Is DLocal Still a Buy?
Taking a Look at DLocal (DLO).
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DLO Sitting in Deep Value Territory?
After careful analysis, I decided to purchase additional shares of DLocal (DLO) for several reasons (refer to my archived DLO articles for a detailed analysis). The primary reason is the significant sell-off, which has created an attractive value opportunity. Investors often overlook that with a new CEO in place, it's crucial to allow time for their strategies to take effect and yield results over the next few quarters. This patient approach can help avoid emotional decision-making and potentially lead to better outcomes.
DLO is a profitable, cash flow-generative business with a clear stated goal by management of growing gross profit dollars. Investors also have overlooked the consistently rising Total Payment Volume (TPV), which has shown strong YoY growth. Although QoQ growth has been stagnant at just 2%, this is largely due to the company reinvesting back into the business and renegotiating contracts with top clients amidst a challenging macroeconomic environment (reasonable). While DLO needs to continue scaling and be prudent about its growth strategies, I believe the company is currently undervalued, even under conservative assumptions.
Picture this conservative scenario, if gross profit increases by 10% annually over the next ten years and then stabilizes at a terminal growth rate of 3%, without any improvement in the free cash flow (FCF) to gross profit margins (an unlikely scenario), I estimate a fair value (FV) of roughly $13.80. This projection corresponds to about $725M in gross profit in ten years, reflecting a 2.6x growth. Introducing a modest margin expansion of 7% over the same period raises the FV to $15.30. Should gross profit grow at 15% annually for the next decade, with less than a 5% margin expansion, the FV could potentially reach $21.20.
Right now though, the company boasts a 10% free cash flow (FCF) yield and holds $680M in net cash, resulting in an enterprise value (EV) of $1.8B. Its price-to-gross profit ratio stands at approximately 7x, and it is profitable. Some might argue that the cash balance should be considered at around $300M, as reported in their earnings under "own" funds, excluding merchant funds. However, even with this adjustment, the recent selloff has positioned the company as a "value" opportunity.
Furthermore, the stock buyback program is also a strategic move in this context. As the company continues to scale, it’s evident that the stock is undervalued. While there is a significant execution risk, the presence of an experienced executive mitigates this concern, making the current valuation highly attractive. This appears to be a strong deep value opportunity in my opinion.
I’ve purchased an additional 150 shares at the current levels. While this is a higher-risk move, I find the risk-reward ratio quite favorable. With this purchase, DLO now ranks among my top 10 holdings and brings my cost basis to just over $11 per share.