Decisive Expansion And Stock Buybacks Signal Robust Growth And Investor Confidence

Key Takeaways

• DLocal's strategy to aggressively buy back stocks and expand into emerging markets like Africa showcases confidence and potential for significant revenue growth.
  
• Investments in operational efficiency and diversification of its merchant base indicate a focus on sustainable growth and profitability.
  
• DLocal faces risks from foreign exchange volatility, merchant negotiations lowering take rates, concentrated revenue sources, and fierce competition in digital payments.

Catalysts

Operates a payment processing platform worldwide.

• DLocal's aggressive stock buyback strategy indicates a strong belief in the undervaluation of its stocks by the company, signaling confidence to investors and potentially leading to higher earnings per share (EPS) and stock price appreciation.
  
• The company's strategic focus on expanding into high-growth emerging markets, like the successful forays into Africa, indicates potential for significant top-line growth through increased Total Payment Volume (TPV) and penetration in new markets, impacting revenue growth.
  
• A commitment to maintaining a high net take rate in comparison to peers, despite a strategic shift towards more local-to-local transactions, suggests resilience in profitability and a potential for a controlled yet higher margin revenue stream.
  
• Investing in engineering and back-office capabilities demonstrates a focus on long-term growth and operational efficiency, which could lead to improved net margins through cost-efficient scalability and enhanced service offerings.
  
• The diversified merchant base expansion, including the addition of marquee global names and powering significant launches in Brazil, indicates a sustainable growth trajectory, likely impacting future revenue and market share expansion.

Assumptions

• Analysts are assuming DLocal's revenue will grow by 23.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 18.8% today to 17.0% in 3 years time.
• Analysts expect earnings to reach $226.1 million (and earnings per share of $0.75) by about November 2027, up from $132.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $264.5 million in earnings, and the most bearish expecting $183.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2027 earnings, down from 20.1x today. This future PE is greater than the current PE for the US Diversified Financial industry at 17.8x.
• Analysts expect the number of shares outstanding to grow by 2.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.57%, as per the Simply Wall St company report.

Risks

• The company has acknowledged exposure to foreign exchange volatility, particularly in emerging markets like Argentina and Egypt, which can significantly impact revenue and gross profits.
  
• DLocal has faced pressure from large merchants renegotiating lower take rates, which could continue and potentially reduce net take rate margins over time.
  
• While the company is investing in long-term growth projects and technology, there is a risk that these investments may not yield the expected returns, impacting earnings and cash flow.
  
• The reliance on a few large merchants for a significant portion of revenue presents concentration risk. Any loss or reduction in business from these merchants could adversely affect revenues.
  
• The competitive landscape in digital payments is rapidly evolving. Increased competition from global and local payment processors might pressure DLocal's market share, potentially affecting revenue and earnings growth.

Valuation

• The analysts have a consensus price target of $10.73 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 $14.0, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.3 billion, earnings will come to $226.1 million, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 8.6%.
• Given the current share price of $9.35, the analyst's price target of $10.73 is 12.8% 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.