Alternative Payment Methods In Emerging Markets Will Drive Future Expansion

Key Takeaways

• Expansion into emerging markets and strategic M&A activity are expected to drive revenue growth and maintain healthy margins.
  
• Innovations in stablecoins and APMs aim to boost midterm revenue and sustain merchant business, supporting future earnings growth.
  
• Operating in volatile markets and facing take rate compression poses challenges to profitability and long-term financial stability for dLocal.

Catalysts

Operates a payment processing platform worldwide.

• The company has identified a massive addressable market as emerging and frontier markets digitize payments, driven by untapped potential in the global South. This is expected to drive significant top-line revenue growth as global merchants expand into these regions.
  
• dLocal plans to deliver operational leverage as it scales, improving net margins. The attractive margin business suggests efficiencies will increase as foundational investments are completed and scale benefits materialize.
  
• The company has a strong pipeline for product innovation, including stablecoins and alternative payment methods (APMs), which are expected to generate additional midterm revenue streams and sustain high recurring business from merchants, driving future earnings growth.
  
• Strategic investments in building licensing and regulatory portfolios, such as acquiring additional licenses and registrations, strengthen market positioning and provide competitive advantages that can impact future revenue positively by expanding merchant confidence and regulatory compliance.
  
• Expansion into more frontier markets and higher take rate verticals, alongside strategic M&A activity, aims to offset take rate compression while driving higher total payment volume (TPV) growth. This approach supports revenue growth and helps maintain healthy adjusted EBITDA margins.

DLocal Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DLocal's revenue will grow by 25.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.1% today to 17.9% in 3 years time.
• Analysts expect earnings to reach $261.1 million (and earnings per share of $0.92) by about March 2028, up from $120.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.6x on those 2028 earnings, down from 22.9x today. This future PE is lower than the current PE for the US Diversified Financial industry at 16.5x.
• Analysts expect the number of shares outstanding to decline by 3.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.05%, as per the Simply Wall St company report.

DLocal Future Earnings Per Share Growth

Risks

• dLocal operates in volatile emerging markets, where macroeconomic shifts, regulatory changes, and currency fluctuations can significantly impact revenue and financial stability.
  
• The company faces ongoing take rate compression due to increased volumes from large merchants reaching pricing tiers, which could pressure net margins.
  
• The decision to discontinue midterm guidance due to market unpredictability suggests potential challenges in forecasting long-term earnings stability.
  
• Take rate compression and competitive pricing, particularly in large markets like Brazil and Mexico, might strain profitability by increasing price competition.
  
• The orchestration product and change in settlement dynamics can affect cash flow operations, potentially increasing financial costs if not managed effectively.

Valuation

• The analysts have a consensus price target of $12.278 for DLocal based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $261.1 million, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 9.1%.
• Given the current share price of $9.67, the analyst price target of $12.28 is 21.2% higher.
• 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.