With over 454 billion global transactions made in 2020, it is clear that e-commerce is here to stay as a core part of the global economy. There are frictions in global transactions that are difficult to solve, however, and these two companies are working to ease those frictions.
Both Shopify (SHOP -1.12%) and dLocal (DLO -0.69%) are making e-commerce easier around the world. They are poised to become the major players in global commerce, and if they can achieve that, both companies could reward shareholders nicely.
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Shopify: A proven track record
For over 1.7 million businesses in 175 countries, Shopify is the place they go to build, grow, and manage their businesses. Shopify allows merchants to set up shop through multiple channels like online or social media, and lets them manage and grow their business into more channels, even including brick-and-mortar locations. The company does this by decreasing friction between merchants and potential customers, making it easier for customers to buy products from merchants. With marketing campaigns and search engine marketing, along with simple online-store setup and point-of-sale systems at checkout, Shopify is decreasing friction in all purchasing avenues.
The company originally focused on small and medium-size businesses, but it has since expanded to offering tools for companies of every size. It even has enterprises like Heineken (HEINY 0.52%) and fitness-apparel maker Gymshark as customers. This shift from a niche focus to offering tools to everyone has broadly expanded its customer base, allowing it to control 8.6% of U.S. e-commerce sales in 2020, behind only Amazon (AMZN -0.96%)
The company had stellar growth in the third quarter, with a gross merchandise value (GMV) of $41.8 billion under management, growing 35% from the year-ago quarter. This boosted revenue by 46% to reach $1.1 billion, $788 million of which was from merchant solutions -- Shopify's take rate on its GMV. The other $336 million came from subscription revenue. The company's operating loss represented just 0.4% of revenue this quarter compared to 7% from the year-ago quarter. And so far in 2021, it has generated nearly $220 million in free cash flow.
One highlight of the company's third quarter was its announcement of Shopify Markets, which will make it easier for merchants to expand internationally and sell globally in new markets. While its merchants are global, the company is now enabling them to cross borders to grow their business even more. With this dominance of market share and increasing optionality, the company could become a staple of e-commerce around the world, which is why I think it is worth paying 54 times its earnings.
dLocal: An emerging cross-border payments provider
While not nearly as big as Shopify, dLocal is a key player in the cross-border e-commerce market. It enables enterprises to get paid and make cross-border payments seamlessly and securely. Enterprise customers heavily lean on dLocal for assistance in this space: On average, the company's merchants used the platform in seven different countries with 65 payment methods in the first half of 2021.
Many big-name enterprises like Amazon and Uber (UBER -3.38%) have opted to become dLocal customers instead of trying to build their own capabilities in-house because of the massive complexity of managing payments in dozens of different countries. The effort needed to safely switch dollars to seven different currencies to pay out local merchants can be immense, and even the biggest global companies have decided to let dLocal handle this.
As a result, the company is growing rapidly and has extreme pricing power. Second-quarter 2021 total payment volume increased 319% from the year-ago quarter to $1.5 billion, and its revenue increased 186% to $59 million. The company is profitable, earning $18 million in the second quarter of 2021. What should blow investors away is its net retention rate, which was 196% for the second quarter. This means that customers who spent $100 in the second quarter of 2020 spent $196 in the second quarter of 2021, demonstrating dLocal's incredible pricing power and ability to increase the customer's usage rates.
Considering its customer base, the probability of enterprises building this in-house is slim, and the barriers to entry for a competitor to do something similar are astronomically high. The breadth of knowledge about the countries in which it operates, along with the relationships the company establishes with local financial institutions, make it incredibly hard for a competitor to replicate dLocal's business.
Therefore, the major risk for this company is its sky-high valuation. At 106 times sales, tremendous success is priced into the company. On the other hand, very few tech companies are growing as fast as dLocal, and this high valuation should be expected. This company is clearly of major importance within the global marketplace, which is why I think dLocal is a stock to buy and hold forever.
