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Dlocal: This Digital Payments Stock Is Growing 55% And Trades At 11x EBITDA (Ticker: DLO)
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Will The Fed raise rates 25 basis points in June 2026? IBKR prediction markets let you trade the outcome alongside your stocks and options, earn interest, get it right and earn $1 per contract at ibkr.com predictions last trading day June 17.
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Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Shafer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan,
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Brett or any other podcast guest is not formal advice or recommendation. Now.
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Please enjoy this episode.
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Welcome into the Chit Chat Stocks podcast. The podcast to help you find your next great investment. My name is Brett Schaefer and today we have on a new guest, James Emanuel, fund manager, author of the Rock and Turner Investment Analysis newsletter, as well as the book Fabric of Success. The golden threads running through the tapestry of every great business. We'll have the link to both those in the show. Notes for anyone, anyone that wants to learn more about James's work. But today we are talking about the payments industry and specifically Deb D Local. It's an emerging markets Latin American payment giant that is growing rapidly. Stocks in a massive drawdown. And for a tease for the listeners, I know we had a lot of value investors listening to this. It now trades at just 11 times EBITDA. According to our friends at Fiscal AI. We're going to get to all the numbers, we're going to get to the valuation. But first, here is the first question we have today. What does D Local do, James, and what problems do they solve?
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Okay, thanks Brett for the introduction. So first, an introduction to the company. So it's a financial payments business and it's listed on Nasdaq and it's got a market cap of about three and a half billion dollars, but the enterprise value is only 2.8 billion. Owing to its huge net cash position. It's got a really strong balance sheet. It was founded in 2016 in Montevideo, Uruguay, but it operates on a global scale. So why does it exist? Well, the problem was that global companies found it nearly impossible to collect payments from or disperse funds to customers in large emerging economies such as Brazil, Nigeria, Indonesia, which have a combined population of more than double the US and the problems existed because of fragmented local payment methods. They've got arcane regulations, they've got currency controls, they've got different tax codes and an underdeveloped banking infrastructure. A large part of the population are unbanked. So D Local exists to solve that problem and it does it by offering a single API that abstracts away the complexity and it enables global merchants to both accept and make local payments in otherwise hard to reach markets. So dlocal is not a bank. It's important to stress that it operates under local payment institution licenses across about 60 markets. And it's growing, it's growing the markets it operates in all of the time. It's a B2B infrastructure that it offers called 1D Local, which is a single API. So its customers have one contract, one platform, and they can access 60 plus markets through that one API. And we can explore the detail of what they do later in our discussions. But it might be helpful to think of D Local as kind of a toll booth type model. So any company looking to operate in these emerging markets has to pay a fee to D Local. D Local creates value by giving access to these markets and so it's very much a win win for all concerned.
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Okay, and how did you've been studying. You, we talked about this before and you've been studying a lot of payments companies. How did you find D Local as a potential investment and something to write up on your substack?
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Yeah, that's a great question. So, you know, we find ourselves at the moment in a world where nationalism trumps globalization. We've got tariffs, we've got supply chain shipping disruptions, we've got an energy crisis, geopolitical turmoil, and all of which are driving inflation and input costs are rising and it's putting a lot of businesses under strain. Yet payment companies are largely insulated from all of these headwinds and more particularly, they don't need branches or inventories or manufacturing plants or large lending portfolios to grow. Plus, this isn't a business that can be easily disrupted by AI, and you know, that really matters. So you can't replicate what dlocal has built simply by writing better code. The business is kind of an accumulation of over 600 local payment method integrations. It's got 38 regulatory licenses with 16 more in process. It operates in over 60 countries. It's got strong onshore banking relationships, local compliance teams. It's got the ability to appease mercurial central banks. What it offers isn't patentable, but it's a product of time, effort and a first mover advantage which is really, really hard to replicate. And that's one hell of a moat. So you've got a company here which isn't subject to any of the headwinds in the macro climate. It's got an incredible moat. And so I think generally payment companies may be one of the most defensive countercyclical plays out there at the moment. They're able to scale with very little incremental capital. They benefit from operating leverage since every additional transaction carries little or no marginal cost. And they benefit from negative working capital dynamics as well. They generate strong cash flows, they've got really robust balance sheets, and their service tends to be really sticky with high rates of customer retention, recurring revenues. And so Delocal itself operates with no debt and it generates high returns on invested capital above 30%, typically with cash conversion, typically well over 100%. So with all of those factors in mind, I've been exploring many companies in this space. But what really grabbed my attention about Delocal was the valuation. The valuation has compressed and the Stock fell from $70 to about 11 or 12 today, despite its underlying economics improving. So, you know, that's, that's what attracted me.
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What I guess one follow up on that. Why do you think the stock is down? Is it just in conjunction with the rest of the payments industry? I see they went public I believe back in 2020 or 2021, maybe earlier. And it's kind of just been down since then. Was down 90%, maybe down 80% from all time highs.
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Now
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is there any kind of why, like what does the market hate about this stuff?
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Stock? I don't think the market hates anything about it. You know, the price of a stock is the result of a number of different factors, one of which of course is the earnings multiple. Now you know, D Local came to market in 2021 when it had its IPO and it was trading at about 300 times earnings. You know, what on earth was Mr. Market thinking? The problem is when you overpay for a stock, you've got kind of an asymmetric risk to the downside. And it doesn't really matter that the underlying economics improve. When you have multiple contraction, it kind of wipes out all of the good stuff that the business is doing. And so what we've seen really is the market price kind of catching up with economic reality. And that's really important because, you know, a lot of people will look at the price, the price action generally, and over a few years they'll see that it's dropped, I don't know, 85% from its highs. But it doesn't ask, it doesn't take the time to ask, you know, why has it fallen? The business itself has gone from strength to strength. The underlying unit economics are really, really strong. Growth is robust, but that damage, as I say, was done primarily by that multiple compression. The stock was overvalued. And they always say that, you know, a good company at the wrong price makes for a really bad investment. And I think that was the case for people who got into D Local too early. Investors paid way too much and they were punished. But now in my mind, the pendulum seems to have swung really too far the other way. The other headwind recently has been margin compression. So the market has heavily penalized the company for near term margin compression. But this is the result of a conscious decision by management to invest in growth. And it's promised that that heavy investment period is now pretty much behind us. That heavy investment is now moderating. And the management has said that in H2 of this year we should see that coming through in the earnings improving and the margins improving. So, you know, customer acquisition and volume growth have been the targets of the business. And judging by the explosive top line growth, that strategy has been really successful. And since the product is really sticky, every time you acquire a new customer, you kind of build on that foundation. There's not very much attrition. So that investment in customer acquisition is well worth making. But as I say, the heavy investment period is now done. And so margins are only likely to expand going forward. And if top line growth continues to grow at strong double digit rates and margins begin to improve, then a rerating is possible. And so you've got the three engines of growth there. You've got top line growth, you've got improving margins and multiple expansion. And all of those things are multiplicative when it comes to pricing a company. And so we should see a rebound. I'm thinking we're at an inflection point now. And then, of course, as margins improve and top line continues to grow, we should see stronger cash generation, which means that the pace of share buyback should increase, which is a fourth engine of total shareholder returns. And so if all of those engines are firing concurrently, you can accelerate pretty quickly out of the current kind of depressed valuation. So for me, it's an incredibly accretive, attractive situation for shareholders at the moment. And you know, we can go in a little bit deeper into valuation a little bit later in our conversation. But for me, it's a really favorable risk reward profile. It's difficult to see very much downside from here. Yet the upside is really significant. It's kind of a classic, what Mohnish Pabrai would call heads. I win big cows, I don't lose setup. And I like that kind of Thing,
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all right, you've hit a lot of it. Is there anything else to the general thesis on the stock? Before we get into a lot of the details for any listeners, we're going to talk, you know, agin, Stripe competition, the old muddy water short report. We're going to talk valuation, we're going to talk, you know, why they're going so quickly and the opportunity there. But anything else on the general thesis?
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Well, to be honest with you, these other aspects in the general thesis I think will come up in our conversation as we go on and discuss, as you say, you want to ask me about Adyen and Stripe and the cabana investors and you know, by looking at their model against the locals model, it becomes really obvious, I think, where their strengths lie and where they are differentiated from the others in the market. So, you know, if I pull those aspects out in context of these other things we're looking to discuss, I think that might be helpful for listeners to get a better grasp of, you know, what this company is all about.
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Yeah, a lot of our listeners I think maybe know Adyen a little bit more. They probably know Stripe, it's famous Silicon Valley company. Although we don't know what their financials look like specifically. We know some of the numbers. But I think maybe the best way to frame it is if Adyen and Stripe already exist. Why does D Local need to exist?
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Yeah, I mean, that's a great question and that's a question that everybody asks. And so, you know, let me kind of, kind of debunk the myth. They're not directly competing and they're not operating in exactly the same market. So adyen, Stripe and PayPal to an extent are superior businesses for standard card processing in kind of developed G7 economies where most customers have bank accounts or credit cards. And operating in these economies requires navigating a well defined financial framework. But D Local has a completely different focus. It solves for extreme fragmentation in high growth emerging markets where non traditional methods dominate. And let me explain a little bit more about that as well. So, you know, the moat at D Local is integrating over 600 local payment methods such as Pix, Pix in Brazil and UPI in India that global competitors lack the local density to handle. So let me explain a little bit of background. So the G7 systems for payments evolved, as I said earlier, around credit card payments, Visa, MasterCard and Swift for cross border dollar settlement. But they're now really quite old infrastructures. They're slow, they're expensive. All of these other companies and intermediaries Take their pound of flesh and they're aimed at an existing, well banked population. But India and Brazil skipped that step entirely. Why would they want to adopt an outdated infrastructure? And so they skipped cards with chips in them and they went straight to cash from mobile payments and they built a central bank controlled payment route with instant transfers. And importantly, under government mandate, there are zero merchant fees. And the reason for this is to give their businesses a competitive boost and to promote business generally and to help economic growth. And so whereas in the G7 countries we've got Amex and Visa or MasterCard taking their two and a half, 3%, whatever it might be, on every transaction. That's quite a heavy tax. They don't have that in India and Brazil, so the merchants don't pay any fees there at all. And you know, as I said earlier, they're aimed at a largely unbanked population. So the uptake has been brilliant. 70% of Brazil uses pics, 28% of India uses UPI and that's kind of climbing and it's growing. And these are just two countries. But as I said earlier, Dlocal operates in 60 countries, each with its own unique system. And the rules in each of these countries isn't static either. The rules, the regulations, the tax framework, it constantly evolves and changes. So think about a company, you know, think about being a mega global company like Amazon or Netflix or even a brand such as Nike. Now each of those companies is really good at something, but their specialization is in payments. And so D Local does the unglamorous, highly fragmented work that these global enterprises don't really want to do themselves. And since it does it, as I said earlier, via a single API, one relationship with dglobal with D Local opens the door for Amazon or Netflix or Nike to 60 other really complex markets. So, you know, it's a really great sales proposition and everyone benefits. So delocal adds value and captures some of that for itself and it becomes kind of a win win. And another critical differentiator here is that Delocals got quite a robust payment out infrastructure. This is something that people don't think about either. So global marketplaces like think about ride sharing or food delivery for instance, they don't just need to accept payments from local people, they need to distribute money as well. They need to pay the drivers in the gig economy, they need to pay restaurants for the food collection, food delivery, and these are hard to reach markets as well. So it's a very two way process and D Local has set that up so that it runs incredibly smoothly. Managing these outward flows while complying with local anti money laundering regulations and currency controls is structurally really, really different from traditional merchant acquiring. And these are the things that Stripe and Adyen that they don't do. They're not focused on these kind of emerging markets. So you know, Delocal has consolidated its local expertise through strategic acquisitions. Recently it acquired AZA Finance, which is deeply embedded in Africa, across Nigeria, Ghana, Kenya. And so suddenly Delocal now has got access to those markets. And again Adyen, Stripe, they're not active in those markets at all. If Netflix or Amazon, they want to reach into those markets, delocal is the obvious choice. Once a global merchant integrates into D Local's API, has access to these 60 markets, everything flows really, really smoothly and it becomes really sticky. You know, replacing that is operationally quite painful, which is explains the, you know, the high retention rates that Delocal has. You know, typically retention rates are around 140, 150% now. What does that mean? How can you have 140, 150% retention rate? You can only retain 100% of your customers, right? Well, you know, what it effectively means is they're gaining a larger share of, of each customer's wallet. So not only they're retaining most of their customers, but every year those customers are putting more and more business through and that's where the 140, 150% comes from. So both Adyen and Stripe, highly disciplined, typically maintaining robust margins, but they've shown really little interest in building custom, high friction, low volume infrastructure for, you know, single volatile market unless there's massive enterprise volume to justify it. And so Adyen recently has started to offer services in both Brazil and India. So two of D Local's markets. So there's a small amount of overlap there, but there's still 58 markets in which there's no overlap at all. But you know, as international merchants seek wider distribution in harder to reach corners of the global economy, they're not offering a service in these markets may prove costly for Adyen and Stripe. You know, if there's customers seek solutions elsewhere. And so, you know, D Local knows this and to protect its volume from these payment giants, it's intentionally embraced a downward trend in its aggregate take rates. You know, Jeff Bezos always used to say your margins are my opportunities. And Dlocal has chosen not to present Adyena Stripe with that kind of an opportunity. So delocal, as it grows volumes, it engages in what's called scale, economic shared and so rather than fattening its margins all the time, it passes some of the benefits of its scale to its customers in lower take rates, which makes it more difficult then for other companies to come in and compete. So Delocal is a pretty unique asset. So there are other payments companies out there who specialize in emerging markets. There's Ebanx for instance, which focuses solely on Latin America. There's a company called Flutterwave which focuses solely in Africa. But none of them offers a single contract, a single API that offers access to Latin America, to Africa, to the Middle east and to Asia. Delocal is the only company that offers a gateway to all of those. So it really makes it quite unique. And the really interesting thing, because you asked about Adyen and Stripe, is that if as they grow, they're looking to play in these other markets and expand in that direction, acquiring Delocal would be the obvious play. In fact, both Adyen and Stripe are fierce competitors of each other. And so it's not inconceivable that one moves to acquire Delocal simply as a defensive maneuver to prevent the other one from doing so. And that dynamic plays into the Delocal investment thesis as well. 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No. Yeah, I can totally understand how this could be a strategic asset for Stripe, Adjin, or maybe in some other players out there. I'm looking at their total payment volume, which is not necessarily the same as the top line revenue, but you know, correlates very highly. I'm seeing, you know, December 2019. Well, year end 2019 they had 1.3 billion in TPV. It's grown at a 78% compound annual growth rate of $47 billion. Again, I'm using our friends at Fiscal AI use our link Fiscal AI chitchat in the show notes get 15% of any paid plan. But they're growing extremely quickly. They put up this extreme growth at increasing scale. Why has that happened and do you think it can continue?
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Well, it's happened because there are so many new markets to expand into. As I said, they've recently acquired this company in Africa which suddenly has opened up, you know, Kenya and three other African countries. And so, you know, not only are they moving into new locations and getting new regulatory licenses, but they're also gaining new customers. You know, they've focused very heavily recently on larger, larger customers, which I'll speak about a little bit later. But you know, if you're onboarding the likes of Amazon and Netflix we discussed earlier, then you know, clearly you've got a higher amount of recurring revenue. Those companies are largely kind of subscription type businesses. Netflix certainly is subscription. Amazon, of course, you've got prime and people who use Amazon constantly ordering, you know, this and that. And every one of the payments that goes to Netflix or goes to Amazon D Local is taking a piece of that, which is, you know, great business to be. That's why I called them a toll booth earlier. So, you know, Q1 2026, which was the most recent numbers released by Delocal, the total process volume TPV, it grew at 73% year on year. Now bear in mind this is a company that was founded 10 years ago. And so a decade on it's still growing its TPV at those kind of rates, 73% year on year. And in fact that was the sixth consecutive quarter above 50% growth. So it's winning these large stable tier one global merchants, the likes of Amazon, Netflix, but also Meta is another name to drop into the mix. All of which offer these subscription type services that promise high rates of recurring revenue. But it's also expanding into new regions. So in Asia it's expanding into Vietnam and Indonesia. In the Middle east it's expanding into Oman and Kuwait and Qatar, we've already mentioned Africa. It's expanded into new countries there as well. Will it continue? Yes, but there is a twist. TPV will continue robust growth, but revenue and gross profit are now growing at a slower rate than tpv. And that's due to a mix shift. You know, the larger customers that are being onboarded onto D Local at the moment, they've got more pricing power. But not only that, you know, DLocal offers them effectively volume discounts which is reasonable to onboard them. Right. So if they're paying a lower take rate, then the kind of mix of take rates is being diluted. But that doesn't necessarily matter because the TPV is expanding a much faster rate. And so net, net the cash profits are growing pretty rapidly. So you know, that's the twist. The TPV will continue to grow, but you know, margins are coming down, but the TPV is growing so quickly that none of that matters because profitability is growing rapidly. You know, the really exciting news is that the investment cycle is expected to moderate. As I said earlier, they've gone through this period of kind of heavy capex investment and so the margins are expected to improve in H2 of this year. So the earnings quality should start to catch up with volume growth. So although the rates of growth of TPV and kind of gross margins are running at different rates, I think we're going to see that narrow a little bit into the at the end of this year and into 2027.
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Let's talk. The short report that came out a few years back actually should have looked up exactly when it came out. But muddy waters, you know, they're very loud, I guess, short firm. What did they say? What happened? Were they right about anything? I know that management changed a bit. Just take us through the short report. How impacted the company and what are your thoughts on that?
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Was a major impact, you know. Yeah, short sellers serve a purpose for sure. You know, they can call out issues with companies which serves a purpose, you know, brings real issues to the attention of investors that may not have otherwise discovered them. But you know, on the flip side, on the other hand, short sellers are really talking their own book as well. So they'll take a short position in a company and then they'll try and sour the sentiment, market sentiment against the company. They're short and you know, hopefully profit that way. So you've got to treat the reports with some kind of caution. Now I've got a lot of respect for Muddy Waters. A lot of the work they've done is really, really good. And they wrote a short report back in 2022 and they alleged against the local discrepancies in the TPV rates and also receivable disclosures. And you know, they were alleging third party related transactions, including a disclosed loan to one of the co founders, an undisclosed loan to one of the co founders. Sorry. So in response, Delocal implemented a full inquiry, had an independent audit committee, independent directors working alongside that was overseen by forensic accountants, all of whom concluded that the allegations were entirely unfounded and unsubstantiated. And despite being kind of cleared of these allegations, the company suffered a blow to its perception and reputation. You know what they say, perception is reality. Right. And so it hit the reputation hard for a while now following that kind of unfortunate chapter in the company's history, the relatively inexperienced founders stepped aside and they made way for more seasoned corporate executives to come in. So something good came out of all of this and it paved the way for or Pedro Arndt to become their CEO. And Pedro is a really huge asset to D Local and a key part of the investment thesis.
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Yeah, let's talk about management. I was looking, researching the company before our discussion. I saw, I forget exactly who is who, but Mercado Libre, Pedigree American payments companies, I think an American Express and MasterCard maybe talk me through management and how they've professionalized things kind of in their, you know, coming on their 10th year here.
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Okay, well, you know, following that short report in 2022, they cleared their name and then they decided to professionalize and they've got now a really highly competent management team and it's one of their key assets. So in 2023, Pedro Arndt joined. He was the former CFO and one of the founders of Mercado Libre. Now that's a name that will be familiar to most listeners. He was at Mercado Libre for 24 years and you know, they grew from next to nothing to, to a global giant, huge success story. So he stepped down, the CFO of Mercado Libre to join Delocal. And you know, that was a fundamental shift and he brings with him this kind of founder led intensity to professional management. Now Pedro was a key part of the team that made Mercado Libra such a huge success and a wonderful investment for those that were lucky enough to be invested early on. But D Local offered him a chance to apply his operating and finance experience in a newer company in a slightly different industry with a completely different growth profile. He kind of wanted to replicate that success himself as CEO. And if he can replicate just a fraction of the success that Mercado Libre has experienced at D Local, then the shareholders are going to be very, very happy. So at the same time that Pedro joined the Local, the corporate board was upgraded to some really high caliber independent directors like Paco Ibarra who was ex Citibank, Nelson Matos who was ex Google and ex IBM. So you know, you're bringing some big hitters to the board. And then Pedro brought in Guillermo Lopez Perez as a CFO now, as an ex CFO himself, as I explained to you, Pedro was the CFO of Mercado Libre for decades. He would have had a clear view of the type of finance partner that he wanted working alongside him. And so he brought in this guy Guillermo, who previously worked at both American Express and Visa. So, you know, he's got a lot of experience in the payments field at the top names. He also holds an MBA from the University of Chicago Booth School of Business. So they're very capable. CFO management typically openly discusses the investment cycles. It expects operating leverage to flow through the P and l more in H2 2026 as that heavy investment subsides and the margins improve. And you know, we should see some more transparency on the near term earnings quality. And so this therefore in my mind is a really pivotal moment for the company. Not only have they upgraded their management, but you know, they've finished this capital cycle. And also the multiple contraction is done. You know, as I said earlier, I think the pendulum has swung too far and now the stock looks way too cheap. So, you know, all of those headwinds are gone and now it's got some really strong tailwinds at its back. And I think, you know, the years to come are going to be pretty strong.
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Yeah, and I think at the same time you have this, you know, as you mentioned, reputational hit from the short report. It was only a few years after the wirecard fiasco in Europe, which people I think in the investment community are probably scared of, especially, you know, delocal emerging markets. You know, all these things that people just kind of go, I want to stay away from this. But they bring on all, as you mentioned, I mean, this is just, at least from a track record standpoint, these new executives just have as good a pedigree as you could want. Let's move on to another topic though. Valuation I mentioned and I think, you know, it can change by the time I release this or whatever multiple you use. But I saw 11 times EBITDA. How do you go about valuation? Why do you think the stock looks optically cheap for something that's growing at this fast of a rate?
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Okay, well, I mean, the stock trades on an earnings multiple of around 17 times. And that's despite the business having compounded TPV at 80, 88% CAGR since it was founded in 2016. That's a decade compounding, you know, total process volume at 88% a year. It's just incredible. And even, you know, as I said in Q1, 2026 that TPV growth was still 73%. It's still really, really strong. So you know, TPV at the moment is $47 billion and that grew at 73% year on year. Based on the most recent quarter, revenue is running at $336 million. So that grew a slightly slower 55% year on year. And then gross profit 119 million grew at 40% year on year. And that's really kind of the figure to focus on. But I'll come back to that shortly. So the difference in all of as you progress down the income statement is due to delocal trading margins for increased volume. As I said, they engage in scale economic shared. And so because they're giving some of their operating leverage back to the customers in order to keep the take rate down and to grow that volume, the volume is growing far more quickly than the revenues and the gross profit and, and so on and so forth. So it's got $800 million of net cash sitting on the balance sheet. It's got a capital light model and it's got really strong cash flows. So you know, why is it so cheap? Well, we kind of touched on it a little bit earlier. There's been this margin compression. Profit margins have fallen from kind of the mid-30s to the mid teens as the company aggressively invested in growth. And you know, it's caused the market price of the stock or at least the market to perceive the stock to be kind of broken because the market's quite myopic and they generally. Now that I don't know if you know this, this is an interesting fact, but back in the 1970s the average holding period for an equity was over eight years. Now people were effectively buying equities as they would invest in a business. Now the average holding period is 156 days. It's not even two quarters. Right. So that's why people are so focused on the next quarter. So if you're only trading for the very short term and you see the margins compress, then what's likely to happen further down the road doesn't really matter to you. And so most of the reaction in the market unfortunately is short end focused. Everyone's focused on kind of next earnings report. But that creates a fantastic opportunity for long term, you know, value investors because there's an arbitrage there. You can pick up really good value stocks and if you're prepared to wait and you've got patience, then you can kind of ride that through. And as I said, you know, the Multiple also collapsed when it IPO'd or soon after. It was trading at 290 times earnings. I don't know how anybody could buy a stock at that kind of level and expect to make a good return. But you know, now we're down to around 17 times today. And 17 times for a company which has gross margins increasing at 40% a year and it's got its total process volume increasing at 70 odd percent a year is kind of mind boggling. But you know, more particularly on a normalized earnings run rate, bear in mind that they've been investing very heavily in growth. The earnings number at the moment arguably is depressed. So that 17 times multiple is on depressed earnings. On a normalized run rate, that multiple is likely to be kind of low teens, which is absolutely ridiculous for a company of this quality with almost a monopoly in being able to offer a single API gateway to 60 different markets across emerging markets, which the big enterprises in the world, the Amazons, the Netflix, the Metaverse, they want access to that. And this really is a turnkey solution for them. So, you know, the earnings multiple is probably on a normalized basis in the low teens. And if you look at the enterprise value to earnings ratio, it's even lower than that because this is a company with no debt and it's got $800 million worth of cash sitting on the balance sheet. So you know, you could be looking at a kind of high single digit there on enterprise value to earnings, depending on how you run your numbers. So this is a really wonderful setup that could provide outsized returns on assumptions that are not particularly aggressive. So I mean, if you assume that top line grows at about 30% annually, which is prudently optimistic at the moment, as I said, gross margins are growing at 40%. So we're looking at my assumptions that growth rate contracting. So it's quite a cautious assumption there. Investment spending is going to moderate, management have already told us that. So that causes free cash flow to improve and margins to expand. Additional cash can enable more aggressive rates of share repurchases, which would be highly accretive at current depressed valuations. And all of this would result in a re rating of the stock, perhaps evaluation with a multiple closer to 21. I mean even 21 is cheap. If you look at where Visa and MasterCard and other payment companies are trading, even 21 is cheap. So you know, all of these assumptions are quite prudent. But with all of those assumptions, by 2030 you could be looking at a share price close to $70 trading around 12 today. So that's about six and a half times where we're trading today and it's about a 42% CAGRADE for in. In terms of shareholder returns. If it achieves what I'm hoping it will achieve. Yeah, if you look.
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A
Or go ahead.
- [38:57]
B
Yeah, I don't know, I was just gonna say, you know, this isn't investment advice but you know, all the usual cautions and disclaimers. This is just the way I'm looking at it. And please, you know, do your own research and get, get kind of independent advice before investing. But this is just the way that I'm looking at it.
- [39:17]
A
Yeah. And one thing to add, I noticed doing some research, reading up from their recent investor presentation yesterday. Is that. Or I was reading it yesterday, it came out a little while ago. The market cap is below $4 billion and they plan on buying back $300 million in stock this year. I mean that could be a decent chunk of the market cap coming down if the stock doesn't go anywhere. I think that can help with the downside protection as well. But as you mentioned, you know, no investment is risk free. Do your own research. Let's talk about any downside. Why could an investment in delocal fail?
- [39:50]
B
Okay, no, I'll answer that. But you know, just, just kind of coming back to the point that you just made about repurchases. Yes, you know they could potentially repurchase 10% of the stock. But just a word of caution, they do issue stock based compensation and so some of the repurchases are going to offsetting some of that stock based comp. So not all of the repurchases are reducing the share count, but the share count is coming down and they do have the capacity based on current targets to bring that down significantly. And as I say, if margins increase and cash flows improve, the rate of repurchases could really be ramped up and it could make a substantial difference. But just be aware of that stock based comp. So in answer to your question, why could an investment in delocal failure. You know, let's add some balance to this. So far I've been really, really bullish on the name D Local, but there are some bears out there and I'll give you some insight into some of the points that they raised. So there's concentration risk. So D Local's top 10 customers currently account for 62% of its revenue. So that's quite highly concentrated. If any one of their top 10 customers, or more than one decided to renegotiate their contract or to move to another provider that could materially impact results. Bear in mind that Delocal is the only turnkey solution that opens up all emerging markets. There aren't really that many other companies to choose from. But it's a risk to call out. So, you know, bear that one in mind. Then you've got the risk of customer vertical integration. So you've got these large merchants who are customers of Delocal. The likes of Amazon and Google and Uber are another one. Meta. Now, you know what would happen if any of them decided to build out their own local payment infrastructure rather than outsourcing to Delocal? It's possible, but do they really want to do that in 60 different countries and climbing? You know, Delocal is now expanding into more than 60. I can't see it happen. You know, as Jeff Bezos always used to say, you know, concentrate on what makes your beer taste better, effectively focus on what you do best and then outsource everything else. So I can't see any of these companies on board in house, you know, bringing everything in house in terms of payments. But it's a risk that some people like to call out. Another risk is potentially emerging market e commerce slowdown, you know, perhaps caused by recession, which would impact top line growth potentially. And if top line growth slows or goes into reverse, worse then the operating leverage that Delocal currently enjoys would go into reverse. So that's something else to kind of bear in mind. But also bear in mind, if you've got a country like India at the moment, which has got a rapidly expanding middle class, it's got a huge population, I think the second largest after China, and people are becoming more and more affluent. And so is it likely that there's going to be a decline in emerging markets? I think if anything is going to go the other way, even if there's a recession, just because of the growth in the middle class and the middle class and the growth in spending, I don't think it's a big risk. Further, margin compression is another risk. So as I said, margins have compressed because of investment spending. Management have said that's at an end now. But if margins do compress further, the company could find itself growing revenue but generating less absolute returns. If the margins compress to a level where the volume growth doesn't compensate for that compression, then there's always operational and regulatory risk. So you could have a sudden currency control law or tax ruling in a major market like Nigeria or Argentina, which could wipe out an entire quarter's profit potentially. It's something to bear in mind. Always a risk when you're dealing in emerging markets. Argentina have had their fair share of currency crises over the years and volatile currency exposure as well. So Delocal is inherently exposed to emerging market macro risks. So a sudden currency devaluation like what happened in the Nigerian naira as their currency or the Argentinian peso, it can crush reported revenue overnight even if the underlying localized transaction volume remains stable. So the long story short, there are risks, but I don't think they're huge. And I think it's an asymmetric risk reward profile at the moment, as far as I can see.
- [44:45]
A
Okay, I know those are, that's, that's wonderful. Last question I have here before we wrap things up. I think people look, you know, people, investors can be cynical. They look at a stock and they go, well, what, what is James missing? It's growing so quickly. It's at 10 times whatever forward earnings. What do you think investors get wrong about D local? What are they missing in your opinion by not seeing the opportunity in the stock?
- [45:11]
B
Yeah, well, you know, as I said, the market tends not to dig deep into, you know, they look at headline numbers, it's very easy to pull up a spreadsheet on some kind of Internet app and you know, look at the numbers and you see the margins contracting. You think, oh, doesn't look good. Maybe there's a cost issue. And they don't take the time to actually understand that this is actually a conscious investment decision by management in order to invest in engineering and gaining new licenses in increasing headcount on the ground in order to capture the next wave of growth. They look at the share price and they say, well, it's down 85% over the last five years. Why do I want to invest in a company that's down 85? It might go down further again. They don't take the time to actually understand that that was actually pretty much all multiple compression because it was once valued at 290 or 300 times earnings, which is ridiculous. So, you know, this, this take rate compression is the big one. I think that most people misunderstand and most of it's down to the mix shift effect. So what do I mean by the mix shift effect? Well, in the early days when Dealocal just got going, 2016, 2017, a new merchant was typically a smaller enterprise that may only be looking to access one or two markets. Maybe it was focused on Latin America and it wanted to access a couple of the countries in Latin America. Now the take rates for those small customers are relatively high. You know, those companies don't have anywhere else to turn. Delocal is the only game in town to provide them with a solution. Dlocal has all of the pricing power and so can charge accordingly. But then as it grows and as it looks to onboard global enterprises, we've already discussed Netflix, Amazon, et cetera, that game is changing. So it becomes a question of volume discounts to grow volume. And so effectively what you're getting is a dilutive effect. You're getting more volume, but the take rate is the average take rate. The basket of take rates is being diluted, but it doesn't matter because the volume is growing so, so rapidly. So you know, these diluted blended take rates will tend towards the lower end of the range. So they're going to tend towards the bigger customers, the bigger enterprise customers, but then only go below that level. And so you kind of got a flaw there. And we're kind of heading towards that floor now. I don't think we're going to go very much lower. So this isn't a race to zero, as some would wrongly characterize it to be. And then as part of this mix shift, there's also higher volume, lower margin domestic instant payment routes like Pix in Brazil and UPI in India, which are growing faster and compressing that blended take rate faster further, but they bring an unmatched volume and share. And so it's the same kind of situation, you know, the, the management is very much focused on volume and top line growth rather than optimizing the, the kind of profit today. So this scale economic shared model works really wonderfully for, for payment companies. So if the value of a business is at least academically, the discounted sum of all future cash flows, then the lifetime value of each customer is more important than optimizing profits today. And this is what so many businesses get wrong. And this is where the likes of, you know, Amazon and Costco got it so right. Walmart is another fantastic example. But these payment companies like Delocal, they get it right as well. This is one of the golden threads that runs through these fantastic companies. And I can see it in abundance in delocal. So you know, the company is now trading margin percentage points for volume scale. And because it's such a sticky business that promises a lifetime value which will compound over time and so that more than offsets the kind of lower rates, what else does the market misunderstand? I think the disintermediation risk is overstated this isn't an easy business to replicate. We already discussed earlier Adyen and Stripe. Some people think, well, those big players are just going to come in and wipe D Local out. Don't think that's going to happen. If anything, they might acquire delocal, but they can't disintermediate it then dlocal has got a broadening portfolio of products. It's not just about payments in and out. They've got other products that they're adding which is is contributing to top line growth. So they've got something called Fuse, which is a buy now, pay later product, which is really interesting because studies have shown that particularly in emerging markets, a lot of customers, I think it's 60 or 70% abandoned their basket, their online basket at the checkout or before the checkout, because they've got no way of actually paying for the products that they would like to buy. So offering Buy now, pay later effectively helps conversion rates, which is a fantastic selling point to the merchants that DLocal is trying to onboard. But not only that, if the merchants are selling more product, D Local is gaining more revenue because that toll booth, every sale is a fee coming through to DLocal. Importantly, on this Buy now, pay later Delocal isn't taking the credit risk, it's effectively acting as an intermediary that credits will be in passed down the chain. It's just taking a fee. So not only does it get its fee on the sale, on the payment, it's getting its fee from the credit institution on the buy now, pay later. So that's now buildings, it's quite big in South Africa for example, but they're rolling that out quite strongly in Latin America as well. Then it's got stablecoin settlement rails. So there's a problem of trapped cash in some countries in Africa and India and Argentina there are cash controls. You only take so much money out and stablecoin in some ways helps to kind of circumvent that. And delocal has incorporated stablecoin settlement rails into its infrastructure and it's offering other kind of tokenized alternative payment methods as well, which can all be cross sold to the existing merchant base without incremental acquisition costs. So, you know, share of wallets going to increase over time and all of this drives incremental revenue uplift. And I think a lot of the market misses all of that. That's all coming down the tracks. And then of course the market's ignoring this optionality. As we've discussed, Deloco is a potential Acquisition target. So you know, the market is ripe for consolidation. We've discussed Adyen and Stripe, but there are other players in the payment space. J.P. morgan Payments is huge and you know, hugely acquisitive as well. There were rumors that JP Morgan Payments was looking at Wise, which is kind of a cross border transfer company that you're probably familiar with. But on the basis that it's looking at the likes of Wise, why wouldn't it also look at potentially delocal? If it wants exposure to emerging markets or wants to be able to offer payment rails to its customer base to access emerging markets, Deloco is fantastic for that. And so, you know, I think there's a high degree of possibility Delocal may be acquired or at least the target of an acquisition at some point in the future. It will be strategically valuable for any larger player seeking to instantly gain a footprint in the widest range of emerging markets. There's no other option. So the company's enterprise value to Ebitda is, is currently around seven times. Now I mean that's almost unheard of for a public company. But a public company with this kind of profile, you know, no debt, loads of cash on the balance sheet, huge cash flow generation growing at really strong double digits, no sign of slowing 7 times EBITDA, it's just unbelievable, mind boggling. And so that's got to make it really attractive as an acquisition target as well. And you know, on this point there's one thing worth mentioning. So you may or may not be familiar with General Atlantic. They're kind of a private equity fund. They've been a cornerstone investor in delocal since pre IPO days and they still own 22% of the company. And they may at some point seek an exit simply because their funds might be coming for maturity and they may need to return capital to their investor base. You know, it could be any kind of legitimate number of reasons. At the end of 2025 they had a secondary placement and they sold 15 million of their shares. For reasons which are beyond me, they sold them at a discount to the closing price in the market the day before. Perhaps it was a volume thing. In order to clear that volume they had to discount them. But it impacted the share price of Delocal. At that particular time. The share price dropped about 8% as a result of General Atlantic divesting 15 million of their shares. But they do still hold 22%. And back at the end of 2024 they asked Morgan Stanley to investigate different options for, you know, whether or not there Might be any interested parties to acquire Delocoal as a potential exit strategy for them. So you know, if they choose to be an activist or they choose to exit, that again could accelerate an acquisition of Delocal at some point. But you know, the gross profit is growing at 35 to 40% and that implies that it's going to double every two years. You know the rule of 72, it's going to double around every 72 years. And this kind of growth is incredibly rare, but it's unheard of at these kind of valuations. This is a capital light compounding machine. And so you know, just to kind of sum up what we've got here in Deloca is a really high quality business with a genuine durable moat trading through a temporary but painful phase of margin compression because of its investment. But it offers this favorable asymmetric setup because the current price is discounting a low growth margin eroding future. While you know, the reality backed by 47 billion in quarterly TBV is that delocal remains the most important toll booth for global e commerce in kind of rapidly emerging, rapidly growing emerging markets. And so it just looks really good to me.
- [56:12]
A
James, that's a great way to wrap things up. I think listeners really will enjoy and find a lot of value from this episode. For anyone that wants to know more about your work, give the 30 second elevator pitch on the substack, which again the name is make sure I get it right. Rock and Turner investment analysis and the book Fabric of Success. The golden threads running through the tapestry of ever great business links will be in the show Notes for both. But give the elevator pitch for the listeners.
- [56:40]
B
I will do, but actually before I do, there's one other thing I'd like to just throw in there that you know, some people throw out as a challenge to Delocal, which is probably worth just kind of discussing very, very briefly because it may have crossed the minds of some listeners. So stable coins, I kind of touched on it briefly before but some people say well, stable coins are going to disrupt a business like the local. But I, I don't believe that's the case at all and I'll explain why. So governments can't avoid stable coins. They've become kind of a fact of life. Any cryptocurrency is kind of unstoppable. It's deregulated by definition. And so governments around the world are kind of settling for the fact that these things exist and they're simply going to be regulating them. And Delocal is the corporate embodiment of that regulatory capture. So by delocal building compliance and reporting and licensed partners into the whole process, dlocal kind of offers governments in these emerging countries the ability to properly tax and monitor flows of stablecoins, which they really, really welcome. And so Delocal has launched something called Stablecoin 4, which is an enterprise grade API that allows global merchants to accept stablecoins at the checkout and to settle in dollars or stable coins or whatever they want and to send payouts across multiple emerging markets as well, also in stablecoin. So effectively, D Local is treating stablecoin as just another local payment method. It's another payment route. So it kind of strengthens the proposition rather than undermining it. So just wanted to put that out there in case anybody was concerned about that in terms of kind of wrapping up. So, yeah, I've written a book called the Fabric of Success, the Golden Threads running through the tapestry of every successful business. Effectively, every chapter of the book deals with a different theme in the operation of a business. It could be capital allocation, it could be recruitment, it could be customer acquisition. And in each chapter, I look at how the very best businesses over time have dealt with all of those aspects. You know, could look at the way Berkshire Hathaway or Apple or Costco. And what you tend to find is there are these golden threads in common. And let me give you a great analogy which might help you kind of visualize this. So I don't know if you're familiar with evolution, but you know, a shark and a dolphin have come down different evolutionary paths. One's a mammal and one's a fish, but they look really quite similar. Right? They've both got the same shape, the dorsal fins, the same coloring. Why? Because as a, as a kind of a level one predator in the sea, that's clearly the optimal model. And what you tend to find when you analyze businesses is that it doesn't matter what industry they're in or where they're located geographically, or even in which area they operate in. Whether it was Standard Oil back in the day or an AI company today, what you tend to find is those companies that really succeed have these traits in common because that's the optimal model. They've all converged in the same place, having started at very different places. And that's exactly what I pull out in the book. And I use those golden threads to try and spot new investment opportunities. And I see a lot of those golden threads in D Local that we've discussed today in terms of my substack it's called Rock and Turner. Why is it called Rock and Turner? Well, Peter lynch and Warren Buffett always said that the best investors are those that turn over the most rocks. You turn over lots of rocks during an investment career. Most of the time you don't find anything. Occasionally you find a hidden gem. They both use that metaphor, and I love that metaphor. So I called my substack Rock and Turner and I give out Investment theses, Timeless Wisdom on Investing, topical Investment pieces. I try and publish one or two pieces every week. So if you want to have a look, It's Rock and turner.substack.com all right.
- [60:55]
A
Thank you once again for joining. Before we get out of here, as a reminder for listeners, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Me or any podcast guests, James today may hold securities. Discussing this podcast may have held them in the past. I may buy, sell or hold them in the future. Thank you everyone for listening and we'll see you next time.