DLocal Limited (DLO) Reports. HOLD
Shares of DLocal (DLO) are getting hammered today (-20%, roughly) after the company released formal Q3 results. Recall, preliminary results were released in October at the time of the secondary offering (priced at 52.25, versus stock at roughly 37 mid-day today).
As a refresher, DLocal operates an international payments platform that provides localized payment options to global merchants (Amazon, Microsoft, Spotify, and many more) in emerging markets, with a focus on Latin America but expanding to Thailand and other regions as well (32 countries total).
Overall, growth here is top notch. The issue, and the reason the stock is down today, is on the take rate (what DLO gets out of each payment processed), which is quite variable given the variability in types of purchases on the platform, geographies where payments are processed, payment options and merchant mix. For example, larger merchants get better pricing (driving lower take rates) than smaller merchants.
This was a big focus on the call and management didn’t sugarcoat it. They essentially said, listen, we’ll take a smaller slice of each payment to drive higher volumes every day of the year because higher volumes ultimately drive higher profits.
To put this in context, the revenue take rate in Q3 was 3.8%, down from 4% in the previous quarter and well below 5.4% from the year-ago quarter (Q3 2020). The gross profit take rate was 1.9%, down from 2.3% in the previous quarter and down from 3% in the year ago quarter.
It’s worth noting that today is funky day for payment processors, partly because of news that Amazon (AMZN) will no longer accept Visa (V) credit cards issued in the UK as of January 19 because of high fees. This type of thing is nothing new – it happened between Visa and Kroger (KR) in 2018, with Smith’s Food & Drug in 2019, with Walmart (WMT) in 2016, among other examples. In all cases it got cleared up as rates were renegotiated, and it will probably happen with Amazon this time too.
I highlight that because Visa and Mastercard (MA) are getting knocked down a peg today. This heightened focus on the finer details of payment processing profits is probably contributing to DLO’s pain.
I think this is a bummer because, big picture, DLocal is doing very well.
Q3 revenue was up 123% to $68.6 million, slightly above the pre-released numbers. Total payment volume was up 217% to $1.81 billion. Net revenue retention was 185%, showing current customers continue to grow a lot with DLocal. Expansion in Thailand and El Salvador began in Q3.
All those “top line” numbers are fantastic. Again, the issue is around margins further down the income statement. And with management doing nothing to ease concerns that 2022 margins/take rate will be lower than expected, the stock is getting dinged.
Ultimately, the question here is this – should DLocal let go of some business it could have grabbed because it’s not willing to take a smaller slice of the payment pie? Or should it take every incremental dollar in sales it can get to gain scale because a smaller slice of an incremental dollar is still more profit than letting that dollar go to another payment processor?
My inclination is to lean toward the second option (gain scale), especially since there are so many moving parts quarter to quarter and that a much bigger operation would have more bargaining power down the road than a comparatively smaller one. But maybe the market needs some time to come around to that way of thinking. Or maybe I’m wrong.
In any event, we’ll continue to hold DLO now as it seems like this is overdone, at least in the short term. If you wished to average down into this selloff, I wouldn’t argue with you. But I won’t officially be that aggressive. HOLD