Flash Report / Uruguay

dLocal: Strong post-IPO rally reaffirms EM digital payments infrastructure story

  • The shares of Uruguay-based dLocal have rallied 50% since last week’s IPO; the firm is now worth US$9.4bn
  • It allows global merchants via single interface to access c2bn EM consumers in 29 countries across 600+ payment methods
  • 330 merchants are already signed up, including Amazon, Didi, Microsoft and Spotify. dLocal's 2020 TPV was US$2.1bn
dLocal: Strong post-IPO rally reaffirms EM digital payments infrastructure story

dLocal is an emerging markets-focused digital payments infrastructure firm targeting multinational merchants. Its shares debuted on Nasdaq last week, and have subsequently risen by 53% to give the firm a US$9.4bn valuation. The shares trade at lofty multiples (eg 90x EV/ sales) reflecting the firm’s strong track record of execution and robust future growth prospects.

The company's 2020 revenue was US$104mn and net profit US$28mn. Key competitive advantages include its high-quality client base, state-of-the art technology, and client-centric culture. Key risks include the firm’s high dependence on Latin America (c90% of revenues) and a few important clients (its 10 largest accounts generate c60% of the top line), but diversification should improve as the business grows.

Company profile

Founded in 2016, dLocal, is a Uruguay-based digital payments infrastructure company. Through one single electronic interface, the firm helps over 330 merchants connect to almost 2 billion emerging market consumers and thousands of suppliers in 29 countries across 600+ different payments methods.

dLocal geographical coverage

In addition to improved convenience, merchants on dLocal’s platform benefit from better conversion rates and lower fraud losses. The firm also helps these merchants scale their businesses across dLocal’s markets of operation.

Key attractions of dLocal’s business

  • A single, simple-to-use interface for merchants to access almost 2 billion consumers across 29 countries

  • A robust, scalable cloud-based platform built on a modern and flexible technology stack

  • Direct integration with global, blue-chip merchants

  • Partnerships with local payments services providers

  • Value-added services such as fraud prevention tools, tax and compliance capabilities

  • Client-centric approach with rapid problem resolution

  • Strong financial performance, in terms of both top line growth and EBITDA margin

A secular growth story

dLocal may be able to sustain high levels of growth for a prolonged period. It is positioned in the fast-developing digital payments infrastructure space. The firm’s existing market share is low. And it is exposed to the superior growth potential of emerging versus developed markets.

Macro growth drivers

AMI estimates that in dLocal's countries of operation, there were US$1.2tn e-Commerce transactions in 2020 (split between US$430mn of pay-in transactions and US$810mn pay-out transactions), giving dLocal less than 2% market share.

86% of these transactions were local-to-local and 14% corresponded to cross-border transactions. The volume of these transactions is forecast to grow by c30% pa, with pay-outs growing faster than pay-ins, and the proportion of cross-border transactions also increasing.

Pay-in transaction volume forecasts

The main drivers of this growth include:

  • Increasing globalisation. Between 1997 and 2017, emerging markets have seen their share of cross-border trade rise by around 10ppts to 53% of global trade.

  • The rise of the digital economy such as improving internet access, rising smartphone penetration and the growing prevalence of e-commerce. For example, e-commerce transaction volume in dLocal’s markets of operation rose by 27% in 2020 even as the GDP in these countries declined.

  • The growing middle class in emerging markets. Next Big Future expects this segment to grow by 120-160mn people per year, mainly in emerging markets.

  • Growth in cross-border payments. dLocal’s integrated payments solutions can help merchants and their customers enjoy a seamless cross-border payments experience.

Company-specific growth drivers

These include:

  • Growth of dLocal’s merchant clients. Growth in e-commerce is helping drive higher transaction value at dLocal’s clients

  • Increases to dLocal’s share of its merchant clients’ business, via its strong account management and value-added services

  • Increasing the number of merchants on the platform. Over the past five years, dLocal has added around six new pay-in merchants and one new pay-out merchant per month. The RFP and onboarding process can take between two months to two years, meaning that, once formed, these are quite sticky relationships.

  • A broadening geographic footprint. Due to its extensive experience in this area, dLocal is typically able to set up operations in new markets within six months of entering. The firm accounts for the needs of its merchant clients when deciding which new markets to target.

  • A widening product range. dLocal has regularly introduced new products, often at the behest of its merchant customers. The pay-out product is one such example. dLocal is currently beta testing an issuing-as-a-service initiative, which will enable merchants to create their own payments ecosystems. It also plans to roll out branded prepaid cards that merchants can issue to end-users.

A high-quality and growing client base

dLocal currently partners with over 330 merchants, including leading global enterprises like Amazon, Didi, Kuaishou, Mailchimp, Microsoft, Spotify, Wikimedia and Wix. On average, for merchants with at least US$6mn annual transaction volume on dLocal’s platform, each of these merchants uses dLocal’s interface in around six countries and for 44 payments methods.

Financial performance

By positioning itself in a fast-growing sector in rapidly developing geographies, and by attracting a high quality roster of clients, dLocal has delivered positive financial performance over the past few years.

Revenues have grown strongly

US$2.1bn was transacted on dLocal’s platform in 2020 (up 60% yoy). In Q1 21, transaction value was US$926mn (up 139% yoy). dLocal earns payments processing fees from these transactions (these generated 95% of the firm’s top line). The take rate in 2020 was around 5%.

Total payment volume transacted on dLocal

Revenues were US$104mn in 2020 (+88% yoy) and US$40mn in Q1 21 (+124% yoy). Around 90% of revenues are generated in Latin America, but this proportion should decline as the firm’s footprint grows.

dLocal quarterly revenues

Margins and profitability

The firm’s gross margin is close to 60%, its EBITDA margin is running above 40% and the net margin has averaged 27% in recent quarters.

dLocal margins

In 2020 the firm generated a net profit of 28.2mn, up 81% yoy. Q1 21 profit was US$16.9mn.

dLocal quarterly performance

Valuation multiples are high, reflecting growth and scarcity

dLocal listed 29.4mn of its shares on Nasdaq on 2 June (with 4.4mn new shares and a 25mn secondary tranche). The IPO was priced at US$21 per share (above the US$16-18 indicative range), valuing the company at US$6.1bn. The shares are now priced at US$32, a 53% increase on the IPO price and valuing the company at US$9.4bn. At this price, the shares trade at a hefty premium to listed peers, which indicates that investors believe the firm can deliver strong profitable growth for a sustained period.

dLocal - valuation multiples versus peers

Key risks

Geographical concentration. Around 90% of business volume and revenue is generated in Latin America, primarily Brazil, Mexico, Argentina, Chile and Colombia.

Concentration by client. The firm’s top 10 customers generate more than 60% of dLocal’s revenues. One customer generates more than 10% of the firm’s revenues.

Concentration by third-party processor. In 2020 the top-10 third-party processors accounted for 39% of transaction value. dLocal has credit risk exposure to such firms.

Complex tax and regulatory compliance requirements across dLocal’s operations. Any violations could result in fines, restrictions on activity and/ or reputational damage for dLocal and its clients.

Competition. As dLocal grows it may increasingly come into competition with more established digital infrastructure firms, such as Adyen. However, we think such firms could also view dLocal as an attractive acquisition target, given its strong EM-focus and flexible technology stack.


dLocal - key operating and financial KPIs

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