Breathtaking Tech Company's Shares Plummet 81% in February, Offering Opportunities for Massive Purchases
E-commerce specialist dLocal, with a ticker symbol DLO (-1.47%), aims to connect global merchants effortlessly with the billions of users in emerging markets. Established in Uruguay, the company is a powerhouse, linking merchants to over 2 billion people in 40 countries through 900+ local payment methods. This makes dLocal an essential component for businesses looking to expand in these burgeoning markets.
While dLocal debuted on the stock market in 2021, shares have plunged 81% below their high mark. Yet, we should reconsider investing in dLocal, with four compelling reasons leading the way in February:
1. DLocal isn't a "broken" IPO
With a mission to solve the payment pain points faced by merchants – including cross-border, localized payments, foreign exchange settlements, and tax management – dLocal's platform significantly boosts merchant acceptance and conversion rates in emerging markets with limited international credit card access. The company grew from serving eight countries with 80 payment methods in 2016 to servicing 40 countries with over 900 payment options today.
This rapid expansion has pressured dLocal's margins due to the intricacies of each country's regulations and the time necessary for partnering with local payment services. However, this tradeoff paints a positive picture. It indicates that dLocal is investing in its network, widening its competitive moat, and becoming increasingly challenging for competitors to replicate.
Although dLocal's high growth has diminished margin profits, its free cash flow (FCF) margin remains an impressive 21%. This puts dLocal on a strong financial footing, and the company is unlikely to face bankruptcy despite its expansion efforts.
2. DLocal's value to merchants is expanding
dLocal targets countries with significant growth potential, including those across Latin America, Africa, and the Asia-Pacific region. These markets are expected to witness urban gross domestic product (GDP) growth 3.5 times faster than developed countries through 2040. By focusing on connecting enterprises with these rapidly-growing markets, dLocal is poised for long-term success.
With over 2 billion potential shoppers in these emerging markets, dLocal has identified a vast expansion opportunity. Analysts predict these countries will make more than $3.7 trillion in digital payments annually by 2028, showcasing an enormous revenue potential for dLocal's merchants. As internet and e-commerce penetration in these emerging markets continue to grow, the upward trend for dLocal looks promising.
Already operating with renowned companies such as Amazon, Spotify, Uber, Shopify, and Netflix, dLocal's services will continue to thrive as these businesses expand beyond developed markets.
3. Pedro Arnt's transition from MercadoLibre is compelling
Pedro Arnt, dLocal's CEO, was formerly the Chief Financial Officer (CFO) at MercadoLibre – a Latin American e-commerce and fintech force. His decision to leave MercadoPago, the fintech platform he helped build, and join dLocal is noteworthy. Arnt appears to see greater potential in dLocal's future compared to MercadoLibre.
Having transformed MercadoLibre from a fledgling e-commerce company into a leading digital marketplace, Arnt will likely bring a wealth of experience and perspective to dLocal's management team. This combination could accelerate dLocal's growth and usher in a new era of success.
4. DLocal's solid cash flow and share buybacks
Although dLocal's aggressive expansion has impacted margins, the company remains a strong generating cash flow machine, with a FCF margin of 21%. Furthermore, it has demonstrated a commitment to shareholder value by fully utilizing its $100 million share buyback plan in 2022 and half of its $200 million repurchase plan in the previous year.
These share repurchases have reduced dLocal's share count by 2% annually since 2023, diverging from many growth stocks that often witness ballooning share counts due to excessive stock-based compensation or shareholder dilution. If dLocal's net take rate remains steady or improves, its profitability should follow, potentially making it a compelling buying opportunity. As of now, dLocal trades at just 27 times FCF, slightly below the average S&P 500 index's ratio.
- Despite plunging 81% below its high mark, dLocal's free cash flow (FCF) margin remains impressive at 21%, indicating a strong financial position that makes it less likely to face bankruptcy.
- As dLocal targets countries with significant growth potential, its peer companies in the emerging markets of Latin America, Africa, and the Asia-Pacific region are expected to experience urban GDP growth 3.5 times faster than developed countries through 2040.
- To further leverage its growth potential, dLocal has repurchased $300 million of its own shares since 2021, reducing its share count by 2% annually and diverging from many growth stocks that often see ballooning share counts.
- With a seasoned CEO, Pedro Arnt, who previously transformed MercadoLibre into a leading digital marketplace, dLocal appears well-positioned to continue its expansion in emerging markets, providing an attractive investment opportunity for those seeking strong cash flow and growth potential.
