DKosig
DLocal (NASDAQ:NASDAQ:DLO) is one of my favorite foreign stock ideas. Its founders are now the first billionaires in Uruguay. DLocal is a fintech stock with a simple mission: to help U.S. multinationals engage in e-commerce with billions of people in emerging markets.
This is a bit different from other payment companies like PayPal and Stripe and Square. Electronic payments is a massive market opportunity, projected to hit $20 trillion in four years. DLocal is distinguishing itself with its focus on the emerging market space. With its tight focus on this one area, DLocal has won a lot of fans in the Fortune 500. Its customer list includes Amazon, Booking.com, Shopify, Spotify, Uber, MailChimp, Dropbox, Nike, and other multinationals.
So I’m bullish on DLocal and the opportunity it’s chasing. Here’s why.
DLocal solves an e-commerce pain point in emerging markets
In the USA, e-commerce is straightforward and easy. When you find something online that you want to buy, you take out your debit card and buy it. But this easy transaction can be a lot harder in the rest of the world.
Every country has its own banks and its own financial systems. Many people in Uruguay, for instance, do not have an international debit card. This limits what they can buy on the internet. They could buy local items from local sellers, using their local credit card. But buying from Amazon, Nike, or Uber would be a lot more difficult.
That’s where DLocal comes in. The company has an app that connects local currencies with international financial systems like Visa and Mastercard. This opens the door for multinational businesses that want to make money abroad. Instead of having to deal with all these payment headaches in emerging markets, you can allow DLocal to solve those problems for you.
DLocal’s app is now available in 37 emerging markets around the world. Multinationals that subscribe to DLocal’s solution can now accept over 700 different forms of payment in an e-commerce transaction. That all comes from one app. What was time-consuming and difficult — accepting payments from 2 billion potential customers in emerging markets around the world — is now a lot easier, thanks to DLocal. That’s why Amazon, Nike, and Uber are all using DLocal’s app now. And many small businesses can reach these markets as well, as Shopify customers can now easily subscribe to DLocal’s offerings.
The financials are impressive
DLocal has over $300 million in revenues over the last 12 months. Recently, however, the fintech has dropped out of the hyper-growth phase of triple-digit revenue growth. In Q2, the company reported just 72% sales growth from a year ago. That broke a streak of five quarters in a row with revenues growing over 100%.
That sort of fast start is what I love to see in emerging tech stocks. These are my favorite stocks to own, the fast-growers. The macro picture has been pretty ugly in 2022, so it doesn’t surprise me that DLocal’s sales growth has declined a bit in Q2. But 72% growth is still very healthy.
What’s interesting about DLocal, however, is its bottom-line numbers. DLocal is already a highly profitable company, with a net income margin of 30%. This is similar to what we see with mature tech companies like Microsoft or Apple. When I see a tech company with high profit margins, I don’t expect a lot of top-line growth. For instance, Microsoft grew revenues about 10% in its most recent quarter, and Apple’s growth is down in the single digits. DLocal is growing revenues seven times faster than Microsoft.
We see a similar divergence when we compare DLocal’s financials to other fast-growing tech stocks like Snowflake or Datadog. All three of these software companies have high revenue growth. (And Mr. Market gives them a high multiple to reflect this). What we expect to see with very fast sales growth is unprofitability. Datadog, for instance, has a profit margin under 1%. And Snowflake has an awful, negative profit margin (41%).
The idea is that as the revenues for these tech companies continue to grow, their fixed costs largely remain constant, and eventually the companies will scale into a very nice profitability. What’s surprising about DLocal is that it’s already achieved this. This is a highly unusual tech stock in that it’s an A+ growth story while it’s simultaneously an A+ profitability stock. That’s a rare breed of tech stock, and it’s pretty exciting to see.
Why is DLocal so profitable right now?
I think the surprising profitability that DLocal is producing so early in its journey is due to specifics in its business model. DLocal is a Software-as-a-Service stock, which is a strong sector, arguably the strongest of all business models. It’s a subscription model, and inertia is a powerful force in the world. So I love subscription businesses, and the repeating revenues that go along with that.
DLocal has one app, which simplifies the adoption process. Multinationals can easily expand or contract the payment systems and the countries in which they operate. So DLocal is becoming a platform-of-choice for large American companies that want to operate in foreign markets.
Many start-up software companies will give away their software at cost in the hopes of grabbing market share. The idea is that profits will come later, assuming the company is able to scale higher. DLocal’s very nice profit margins suggest the company is winning customers without doing that. The positive bottom-line numbers suggest DLocal is already becoming a gorilla, even at this early stage. It’s rather unusual to say that about a $6 billion company.
What excites me the most about DLocal is how this company has aligned itself with its customers. The company gets paid per transactions on the platform. Two billion is a lot of people in DLocal’s markets. As more and more poor people around the world start to access American e-commerce, I expect this business to really flourish.
What are the risks?
DLocal stock is down 55% over the last year, so the price has really been hammered. A year ago, DLocal’s P/E ratio was 291, and now it’s 68. So if you’re a momentum investor, the momentum for DLocal stock is all in the wrong direction. And if you’re a value investor, a stock trading at 68 times earnings is still high. So there’s room for this stock to get cheaper, and that could still happen.
The macro risks remain as well. We’re seeing bad inflation in the U.S. This has caused the federal reserve to jack up interest rates this year. And that has made the dollar quite strong vis-a-vis other currencies around the world. This is a negative for multinationals trying to sell their goods abroad, and it’s bad news for emerging markets.
So DLocal is facing strong headwinds right now. It’s no secret that rising interest rates have hit the stock market this year — internet stocks in particular have been hit hard, and high multiples for those stocks have shrunk dramatically. But higher interest rates don’t just affect DLocal’s stock price; they also affect its customers. People in emerging markets are less likely to buy American goods and services when they become more and more expensive.
Another risk is concentration risk. DLocal has 500 merchants on its platform. These are multinationals that want to do business in South America, Africa, and Asia. 51% of the company’s revenues come from its top 10 customers. So that’s a sizable risk, although the risk is shrinking as DLocal gets more and more customers. (A year ago 61% of its sales came from its top 10 customers). In 2020 the company had 300 customers, and in 2021 it had 400 customers, so it’s adding about 100 multinational customers a year.
On the positive side, DLocal is still reporting a very high net revenue retention (NRR) stat: 157% in Q2. That means the company is seeing an overall revenue growth of 57% from its existing customers, who are adding more subscriptions. This is the famous “land and expand” strategy that has made so many software-as-a-service companies such happy investments. In the case of DLocal, if a multinational is satisfied with the way the app works in one country, it’s quite easy to add additional countries or currencies to its subscription plan.
This is a long-term buy, not a short-term trade
While DLocal is seeing near-term headwinds in this macro environment, the market has already adjusted its stock price to account for this. In other words, much of this bad news has already been priced in. So yes, inflation is bad, and interest rates have jacked higher, in 2022. But what will 2026 be like?
DLocal is solving a major problem for multinationals trying to engage in internet commerce in emerging markets. Its payment solutions unlock American internet commerce in countries that house two billion people. Mega-caps trying to find growth opportunities are going to want to be in emerging markets. And DLocal is facilitating that trade.
I love the company’s high profit margins, especially in this environment. This suggests to me t hat DLocal is solving a real pain point that was hindering American e-commerce abroad.
There’s no question that 2022 has been a lousy year for fast-growing stocks, and DLocal stock has not been immune to that. So while the short-term price moves can be volatile, I am very optimistic about this stock over the next decade.
Editor’s Note: This article was submitted as part of Seeking Alpha’s Top Ex-US Stock Pick competition, which runs through November 7. This competition is open to all users and contributors; click here to find out more and submit your article today!
Be the first to comment