New Technologies And Market Expansion Will Improve Transaction Performance And Client Diversification

Key Takeaways

• Strategic expansions and integrations in emerging markets are boosting revenue potential and enhancing service capacity across sectors.
  
• New technologies and products improve transaction performance, leading to higher revenue, better margins, and strengthened client relationships.
  
• Exposure to currency fluctuations and regulatory issues poses risks to revenue stability and margin pressures, compounded by reliance on major merchants.

Catalysts

Operates a payment processing platform worldwide.

• dLocal has been expanding its operations into more countries and offering more payment methods, improving share of wallet across major clients in sectors like financial services, SaaS, advertising, and ride-hailing. This is likely to drive future revenue growth through increased transaction volumes and client diversification.
  
• The company has successfully integrated major players like MoneyGram and other significant remittance companies, broadening its service offerings in Latin America, Africa, and Asia. This integration is expected to boost revenue and enhance service capacity, thus supporting future earnings growth.
  
• dLocal's launch of new technology, such as smart requests and alternative payment methods like Nupay integration in Brazil, aims to improve transaction performance and expand its payment method footprint, which could lead to higher revenue and better net margins.
  
• The introduction of a new payment orchestration product allows merchants more flexibility, enabling dLocal to capture more share of wallet and strengthen long-term client relationships. This strategy could materially impact revenue and possibly earnings stability.
  
• Investments in acquiring new licenses across various countries support regulatory compliance and merchant trust, potentially leading to higher transaction volumes and revenue growth through expanded market access in volatile emerging markets.

DLocal Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DLocal's revenue will grow by 24.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.3% today to 19.0% in 3 years time.
• Analysts expect earnings to reach $266.7 million (and earnings per share of $0.94) by about December 2027, up from $119.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $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 15.3x on those 2027 earnings, down from 27.9x today. This future PE is lower than the current PE for the US Diversified Financial industry at 18.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.61%, as per the Simply Wall St company report.

DLocal Future Earnings Per Share Growth

Risks

• The exposure to currency fluctuations, as mentioned with weaknesses in emerging market currencies, could result in less favorable revenue outcomes, impacting gross profit and net income.
  
• The loss of share of wallet with a top commerce merchant in Brazil, due to regulatory compliance issues, highlights a risk of revenue loss if other major partners follow suit, which could impact top-line growth.
  
• The potential for currency devaluation, as seen in Nigeria and anticipated in other markets, poses a risk to revenue stability and could adversely affect net margins.
  
• Continued investment in engineering, product development, and IT capabilities, while essential for growth, may increase operating expenses and pressure net margins if revenue growth does not offset these costs.
  
• Heavy reliance on larger merchants, which contributes to revenue concentration risk, presents a vulnerability if these merchants reduce their usage or switch to competitors, potentially impacting overall earnings.

Valuation

• The analysts have a consensus price target of $11.18 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 $9.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.4 billion, earnings will come to $266.7 million, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 8.6%.
• Given the current share price of $11.66, the analyst's price target of $11.18 is 4.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.