dLocal (DLO): Fundamentals

Fundamental Question #1: Objective – Generate Sustainable Free Cash Flow (FCF)

Core Idea:
dLocal’s ultimate goal is to produce stable and growing free cash flows by leveraging its niche position in emerging markets (EM) online commerce. The company has historically shown strong EBITDA-to-FCF conversion due to low capital intensity and minimal debt. Its challenge now is maintaining FCF growth amidst intensifying competition and shifting mix.

Recent and Projected FCF Figures:

• Historically, FCF has been minimal but positive. In 2023, adjusted net income reached $149 million (22.9% net margin), illustrating strong earnings power.
• By 2025, we estimate adjusted net income of ~$162 million (+25% Y/Y), enabling strong internal cash generation. However, free cash flow (FCFF) is slightly negative in the near term (e.g., -$7 million in 2025E) due to incremental working capital and strategic investments in new geographies and product lines.

FCF Expansion Constraints & Drivers:

• Constraints: Slight net working capital usage due to rapid volume growth, potential foreign exchange hedging costs, and minor capital expenditures for technology infrastructure and compliance.
• Drivers: As revenue surpasses ~$900 million by 2025 (vs. $650 million in 2023), scaling overhead and stabilizing tax rates (~20% by 2025, up from ~16.5% in 2023) still allow significant profit retention.

The aim is that as dLocal matures, economies of scale and process automation boost EBITDA margins back into the low-20% range and eventually translate into stronger positive FCF beyond 2025–2026.

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Fundamental Question #2: How Does This Business Make Money?

Revenue Model & Pricing Dynamics:

• Pay-In Transactions: dLocal charges a merchant discount rate (MDR) on each approved transaction. Initially around 4–5%, these take rates are expected to compress towards ~3.5–4.0% by 2025 as larger merchants gain pricing leverage and local-to-local volumes, which carry lower margins, increase.
• Pay-Out Transactions: dLocal earns fees for distributing funds (e.g., marketplace seller payments). Although essential for stickiness, pay-outs often have lower take rates, pulling blended margins down.
• FX Spread Fees: Historically, EM cross-border flows allowed dLocal to capture healthy FX spreads. For instance, if FX spreads contributed around 60–80bps to revenue historically, competition and improved liquidity could narrow that by ~10–20bps by 2025. This narrowing could shave a few percentage points off revenue growth. For example, if FX revenue contributed ~10–15% of total revenue at peak, a 20-30% reduction in FX margin might trim total revenue growth by ~2–3 percentage points annually.

Customer Concentration & Contract Duration:

• Top 10 clients ~60–65% of revenues. While no major churn reported to date, reliance on a few large digital merchants (e.g., Amazon, Netflix) poses a risk if they renegotiate terms or in-house some capabilities.
• Contracts tend to be multi-year with complex integrations, discouraging swift vendor switching. This complexity supports dLocal’s stable baseline of volumes.

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Fundamental Question #3: Nature of the Cost Structure

Cost Structure & Operating Leverage:

• Fixed vs. Variable Costs:
  • Variable: Interchange, network fees, and local partner commissions scale with volumes. These are recognized in COGS.
  • Fixed: R&D, compliance, overhead, and SG&A scale more slowly, offering operating leverage as revenues grow.
• Current vs. Future State:
  In 2023, EBITDA margin at ~29.5%. By 2024/2025, due to pricing adjustments and mix shifts, margins dip (~21.7% in 2024E, rising to ~23.0% in 2025E).
  Despite slight margin compression, absolute EBITDA grows as TPV expands. The efficiency gains (one integration for multiple countries) eventually lower per-unit overhead costs.

FX and Processing Costs Impact on Unit Economics:

• As competition intensifies (Adyen, PayU, Ebanx, Stripe) and local acquiring improves, dLocal may pay slightly higher partner fees or accept narrower spreads.
• If FX spreads tighten from, say, ~80bps to ~60bps by 2025, that 20bps reduction can mean a loss of ~$10–15 million in potential revenue (on ~$9 billion TPV), requiring volume growth to offset.

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Fundamental Question #4: Key Drivers of the Business

Academic Drivers – Growth, Margins, Capital Efficiency:

1. Organic Revenue Growth:
   Driven by TPV expansion: from ~$2bn in 2020 to $6–9bn range by 2025. With $922 million revenue forecast by 2025 (+25% Y/Y from $738m in 2024), volume growth remains the main revenue driver despite lower take rates.
2. Margin Trajectory:
   EBITDA margins compressed from ~30% in 2023 to ~22–23% in 2024–2025. Long term, better cost control and scaled operations could lift margins back to mid-20%.
3. Capital Intensity & ROIC:
   Minimal capex and asset-light model yield high ROIC (>25%). This capital efficiency remains intact, making dLocal a structurally profitable growth story.

Comparative Valuation & Market Perception:

• dLocal Multiples: Trades at ~21x EV/2024E EBITDA and ~16x EV/2025E EBITDA.
• Comps:
  • Adyen: Trades around ~22–25x 2025E EV/EBITDA, but is a more established player in developed markets.
  • PayPal: Closer to ~13–15x 2025E EV/EBITDA, with a broader ecosystem but slower growth.
  • dLocal’s multiples sit between PayPal’s lower multiple (due to mature growth) and Adyen’s premium (due to best-in-class global profile). dLocal’s EM focus and strong growth justify a premium to PayPal but not as high as Adyen, given margin pressures and execution risks.

Model Sensitivities – What Moves the Needle?

• Upside: Faster merchant expansion, stable FX spreads, or quicker margin recovery.
• Downside: Larger merchants securing fee concessions, accelerated FX margin compression, or losing a key client.

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Fundamental Question #5: Business Momentum

Momentum Indicators & Current Trends:

• After years of triple-digit volume growth, the pace moderates to 50%+ TPV growth, still robust but normalizing.
• Revenue growth decelerates from 55% in 2023 to ~13.5% in 2024E and re-accelerates to 25% in 2025E as mix stabilizes.
• 2024 earnings dip slightly (-12% Y/Y in EPS) due to margin compression and transition costs, but by 2025 EPS rebounds (+26% Y/Y).

FX Impact & Normalization:

• Previously, FX fees were a strong tailwind. Now, more competition and liquidity reduce FX margins by an estimated 20-30bps, trimming revenue growth by a couple of percentage points. Merchants value stable, reliable processing over high FX spreads, so dLocal prioritizes relationship longevity over short-term FX gains.

Long-Term Narrative:

• The story evolves from hyper-growth, high-margin startup to a more mature, scaled EM payments enabler. While early valuation premiums may fade, steady expansion, ongoing product development (e.g., pay-outs, marketplace solutions), and incremental operating leverage support a constructive long-term outlook.

Where is the Debate?

• Investors debate the sustainability of dLocal’s pricing power, the intensity of competition, and the realistic long-term margin trajectory.
• The company’s ability to execute on growth in multiple EM markets simultaneously—maintaining quality as volumes surge—remains top-of-mind.

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Conclusion

dLocal’s objective is sustainable FCF generation from its niche platform that simplifies EM commerce. Its revenue model—integrating pay-ins, pay-outs, and FX spreads—ensures diversified income streams, though take rates and FX fees are under pressure. The cost structure evolves as the business scales, and while margins dip in the near term, long-term economics remain compelling due to low capital intensity and high ROIC.

Key value drivers include robust volume growth, partial margin recovery, and capital efficiency. Valuation is currently moderate, with an EV/EBITDA multiple between established (PayPal) and hyper-growth (Adyen) peers. Momentum, while still positive, is moderating, and short-term earnings softness challenges near-term sentiment.

In short, dLocal transitions from an early hyper-growth story to a more balanced growth and profitability narrative. With a Dec-2025 PT of $14 and a Neutral rating, the outlook reflects optimism on long-term expansion balanced by caution over near-term margin and pricing headwinds.