Alert: 77.7% Upside In Under-the-Radar Growth Stock
Investment Alert: Buy dLocal Under $13
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
Growth stocks aren’t in vogue right now but some exhibit growth rates so high that they can’t help but seize your attention. dLocal fits into that category after reporting revenue growth of 88.4% in FY 2020 and 134.4% in FY 2021. In those years, gross margins were sky high too, 57.7% and 53.4% respectively.
The company has a presence in 29 countries and caters to as many as 600 payment methods, making it a highly versatile payments solution. As e-commerce expands around the world, dLocal is well-positioned to ride the secular trend.
So, is it a buy?
Key Points
- dLocal’s payments platform supports over 600 payment methods in 29 countries, and it has a strong track record of growth. In 2021, dLocal’s revenue grew by 133% year-over-year, and its gross profit margin was 66%.
- dLocal has a strong balance sheet with a healthy cash balance and no debt. This gives dLocal the financial flexibility to invest in new products and services, as well as to expand into new markets.
- Some of the risks to consider before investing in dLocal include competition from Stripe and PayPal, as well as the risks associated with operating in emerging markets.
Why Buy dLocal?
dLocal enables merchants to reach wider audiences via e-commerce offerings. While that trend is well established in the United States, it is still in its infancy in many parts of the world. The increased adoption of digital payments positions the company well to continue growing for the foreseeable future.
The evidence of its success is already apparent in the company’s financial statements. Not only has sales growth been impressive but the balance sheet looks really good too: Cash sits at $336 million, and the company has no long-term debt. A strong balance sheet acts as a reserve in which the company can dip into when building new products and services. It also capitalizes the company well to grow in new markets.
From our research, the company appears to have a decent moat too. Once entrenched in a merchant’s payment ecosystem, it’s hard to disrupt it. Add proprietary technology and long-term contracts, and you can see where competitors will struggle to elbow in on its territory.
From our analysis, the upside is large. We see as much as 77.7% upside to $22 per share from current levels. That’s a little more optimistic than the Street, which has a consensus median estimate of $19.90 from 10 analysts. Our forecast was based on a 5-year discounted cash flow forecast analysis.
Before going all in on dLocal, however, it’s worth pointing out some key risks to the investment thesis:
- Competitive threats from Stripe and Paypal are significant, not least because both are so well capitalized and established.
- dLocal operates in many emerging markets, which are by definition more uncertain due to regulatory concerns and political upheavel.
- Short seller, Muddy Waters, took aim at the company last November, triggering a stock crash to the tune of 50% in a day.
In spite of the concerns, we believe dLocal is a well-regarded company with Fortune 500 customers that include Nike, Amazon, Shopify and Uber. Management strongly contested the accusations from Muddy Waters that total payment volumes were inflated and take rates exaggerated.
It’s always a bit concerning when a renowned short seller takes aim at a company, but in this case we believe the news is largely priced in, and the upside opportunity outweighs the potential downside threat.
