have a high likelihood of turning into so-called “compounders.”

Do they really exist? They do.

Take a look at this:

From 2015 to 2024, Visa’s payment volume grew at an annual rate of 11.5%.

Now, you may think this is something special to Visa. Both yes and no.

Yes, because Visa is an exceptionally successful company; no, because there is something inherent about the business model, and if you succeed with that business model, you get the same result.

Take MasterCard, a Visa competitor. It grew total payment volume by 23% annually from 2017 to 2024.

Now you may say, “It’s also an exception.”

Indeed, 90% of the global card payments outside China run through Visa and MasterCard networks.

But scale is irrelevant. You may grow a much smaller base at a slower rate, and you’ll still have a compounder.

Take American Express.

Between 2015-2024, total spending on American Express cards grew by 4.6% annually, yet American Express grew its revenues from $32 billion to $65 billion in the same period, a CAGR of 8.3%.

What do these businesses have in common? They are all toll bridges.

Together, they process over 90% of card payments worldwide. If you want to use a credit card, the transaction goes through one of these networks.

They are toll bridges for card payments.

This way, they grow even faster in inflationary times. Inflation increases basket totals, so the dollar value of their commission per transaction also grows.

In a recession, they stay stronger than other businesses. People don’t change their cars in recessions, car sales plummet, and car companies suffer a lot. But they still buy necessary items, and they still use cards to pay for them. Thus, processors are affected less than other businesses.

Here is a proof:

From 2008 to 2009, Visa’s payment volume remained basically flat while we had the worst recession since the Great Depression.

This is the power of toll bridges.

The most important thing in such businesses isn’t the scale or growth—it’s the robustness of the network.

Size is irrelevant because a small growth in dollar value can still provide a relatively large percentage growth.

What’s important is whether those in the network stay in the network. If they do, you have a path to sustained organic growth. You have many levers to pull:

• Increase in members.

• Increase in commission rate.

• Increase in membership fee.

• Spending growth of members.

Thus, if you are looking at a toll bridge business with a robust network and attractive valuation, the chance that it’ll be a compounder is high.

DLocal might be that business that will compound for decades to come.

It’s a payment processor that fills a significant gap in the market—connecting local payment methods to global merchants.

• Total payment volume has grown 60% annually since it became public in 2021.

• Revenues grew 42% annually in the same period.

• Expanded from 29 countries to 43 countries.

If somebody told me this performance, I would think that the stock must have skyrocketed.

The exact opposite happened.

The stock has plummeted since it became public:

This happens occasionally. The market distrusts a business for sustained growth, hammers it down for a prolonged period.. These tend to create asymmetric opportunities.

If you can spot these situations where the market is wrong, you have a shot at stellar returns. This happened lately with RobinHood, Hims, Sofi, Palantir, and Oscar.

Can DLocal be one of these businesses? This is what we are going to discuss today.

So, let me cut the BS and dive deep into DLocal!

What are you going to read:

What you're going to read:

1. Understanding The Business

2. Moat Analysis

3. Investment Thesis

4. Fundamental Analysis

5. Valuation

6. Conclusion

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🔑🔑 Key Takeaways

🎯 DLocal is creating a unified digital payment infrastructure for digital markets.

🎯 Its payment network benefits from direct and indirect network effects. It also exercises ecosystem lock-in by providing services like Merchant of Record, which make sellers dependent on it, erecting exit barriers.

🎯 It has secular tailwinds as emerging economies will grow three times faster than the developed markets in the next 5-10 years.

🎯 It suffered from eroding margins and shrinking take rate, but both appear to be stabilizing right now, and the management guides for accelerating growth.

🎯 It’s 30% undervalued even based on assumptions that are conservative relative to its potential.

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🏭 Understanding the Business

One of my friends moved to Colombia back in 2021, just after COVID.

He had a Colombian girlfriend, and they went there to live for a few months. He loved it there. They decided to get married and live in Colombia.

He had a business plan to sell Colombian coffee beans online to the rest of the world. Sounded like a nice idea.

I remember telling him, “It’s so easy, just set up the website, connect Stripe, and the rest will be marketing.”

He said hopelessly, “Stripe isn’t available here, and I don’t want to work with banks to get a virtual point of sales, it’s a total regulatory mess.”

This was a painful problem for him, and it’s a painful problem for millions of merchants and customers.

At the time, I wasn’t aware DLocal, probably he wasn’t either, but it solves exactly this problem.

But why do we have this problem in the first place?

Because payment processing is a complex flow that consists of multiple actors.

When you tap your card to make a payment or click checkout, the process is triggered:

• A point of sale (POS) machine encrypts the payment details and sends them to the PSP.

• PSP (payment service provider) detects the card and transaction details and sends them to the merchant’s bank.

• The merchant’s bank sends it to the card network with the card details.

• The card network transmits the message to your bank.

• Your bank either approves the transaction or not.

• The card network transmits this message to the merchant bank.

• The merchant bank transmits to the PSP.

• PSP transfers to the payment terminal (POS), and you see either approved or declined.

It’s a cumbersome process.

The two critical actors in the process are payment service providers (PSPs) and card networks.

Card networks are pure middlemen; they work internationally with all the banks that want it. What they do is fairly simple. Think of them like a language. As long as your card uses the network’s language, the network transfers the message. It doesn’t matter who the message comes from. They get an encrypted message and transmit an encrypted message.

Payment service providers aren’t like that. Who you work with matters.

They are the first step; they collect your card and transaction details. Imagine a fraudulent PSP. It can collect the card details of millions of people. They are the ones that you are exposing yourself to; the rest of the flow gets an encrypted message.

This is why PSPs are heavily regulated in many countries. In most emerging economies that still have financial security problems, only the government-licensed banks are allowed to operate PSPs.

The result is that if you want to create a payment processor to enable merchants to receive payments, you need to create different PSPs in different countries.

You can create a PSP in Colombia based on local laws and work with Colombian merchants. But merchants in Chile wouldn’t be able to use that network.

The problem is elevated given the prevalence of local payment methods. Even if you start with Stripe in Mexico, most people in Brazil won’t be able to buy from you because they don’t see internationally recognized Visa and MasterCard credit cards.

For instance, Pix is the preferred payment method in Brazil:

In 2024, Pix accounted for 76.4% of all payments in Brazil.

Now, imagine you are a Mexican merchant using Stripe. You will get card payments, but you won’t be able to process Pix payments. This means that you won’t be able to penetrate most of the Brazilian market.

This is a huge problem for multi-national merchants like Amazon, Shopify, Google, Microsoft, Uber, etc..

DLocal solves this.

What it does is fairly simple:

• It creates partnerships with local payment service providers to integrate its platform.

• It brings all these integrations together in one API.

• Merchants in emerging economies can easily start collecting payments.

• Multinational merchants can collect payments in local methods.

It’s a win-win for both merchants and customers. While merchants expand their addressable market, customers can access products and services that were previously inaccessible to them.

In exchange for facilitating these transactions, it cuts a commission, which is just like other payment processors as Stripe, PayPal etc..

It’s a genius business model that solves a critical problem; it’s not just a ‘nice to have’ product.

The question is simple—can this model drive consistent growth for years to come?

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🏰 Competitive Analysis

If somebody asked me to name 10 companies that have the strongest moats at the top of mind, I would say Amazon, Meta, Google, Visa, MasterCard, American Express, Uber, Booking, Apple, and Shopify.

Do you see the pattern? All these companies operate multi-sided platforms.

Apple’s app store brings together developers and users; Uber meets drivers and riders; Booking meets hotels and travellers; Amazon meets merchants and customers; Visa brings together card issuers and acquirers etc.

It’s extremely hard to create these businesses for one simple reason—you have at least two sides to convince and satisfy, not just one.

Imagine a coffee shop. It just needs to satisfy the customer it sells coffee to.

For Booking, it’s not that simple. It had to convince hotel owners first to list their free rooms on the website and then travellers to land on the site and book those rooms.

Both parties should be satisfied, so they come back. As they come back, they attract more users of the same type and others.

What the hell does this mean?

More hotels use Booking, more hotels get attracted because if they don’t, they miss out on a customer acquisition channel. This is called direct network effects. Increasing users attracts more of the same type of users.

At the same time, more hotels on the platform attract more travellers to the platform. This is called indirect network effects. Increasing users attracts more of the different types of users.

The strongest business benefit is from both indirect and direct network effects.

Take Facebook, for example:

• More users attract more users.

• More users also attract more advertisers.

DLocal has this too.

Imagine you are a merchant in Colombia using a local bank as a PSP to process online payments. Your competitor is using DLocal, so it could accept OXXO payments from Mexico, Pix payments from Brazil, and Pago Efectivo payments from Ecuador.

This will prompt other merchants to switch to DLocal to also expand their addressable market.

The growing number of global merchants accepting DLocal payment methods increases the utility for consumers in emerging markets. Products and services that were previously inaccessible to them become accessible. This naturally grows the total transaction volume.

More merchants lead to growing transaction volume, which again attracts more merchants as they want to take a share from a growing pie.

And just like that, you have a business that benefits from both direct and indirect network effects.

It doesn’t stop here…

On top of that, it exercises a customer lock-in.

Once you set up all the payment methods through one API and scale the business, you won’t want to change it just because some alternative vendor is offering a bit less commission etc…

If you try to switch and it doesn’t work as expected, you will lose sales and market share every hour it doesn’t work as expected.

This is why payment processors are extremely sticky. Most merchants don’t change their processor throughout the life of their business.

Further, DLocal reinforces this customer lock-in through Merchant of Record (MoR) services.

In most countries, you need to set up a legal entity to comply with tax regulations to start accepting payments.

For businesses that are just starting or those that are too small to comply with multi-country regulations, this erects a significant barrier to expansion.

DLocal addresses this problem through its MoR service.

It works like this:

Instead of sellers themselves, DLocal creates local entities in those countries and acts as if that entity is the seller of the product and service:

• Assumes legal liability.

• Ensures regulatory compliance.

• Handles all the flow of payments.

This way, merchants can easily expand their market opportunity.

Once a merchant uses this service and multi-national operations scale, it can’t easily dump DLocal as it would risk losing these markets and sales.

In sum, DLocal benefits from significant direct and indirect network effects. This creates a flywheel of growth.

Once the customer lands, he is not likely to leave as payment processing is a sticky business, and DLocal enhances this effect by providing complementary services that could significantly benefit merchants’ business.

Is this a big enough competitive advantage to make DLocal win the whole market?

Of course not, exactly for the same reasons why DLocal is a nice business. Existing merchants are unlikely to dump their processors as it’s a sticky business. But they don’t need to.

As I said in the beginning, the size of the network is actually irrelevant. The important thing is its robustness.

As long as DLocal preserves this robustness, it’ll naturally grow thanks to the market characteristics. And it has enough competitive strength to preserve this.

For a $3 billion company processing just $26 billion in payments, this is all we need.

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📝 Investment Thesis

My DLocal investment thesis relies on three pillars.

1️⃣ Payment processing is a huge market.

The global payment processing market currently stands at $173 billion and is expected to grow 20% annually, reaching $914 billion in 2034.

Unlike card networks, this is a highly fragmented market that is dominated by local service providers in most countries because of regulatory barriers.

Even if we assume a very fast 25% annual growth for DLocal in the next 9 years, it’ll be generating just $3.8 billion in revenue, and it’ll have only 0.4% market share.

This is a very achievable target given the strong product offering of DLocal.

2️⃣ Emerging markets will grow faster.

According to the IMF forecast, emerging markets will grow nearly 3 times faster than developed economies in the next decade.

IMF forecasts, on average, 4% annual growth for emerging economies while developed economies are expected to grow only 1.5% annually in the same period.

This means that there’ll be much larger contestable market shares for payment processing services in developing markets. We will have a growing pie in emerging markets while it’ll largely remain stable in developed markets.

DLocal is well-positioned to take advantage of this confluence due to its unmatched penetration into emerging markets.

No other processor has been able to penetrate into that many emerging economies, navigate complex regulatory frameworks, and bring the PSP services for all these countries together in an API so far. Only DLocal.

3️⃣ Margins will expand again.

Perhaps one of the most obvious reasons investors dumped the stock in the last few years, despite stellar growth, is consistently shrinking gross margin.

Consistently eroding gross margin sends the message that the business has lost its ability to price the product at a premium.

This perception will likely hold in 8 out of 10 situations like this, but I am not so sure for DLocal.

To start with, it already had higher-than-normal take rates because of the uniqueness of its product suite. Thus, when Stripe and Adyen pushed to expand their capabilities in the region, for instance, by allowing OXXO and Pix payments, DLocal started to get some margin pressure.

This was natural, and it could have stabilized by last year, as rivals haven’t gone further than Brazil and Mexico so far.

What caused most of the shrinkage in the take rate last year was mostly one-time events. It got into a repricing arrangement with its largest customer in Q1 2024, which was being charged larger-than-normal take rates. In Q3 2024, a regulatory change in Brazil also forced it to reprice with one other large merchant.

It’s early to reach a conclusion, but it looks like gross margin started to stabilize around 40% as it expanded gross margin by 5% YoY in Q1 2025.

I believe gross margin will expand again and settle above 50% as it enters new countries where competitors like Stripe have avoided because of regulatory complexity, such as Turkey. In the absence of competition, it’ll be able to charge higher take rates in these countries, driving the average take rate and the gross margin up.

Overall, I believe DLocal has secular macro tailwinds that set it up for stellar returns in the next decade, even with the current business dynamics.

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📊 Fundamental Analysis

➡️ Business Performance

DLocal’s performance since it has become public has been nothing short of stellar.

Take a look at this:

If this were a business that had an “AI” in its name, it would be trading at least 5 times higher than today’s valuation.

It grew revenues by 60% annually since 2020, while net income also grew 48% in the same period.

Such a performance doesn’t take much comment. I just want to emphasize two things:

• The growth slowed down significantly in 2024 compared to the years before that.

• Net income grew more slowly than revenue.

This tells us two things:

• It’s struggling to acquire big merchants.

• Thus, operating expenses remain elevated.

This is a natural consequence of its business model. Big merchants generally don’t struggle as much as small merchants to handle cross-national payments. They have resources and operational capabilities.

Thus, what likely happened is that DLocal has already acquired most big merchants that could use such a service, and the merchants remaining in the pool are smaller.

Thus, big jumps in revenue will be harder as the number of such businesses in the pool has shrunk.

So, we will have to show some patience while the smaller merchants it acquired grow their business. At the same time, it’ll also try expanding into new geographies and land the big merchants and many more small merchants.

I believe these two drivers of growth may coincide at some point, leading to reacceleration.

➡️ Financial Health

DLocal has what I call a “golden line.” This is my favorite setup to see in a balance sheet. Take a look at this:

When you put equity, EBITDA, and debt in this order, they create a perfect declining line. If there aren’t any other accounting quirks you need to pay attention to, this generally is a golden standard for a balance sheet.

Its equity pool is nearly 10x as large as its total debt, and its EBITDA can pay all the debt under a year.

This draws us a picture of a business that can weather even the strongest economic storms.

It’s rock solid.

➡️ Profitability & Efficiency

• Gross & Net Margin

This is where it gets bitter for this business..

If you showed me this chart and said nothing else, I would say stay away from this business. But in DLocal case, this may be misleading.

Such a consistent and rapid decline in margins generally indicates a lost competitive position. However, when a business loses a competitive advantage that way, it’s generally accompanied by a flatlining or even declining revenue.

Just look put Intel’s declining margins and revenue chart side by side and you’ll see what I mean.

For DLocal, we are looking at a business that is poised for fast growth. Though growth looks to have slowed in the last 2 years, it’s nowhere near flatlining.

On top of that:

• Management is guiding for accelerating growth this year.

• Margins may have stabilized at around 40% as it expanded gross margin by 5% YoY in Q1.

When you consider all these, you see an alternative scenario:

It priced its product at a restrictive price premium that put a drag on growth. Now that it has removed some of that premium, growth may accelerate.

Looking at stabilizing margins and the management’s guidance, I think this scenario has a shot to play out.

• Return on Equity (ROE)

As DLocal uses a minimal debt in its operations, I believe ROE is the right way to assess its capital allocation.

Its capital allocation performance is actually a good reason to be optimistic about its future:

Though it normally declined fast as the business grew, it’s still just above 29%! This is an amazing performance.

For reference, the average ROE of all American companies is around 12%, meaning it’s generating two times the return on its equity compared to an average company.

Given that it still has many markets to tap into and emerging economies will grow faster than the rest of the world, it has ample opportunity to sustain this capital allocation performance.

As it generates above-average return on its equity, shareholders may also expect above-average return on their investment, provided that they don’t overpay.

Overall, DLocal performance has been robust, but its eroding margins raise questions. However, given the management’s guidance for acceleration, very high return on equity, and stabilization of the margins lately, I believe we have more reasons to be optimistic than pessimistic.

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📈 Valuation

I love valuation when the story is clearly visible.

This is the thing about valuation: It’s a combination of story and numbers, as Aswath Damodaran says.

The nuance is that if the story isn’t clearly visible, you risk drafting toward a speculation rather than a realistic scenario.

This is why they say valuation is more of an art than a science.

Understanding what scenario is realistic and what’s not is an art. But here is a thing with stories—if you read a similar story before, you can more easily understand how this one could progress.

Luckily, payment processors are a story that has been told many times before.

Take a look at digital payment processors like PayPal, Adyen, Block, and you’ll see a similar pattern:

• Consistent growth. It could be slow or fast, but it’s consistent.

• High return on investment.

• High operating margins.

I believe this will hold true for DLocal in the long term, too.

Thus, valuation will be pretty straightforward—just combine conservative growth assumptions with these common elements from similar stories having been told already.

So, here is my story for DLocal:

• I believe it can grow revenues at least by an average of 15% annually in the next 5 years. Then, the growth will converge to a terminal growth rate of 3% in the 5 years beyond that.

• Its operating margin will gradually expand from 20% to 25%.

• Its return on investment will gradually converge to 15% in the terminal period as its competitive advantage will allow it to have a bit higher return on investment than average.

• Current cost of capital is around 9.5%, and it’ll converge to 8% in the terminal period.

• The marginal tax rate will be 25%.

Here is how this scenario plays out:

Based on this scenario, the stock is currently 30% undervalued.

Note that this scenario implies 11% annual revenue growth for the next decade.

There is a chance that the business can grow better than this; however, I wouldn’t base my thesis on this, as 11% annual growth for a decade is already a rare performance if you look at the base rates.

Even if you demand a 30% margin of safety on this valuation, we will get a price target of $10.5, and this is approximately where the stock is today.

It’s grossly undervalued.

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🏁 Conclusion

DLocal has a product that is solving a critical problem for emerging market merchants and multinational sellers.

The quality of its product, direct and indirect network effects around it, and the ecosystem lock-in it exercises give it a significant edge against the competitors.

Its growth has been stellar so far, but the shrinking margins have led investors to be more pessimistic rather than optimistic.

Stabilizing margins and expectations for accelerating growth, together with 30% undervaluation, tell us that this pessimism is now overstated. More discount is now baked into the stock than it deserves.

It also has secular tailwinds behind it as emerging market economies will grow three times faster than the rest of the world in the next 5-10 years.

Further, it’s being a LatAm company is also a desirable feature given the general overvaluation of American companies despite the macro headwinds it faces.

Overall, I think it’s a nice buy at these levels if you are looking for exposure to growth stocks, but struggle to find anything attractively valued in the US.

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That’s all friends!

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