DLocal Limited (NASDAQ: DLO) is a fintech company that is allowing business to be done in and between emerging markets. Their goal is to make you feel like doing business with emerging markets is as simple as doing business locally. Largely located in Latin American countries they have also grown globally in the past few years in order to provide their services to countries in Africa as well as Asia.
Their services provide value to both sides of business transactions, which they call their Pay-ins and Pay-outs services. Representing the two sides to a transaction between different currencies and specializing in these emerging markets.
According to the $DLO company website, they have reputable companies doing business with them such as Shopify, Amazon, Nike and Wix to name a few, and have stimulated growth within the last few years with large investments upwards of $5 billion pre-IPO. They provide payment services for the mentioned companies in order for them to accept, process and deliver their products and services in these emerging markets.
At the moment Fintech companies seem to be very popular. The trend is crossing over into the IPO market as well, we have seen in recent months; FlyWire, Coinbase and it is expected for Stripe, Marqueta, Affirm to IPO in the near future. These all outside of Dlocal Limited also are all interested in some sort of payments sector with in Fintech. Whether it’s making cross border payments easier, having a point of sale, or anything else related to making payments and transactions easier for their customers and clients.
Where Dlocal has a competitive advantage is in the emerging markets. Their focus on emerging markets is interesting because it could be argued that the characteristics of an emerging market, for instance lack of financial infrastructure provides actually a need for a business such as Dlocal, rather than Dlocal being a commodity service. It actually fits the mold of a necessity for some of these emerging markets. This is creating a competitive advantage over other companies in the Fintech industry, and some of those that will IPO.
Not only is the FinTech market growing in popularity but it is also forecasted to grow 24% CAGR till 2026. According to Market Data Forecasts it’s expected that the FinTech industry will reach approximately $324 billion valuation by 2026.
Crypto is a big consideration within the fintech and payments sector. Some recent news from Reuters that came out was that El Salvador legislation approved Bitcoin as legal tender. This change could give them protection against inflation. It also gives them the building blocks to build greater infrastructure and to prevent getting left behind in the World economy. This may make it easier for developing countries to develop and to give the little guy an upper hand. Also, if crypto could be introduced by these payment companies such as Dlocal. This could also provide extreme future growth in the fintech market. It has been a topic of discussion and consideration by many of these payment focused fintech companies already and probably will be for the future. This is why the story in El Salvador in so important. We could see smaller countries, in emerging markets be the first countries to adopt bitcoin and other crypto currencies as legal tender. Ultimately pushing Dlocal to help facilitate payments within these emerging markets.
The largest concern for Dlocal is being the competitiveness of the market and the popularity of these trendy IPOs. It might be that a recent IPO valuation is based more off the story rather than the limited performance data provided from Dlocal. Dlocal has a great story and the market is pricing that in as Dlocal has what some may consider astronomical valuation for their present state. Where their story of possible growth in emerging markets is strong, it also begs the question. What will their role be as the emerging markets develop the infrastructure needed to become more of a developed market? Would the need for Dlocal fall by the wayside? If and when these emerging markets develop.
Thankfully for Dlocal is that this won’t be happening anytime soon and if it does it gives them ample time to restructure their position as a firm.
Another concern is that the majority of their revenue and operations only comes from a small portion of their clients, the small portion that it comes from also happen to be their biggest clients. Although this isn’t great it does leave room for a lot of growth, whether that be more clients, more sales, or more markets.
Dlocal for it position of entering the public market has features about it that point to future success. Not only their story but their margins and take rate of revenue are industry highs when comparing to other fintech companies. Where Paypal ($PYPL); regarded as the best payments company out there has a take rate of just under 3%, Dloacal boasts a take rate of 5% in comparison. Not to mention that the Paypal comparison is comparing to the current highest rate in the sector. Many of the other companies have a smaller rate such as 2%, 1% or even in Ayden companies’ case of less than 1%. The combination of a great story as well as their good financial growth puts the company in a perfect position to take advantage of an IPO.
Dlocal had an original valuation of between $16 and $18 per share heading into their IPO. On the day of their debut, they IPO’d at $21. Confirming that Dlocals story and sentiment surrounding the stock was greater than thought. Days later the price has pushed higher hitting a high of $36 per share. As the IPO was so recent, there hasn’t really been enough time for the market to fully get over the IPO excitement and move their valuations based on fundamentals. It is still full of short-term traders looking to take advantage of what seems to be a $30 per share support. Indicating a buy or entry price to the stock.
Over time the market will begin to factor in the performance data Dlocal will provide. But until then the price remains uncertain and very volatile. It is after the consolidation where I can see Dlocal really starting to grow and take off. As their performance will begin to develop their stability and reputation as a public company. Whether that be due to their growth and performance data or because of positive news headlines surrounding possibly introduction of crypto, political news, etc. In the meantime, the $30 support is holding strong, but wouldn’t be surprised if that broke in the short term followed by higher growth as fundamentals and growth of Dlocal become more quantitative.