Global Regulatory Pressures Will Hinder Digital Payment Expansion

Key Takeaways

• Regulatory pressures and global trade fragmentation threaten expansion, curtailing margins and long-term growth, while rising operational complexity increases compliance and technology costs.
  
• Heavy dependence on major merchants and growing competition in payment processing heighten risks of revenue instability, shrinking fees, and sustained margin erosion.
  
• Expansion in emerging markets, tech-driven efficiency, and diversified business lines enhance defensibility and growth, while disciplined capital management supports long-term earnings resilience.

Catalysts

Operates a payment processing platform worldwide.

• Heightened global regulatory scrutiny of cross-border payments and digital financial services is poised to raise compliance costs and significantly impede DLocal's expansion into new markets, directly threatening margins and constraining long-term revenue growth as oversight increases across core jurisdictions.
  
• Intensifying deglobalization and fragmentation in international trade may lead to reduced cross-border transaction volumes, shrinking DLocal's total addressable market for payment processing and causing a material slowdown in top-line growth that cannot be offset by regional diversification alone.
  
• Continued reliance on a concentrated group of large merchants for revenue-as evidenced by the significant take rate and volume impact from shifts in single, mega-cap clients-exposes DLocal to abrupt declines in revenues and margin compression risk in the event of customer churn or loss of share of wallet with key clients.
  
• The commoditization of payment processing services and growing competition from both global providers and new fintech entrants is expected to drive down fees, making it increasingly difficult for DLocal to defend its take rates and maintain historical levels of net margin, particularly as technological innovation accelerates.
  
• Escalating operational complexity, due to geographic diversification attempts and higher processing costs in emerging markets such as Nigeria and South Africa, is likely to result in further margin pressure and necessitate ongoing, sizable investment in technology and compliance, ultimately limiting the company's ability to deliver sustained earnings growth.

DLocal Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on DLocal compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming DLocal's revenue will grow by 27.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 19.2% today to 19.5% in 3 years time.
• The bearish analysts expect earnings to reach $312.2 million (and earnings per share of $1.05) by about July 2028, up from $149.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, down from 21.4x today. This future PE is lower than the current PE for the US Diversified Financial industry at 17.5x.
• Analysts expect the number of shares outstanding to decline by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.59%, as per the Simply Wall St company report.

DLocal Future Earnings Per Share Growth

Risks

• The accelerating adoption of digital payments in emerging markets and DLocal's expanding presence across Latin America, Africa, and Asia could drive sustained double-digit growth in payment volumes and revenue, especially as more merchants seek to access these high-growth regions.
  
• Consistent investments in automation, AI, and operational efficiency are expected to reduce cost per transaction, drive higher operational leverage, and improve EBITDA margins and overall earnings over time.
  
• The company's diversification across markets and verticals, along with high net retention rates (144%), suggests strong defensibility and customer loyalty that could support stable or growing revenues even as competition intensifies.
  
• DLocal's ability to maintain elevated gross profit margins in frontier and smaller Latin American markets, combined with product innovation and cross-selling to existing merchants, could help offset any secular declines in take rates and protect net margins.
  
• A disciplined capital allocation approach, robust cash generation, and an asset-light business model provide flexibility for reinvestment, M&A, and consistent shareholder returns, increasing resilience and the potential for long-term earnings growth.

Valuation

• The assumed bearish price target for DLocal is $9.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of DLocal's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.0, and the most bearish reporting a price target of just $9.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $312.2 million, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 9.6%.
• Given the current share price of $11.18, the bearish analyst price target of $9.0 is 24.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.