After crushing its third-quarter earnings report where it beat revenue estimations and missed earnings estimates by just $0.01 per share, dLocal Limited's (DLO) stock price took a 20% haircut. That might not sound fair, but dLocal stock was trading at over 100 times sales going into earnings, so the company needed a perfect quarter if it was going to see shares rise further. 

Even though it marginally missed earnings estimates, the South American fintech company's quarter was still impressive. There are two things that dLocal investors should be monitoring for success, and both of these metrics were strong in Q3. It was a company worth further investment consideration before its Q3 earnings, and I like the stock even more at a 20% discount.

Person unpacking a box.

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dLocal is a financial and technology platform that enables companies to make cross-border payments safely and efficiently. Based in Uraguay, dLocal operates in over 32 countries in South America, Africa, and Asia. With over 600 different payment methods across the world, dLocal is a place where enterprises can go to manage their online global payment infrastructure.

The process for businesses to safely and quickly convert dollars to a local currency to pay a local merchant can be difficult and complex, especially when the business is doing these transactions millions of times. dLocal offers businesses a platform that makes the process much easier. Instead of creating these processes in-house, big-name companies like Uber Technologies and Amazon have decided to outsource this work to dLocal. 

A monster grower

dLocal's growth on all fronts of its business has been stunning. Third-quarter 2021 revenue reached $69 million, up 123% from Q3 2020. Revenue growth also accelerated from 96% in 2020 to 123% this quarter. Total payment volume (TPV) for the company in Q3 reached $1.8 billion, a massive increase of 217% year over year. dLocal's massive rise in TPV shows how much more reliant its customers are becoming on dLocal to sort out all of their global payment needs. 

The company is also expanding its reach across the world. In Q3, it expanded into Thailand and El Salvador, bringing its reach to 32 countries. On average, dLocal customers are using its platform to operate in seven different countries, using 64 different payment methods. This has been increasing as well: In Q3 2020, its customers were using dLocal in six countries with 62 payment methods. 

Despite being just a $10 billion company, The company's net income margin is an impressive 29%. dLocal earned $20 million in net income in Q3, which grew 129% from the year-ago quarter. Net income also grew 11% sequentially. The company has generated $67.5 million in free cash flow so far this year, representing a 40% free cash flow margin for 2021.

Retention remains strong

The other primary metric dLocal investors should watch is its net revenue retention. dLocal's retention rate is one of the highest in the market at 185% in Q3. This declined from 196% in the second quarter of 2021, but it increased year over year. This retention rate means customers from Q3 2020 that spent $100 then on the platform are now spending $185, indicating that dLocal's customer churn is low and it is succeeding in expanding its customer relationships.

As a result of this, $26 million in revenue came from existing merchants. What is even more impressive about this company is that not only is it bringing in more revenue from existing customers, but it is also acquiring new customers: In Q3, $11.6 million in revenue came from new customers. 

The risks of a highflier

Despite all of this growth, dLocal management thinks it has just scratched the surface in its industry. The company has almost $5 billion in TPV in the trailing 12 months, but the company estimates its 2020 TPV potential was $1.2 trillion, and this figure is expected to grow 27% annually until 2024. Therefore, dLocal has just 0.4% of its current addressable TPV, and this could reach $3.1 trillion by 2024.

This company is fast-growing, profitable, and has a massive market ahead of it, but there are still risks for dLocal. The main concern is its high valuation. Despite share prices falling 20% after earnings, the company is still valued at 80 times sales and 261 times earnings. These metrics are astoundingly high for a fintech: Another international stock that is growing at triple-digit percentage rates -- Sea Limited -- trades as just 19 times sales. 

With the number of payment methods it has and the high number of countries it is operational in, it is clear that dLocal is becoming more important to the global economy. While some investors might say dLocal's business can be replicated in-house, there is no denying some of the biggest companies in the world have chosen to hand this off to dLocal, demonstrating how difficult building this really is. dLocal looks like it has cracked the code to this market, and it could become the primary platform that enterprises go to when they need to process international payments to local merchants. 

Despite this valuation, I think this company has immense potential, and because of its supercharged growth and ability to hold on to large customers, I think dLocal can take advantage of the market expansion and grow with it. This is why dLocal is one of my favorite stocks to buy right now.