When searching for stocks with massive upside, it's never a bad idea to start your research with smaller market-cap companies. Mid-cap companies, in particular, are a great place to look when balancing return potential with risk. These businesses are typically established and have a solid customer base, yet are small enough to still have room for growth. For dLocal (DLO 9.24%), which hovers around a $10 billion market cap, a 10x run would turn it into a $100 billion businesses.
dLocal only IPO'd in 2021, and so does not have much public history, making the evaluation of management and fundamentals difficult. However, I believe dLocal's story is compelling and its astronomical sales growth warrants scooping up this stock today.
Giving retailers access to emerging markets
Emerging markets such as those in India, Mexico, Brazil, and Indonesia represent massive opportunities. These countries' residents have growing disposable income, but payment methods for purchasing goods online are difficult to come by. dLocal acts as an intermediary between customers and businesses. It does this in three ways: pay-ins, pay-outs, and prepaid card issuing.
Pay-ins let consumers use a local payment method (often cash in local currency at a bank) to purchase their goods. This solution is adaptable to each country, as dLocal can accommodate the popularity of eWallets in Latin America and bank transfers common in India. In either case, dLocal provides retailers the tools to facilitate the payment method of choice for many emerging markets.
dLocal's pay-out solutions allow retailers to partner with local merchants and navigate tricky regulations and currency fluctuations for businesses that use it. Finally, emerging-market consumers can acquire pre-paid branded physical and virtual cards through dLocal. This allows consumers the luxury of paying with a card for important items like gas or bills, all while seeing a company's logo on the card, building brand loyalty.
dLocal and the big players
dLocal has many integrations, but none bigger than with Shopify. With dLocal, Shopify merchants can begin selling to fast-growing emerging markets, even if the business is a small retailer based in the midwest. dLocal is giving companies unprecedented e-commerce access to areas previously unreachable. Massive brands like Nike and Amazon are already using dLocal, showcasing its usability from small businesses on Shopify to the largest e-commerce company in the world.
A strong dLocal competitor is PayPal. It serves emerging market consumers similar to dLocal's pay-in solution. However, many websites (including Amazon) still don't accept PayPal as a payment method, reducing its usability. Additionally, PayPal doesn't have business partnerships with e-commerce companies like dLocal does. If this tie-in is valuable, dLocal possesses a strong competitive advantage. If it isn't, then d-Local will need to go above and beyond to beat out an established behemoth.
Unsurprisingly, dLocal's quarterly results have been unbelievable. Its total payment volume (TPV) was up 217% year over year to $1.8 billion during the third quarter. Revenue grew 123% and dLocal generated a $19.7 million profit. EBITDA margin was an incredible 33.1% and 38.3% when adjusted by management for items like stock-based compensation and IPO costs, rivaling fully developed software-as-a-service (SaaS) companies like Adobe (ADBE 4.63%) and its 41% margin. dLocal's most impressive financial metric is its net retention rate -- how much existing customers spend during this period versus last -- of 185%, meaning customers spent 85% more during Q3 2021 versus Q3 2020.
Its current valuation is steep, but with only a small picture to go off of, investors must take a leap of faith if they believe in dLocal's potential.
At 47 times sales, its P/S ratio is about 20% higher than Shopify's, which dominates e-commerce. Should its revenue and earnings continue to increase rapidly, the denominator of the ratio will increase, driving the multiple down. If its year-over-year growth rates stay above 100%, expect the valuation to remain at a high level because of solid business execution. The market values some stocks higher than others for a reason; dLocal's growth, profitability, opportunity, and execution have earned it a higher price tag.
dLocal has many expansion opportunities available. It has more than 120 customers in ride-hailing, streaming, advertising, and other industries that are in various stages of investigating and testing additional dLocal services. dLocal has 20 in the early "go-live" phase, showcasing its potential upselling ability. Meanwhile, more than 800 new customers are considering using dLocal and are in different stages of the sales process. Should even half of these companies continue using dLocal's solution, that will help its stock become a successful investment.
Excluding China, the addressable TPV in dLocal's markets was $1.2 trillion and is expected to grow at a 27% compounded annual growth rate (CAGR) through 2024. Many other players exist within this industry, so capturing the entire market will be impossible. However, with $4.9 billion TPV throughout the last 12 months, dLocal is just getting started.
Investing in dLocal comes with some risks. One is that it has substantial customer concentration, with the top 10 customers accounting for 62% of revenue from June 30, 2021, to the beginning of the new year. This was down from 70% during the previous year's time frame, showing some improvement. In the same time period, one customer accounted for more than 10% of revenue. If any of these heavy-hitting customers left, dLocal would take a serious sales hit. Investors should make sure that as dLocal expands and captures more business, this concentration is reduced.
A dLocal investment could be risky right now; however, I believe the upside outweighs that risk. Keep your position sizing small and add additional shares if it succeeds. Applying this principle will allow the position to fade into obscurity if it fails and return huge profits if it is successful.