Chit Chat Stocks - Dlocal: This Digital Payments Stock Is Growing 55% And Trades At 11x EBITDA (Ticker: DLO)

Episode Date: June 17, 2026

On this episode of Chit Chat Stocks, Brett interviews new guest James Emanuel, who discusses a payments stock trading at a discounted earnings multiple. We discuss: (00:00) Introduction (03:43) Understanding business model (09:38) Competitive Landscape (12:35) Unique Country Focus (15:58) Growth Drivers: Total Payment Volume and Customer Acquisition (18:53) Addressing the Muddy Waters Short Report (33:00) Valuation (39:46) Risks and Challenges in Investment (45:10) Growth potential (56:40) Final Thoughts and Resources James's Substack: https://rockandturner.substack.com/ James's book: https://www.amazon.com/Fabric-Success-Threads-Tapestry-Business/dp/B0D5W7B9W1 ***************************************************** Subscribe to our newsletter, Emerging Moats: emergingmoats.com  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Will the Fed raise rates 25 basis points in June 2026? IBKR prediction markets let you trade the outcome alongside your stocks and options. Earn interest, get it right, and earn $1 per contract at ibkr.com slash predictions. Last trading day, June 17th. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest

is not formal advice or recommendation. Now, please enjoy this episode. Welcome into the Chitchat Stocks podcast, the podcast to help you find your next great investment. My name is Brett Schaefer. And today we have on a new guest, James Emanuel, fund manager, author of the Rock and Turner Investment Analysis newsletter, as well as the book, Fabric of Success, the golden threads running through the tapestry of every great business. We'll have the link to both of those in the show notes for anyone that wants to learn more about James's work. But today we are talking about the payments industry and specifically d local uh it's an emerging markets latin american payment giant that is growing rapidly

stocks in a massive drawdown and for a tease for the listeners i know we had a lot of value investors listening to this and now trades at just 11 times ebitda according to our friends at fiscal ai we're going to get to all the numbers bringing into the valuation but first here is the first question we have today what does d local do james and what problems do they solve OK, thanks, Brett, for the introduction. So first, an introduction to the company. So it's a financial payments business and it's listed on Nasdaq and it's got a market cap of about three and a half billion dollars. But the enterprise value is only two point eight billion owing to its huge net cash position. It's got a really strong balance sheet. It was founded in 2016 in Montevideo, Uruguay, but it operates on a global scale.

So why does it exist? Well, you know, the problem was that global companies found it nearly impossible to collect payments from or disperse funds to customers in large emerging economies such as Brazil, Nigeria, Indonesia, which have a combined population of more than double the US. and the problems existed because of fragmented local payment methods they've got arcane regulations they've got currency controls they've got different tax codes and an underdeveloped banking infrastructure you know a large part of the population are unbanked so delocal exists to solve that problem and it does it by offering a single api that abstracts away the complexity And it enables global merchants to both accept and make local payments in otherwise hard to reach markets. So DLocal is not a bank. It's important to stress that it operates under local payment institution licenses across about 60 markets. And it's growing. It's growing the markets it operates in all of the time.

It's a B2B infrastructure that it offers called 1DLocal, which is a single API. So its customers have one contract, one platform, and they can access 60 plus markets through that one API. And we can explore the detail of what they do later in our discussions. But it might be helpful to think of D-Local as kind of a tollbooth type model. So any company looking to operate in these emerging markets has to pay a fee to D-Local. um d local creates value by giving access to these markets and so it's very much a win-win for all concerned okay and how you've been studying you we talked about this before and you've been studying a lot of payments companies how did you find uh d local as a potential

investment and something to write up on your sub stack yeah that's a great question so you know we find ourselves at the moment in a world where nationalism trumps globalization um we've got tariffs, we've got supply chain shipping disruptions, we've got an energy crisis, geopolitical turmoil, and all of which are driving inflation and input costs are rising, and it's putting a lot of businesses under strain. Yet payment companies are largely insulated from all of these headwinds. And more particularly, they don't need branches or inventories or manufacturing plants or large lending portfolios to grow. Plus, this isn't a business that can be easily disrupted by AI. And, you know, that really matters. So you can't replicate what

D-Local has built simply by writing better code. The business is kind of an accumulation of over 600 local payment method integrations. It's got 38 regulatory licenses with 16 more in process. It operates in over 60 countries. It's got strong onshore banking relationships, local compliance teams. It's got the ability to appease mercurial central banks. um what it what it offers isn't patentable uh but it's the product of time effort and a first mover advantage which is really really hard to replicate and that you know that's one hell of a moat so you've got a company here which isn't subject to any of the headwinds in the macro climate it's got a an incredible moat um and so you know i think generally payment companies may

be one of the most defensive counter cyclical plays out there at the moment um they're able to scale with very little incremental capital. They benefit from operating leverage since every additional transaction carries little or no marginal cost. And they benefit from negative working capital dynamics as well. They generate strong cash flows. They've got really robust balance sheets. And their service tends to be really sticky with high rates of customer retention and recurring revenues. And so, you know, D-Local itself operates with no debt and it generates high returns on investor capital above 30% typically, with cash conversion typically well over 100%. So, you know, with all of those factors in mind, I've been exploring many companies in this space,

but what really grabbed my attention about the local was the valuation. The valuation is compressed and the stock fell from $70 to about $11 or $12 today, despite its underlying economics improving so you know that's that's what attracted me what uh i guess one follow-up on why do you think the stock is down is it just in conjunction with the rest of the payments industry i see they went public i believe back in 2020 or 2021 maybe earlier and it's kind of just been down since then was down 90 maybe down 80 from all-time highs now is there any kind of why like what does the market hate about this stock? I don't think the market hates anything about it. The price of a stock is the result of a number of different factors, one of which, of course, is the earnings

multiple. Now, D-Local came to market in 2021 when it had its IPO, and it was trading at about 300 times earnings. What on earth was Mr. Market thinking? The problem is when you overpay for stock, you've got kind of an asymmetric risk to the downside. And, you know, it doesn't really matter that the underlying economics improve. When you have multiple contraction, it kind of wipes out all of the good stuff that the business is doing. And so what we've seen really is the market price kind of catching up with economic reality. And that's really important because, you know a lot of people will look at the price um the price action generally and over a few years they'll see that it's dropped i don't know 85 percent from its highs um but it doesn't ask it

doesn't take the time to ask you know why has it fallen the business itself has gone from strength to strength um the underlying unit economics are really really strong growth is robust but that damage as i say was done primarily by that multiple compression the stock was overvalued and they always say that you know a good company at the wrong price makes for a really bad investment and i think that was the case for people who got into delocal too early investors paid way too much and they were punished and now in my mind the pendulum seems to have swung really too far the other way um the other headwind recently has been margin compression so the market has heavily penalized the company for near-term margin compression um but this is the result of a

decision by management to invest in growth and it's promised that that heavy investment period is now pretty much behind us. That heavy investment is now moderating and the management has said that in H2 of this year we should see that coming through in the earnings improving and the margins improving. So you know customer acquisition and volume growth have been the targets of the business. And judging by the explosive top-line growth, that strategy has been really successful. And since the product is really sticky, every time you acquire a new customer, you kind of build on that foundation. There's not very much attrition. So that investment in customer acquisition is well worth making. But as I say, the heavy investment period is now done,

and so margins are only likely to expand going forward. And if top-line growth continues to grow at strong double digit rates and margins begin to improve then a re-rating is possible and so you've got the three engines of growth there you've got top line growth you've got improving margins and multiple expansion and all of those things are multiplicative when it comes to to pricing a company um and so um you know what we we should see that a rebound i mean you know i'm thinking we're at an inflection point now um and then of course you know as margins improve and top line continues to grow we should see stronger cash generation which means that the pace of share buyback should increase which is a fourth engine of of of total shareholder returns

and so if all of those engines are firing concurrently um you can accelerate pretty quickly um out of the current kind of depressed valuation um so for me it's an incredibly uh a creative attractive situation for shareholders at the moment and you know we can go in a little bit deeper into valuation a little bit later in our conversation but for me it's a really favorable risk for all profile um it's difficult to see very much downside from here yet the upside is really significant it's kind of a classic what monish pavri would call heads i win big cows i don't lose setup and i like that kind of thing all right you've hit a lot of is there anything else to the general thesis on the stock

before we get into a lot of the details. For any of the listeners, we're going to talk, you know, Agile and Stripe competition, the old Muddy Water Short Report. We're going to talk valuation. We're going to talk, you know, why they're going so quickly

and the opportunity there, but anything else on the general thesis? Well, to be honest with you, these other aspects in the general thesis, I think will come up in our conversation as we go on and discuss, as you say, you want to ask me about Agile and Stripe and the Capestas.

And, you know, by looking at their model against the locals model, it becomes really obvious, I think, where their strengths lie and where they are differentiated from the others in the market. So, you know, if I pull those aspects out in context of these other things we're looking to discuss, I think that might be helpful for listeners to get a better grasp of what this company is all about. Yeah, a lot of our listeners, I think, maybe know Adyen a little bit more. they probably know Stripe. It's a famous Silicon Valley company, although we don't know what their financials look like specifically. We know some of the numbers, but I think maybe the best way to frame it is if Adyen and Stripe already exist, why does DLocal need to exist? Yeah. I mean, that's a great question. And that's a question that everybody asks. And so, you know, let me kind of debunk the myth. They're not directly competing and they're not

operating in exactly the same market so at the end stripe and you know paypal uh to to an extent are superior businesses for standard card processing in kind of developed g7 economies where most customers have bank accounts and credit cards and operating in these economies requires navigating a well-defined financial framework but d local has a completely different focus. It solves for extreme fragmentation in high growth emerging markets where non-traditional methods dominate. And let me explain a little bit more about that as well. So, you know, the moat at D-Local is integrating over 600 local payment methods, such as PIX, P-I-X in Brazil, and UPI in India. But, you know, global competitors lack the local density to handle.

So, you know, let me explain a little bit of background. So the G7 systems for payments evolved, as I said earlier, around credit card payments, Visa, MasterCard and Swift for cross-border dollar settlement. But they're now really quite old infrastructures. They're slow. They're expensive. You know, all of these other companies and intermediaries take their pound of flesh and they're aimed at an existing well-banked population. But India and Brazil skipped that step entirely. You know, why would they want to adopt an outdated infrastructure? And so they skipped cards with chips in them and they went straight to cash from mobile payments. And they built a central bank controlled payment rail with instant transfers. And, you know, importantly, under government mandate, there are zero merchant fees.

And the reason for this is, you know, to give their businesses a competitive boost and to promote business generally and to help economic growth. And so whereas in the G7 countries, you know, we've got Amex and Visa or MasterCard taking their two and a half, three percent, whatever it might be on every transaction. That's quite a heavy tax. They don't have that in India and Brazil. So the merchants don't pay any fees there at all. And, you know, as I said earlier, they're aimed at a largely unbanked population. so um the uptake has been brilliant 70 percent of brazil uses pix uh 28 percent of india uses upi and that's kind of climbing and it's growing and these are just two countries uh but as i said earlier d local operates in 60 countries each with its own unique system um and the rules in each of these countries isn't static either the rules the regulations the tax um framework it constantly

evolves and changes. So think about a company, you know, think about being a mega global company like Amazon or Netflix, or even a brand such as Nike. Now, each of those companies is really good at something, but their specialization isn't payments. And so D-Local does the unglamorous, highly fragmented work that these global enterprises don't really want to do themselves. um and since it does it as i said earlier via a single api one relationship with d global with d local opens the door for amazon or netflix or nike to 60 other really complex markets so you know it's a really great sales proposition um and uh you know everyone benefits so d local adds value and captures some of that for itself and it becomes kind of a win-win um and another

critical differentiator here is that the locals um got quite a robust payment out infrastructure this is something that people don't think about either so you know global marketplaces like you know think about ride sharing or food delivery for instance they don't just need to accept payments from local people they need to distribute money as well they need to pay the um the the drivers in the gig economy they need to pay restaurants for you know the food collection food delivery and these are you know hard to reach markets as well so it's a very two-way process um and and d local has set that up so that it runs incredibly smoothly managing these out from outward flows while complying with local anti-money laundering regulations and currency

controls is structurally really really different from traditional merchant acquiring and these are the things that stripe and adien that they don't do they're not focused on on on these kind of of emerging markets so you know d local has consolidated its local expertise through strategic acquisitions um recently it acquired aza finance uh which is deeply um embedded in in africa across nigeria ghana kenya and so you know suddenly d local now has got access to those markets and again you know adyen stripe they're not active in those markets at all so if netflix or amazon they want to reach into those markets d local is the obvious choice so you know once a global merchant integrates into d local's api has access to these 60 markets um everything flows

really really smoothly and it becomes really sticky you know replacing that is is operationally quite painful um which is explains that you know the high retention rates that d local um has uh Typically, retention rates are around 140%, 150%. Now, what does that mean? How can you have 140%, 150% retention rate? You can only retain 100% of your customers, right? Well, what it effectively means is they're gaining a larger share of each customer's wallet. So not only are they retaining most of their customers, but every year those customers are putting more and more business through.

And that's where that 140%, 150% comes from. So both Adyen and Stripe, highly disciplined, typically maintaining robust margins, but they've shown really little interest in building custom high-friction, low-volume infrastructure for a single volatile market, unless there's massive enterprise volume to justify it. And so Adyen recently has started to offer services in both Brazil and India. So two of Delocal's markets. So there's a small amount of overlap there. But there's still 58 markets in which there's no overlap at all. But, you know, as international merchants seek wider distribution in harder to reach corners of the global economy, they're not offering a service in these markets may prove costly for Adyen and Stripe.

You know, if there's customers seek solutions elsewhere. And so, you know, D-Local knows this and to protect its volume from these payment giants, it's intentionally embraced a downward trend in its aggregate take rates. You know, Jeff Bezos always used to say, your margins are my opportunities. And D-Local has chosen not to present Adyen and Stripe with that kind of an opportunity. So D-Local, as it grows volumes, it engages in what's called scale economic shared. And so, you know, rather than fattening its margins all the time, it passes some of the benefits of its scale to its customers in lower take rates, which makes it more difficult then for other companies to come in and compete. So, you know, D-Local is a pretty unique asset.

So there are other payments companies out there who specialize in emerging markets. There's e-banks, for instance, which focuses solely on Latin America. there's a company called flutter wave which focuses solely in africa but none of them offers a single contract a single api that offers access to latin america to africa to the middle east and to asia d local is the only company that offers a gateway to all of those um so it really makes it quite unique and the really interesting thing because you asked about adyen and stripe is that you know if as they grow they're looking to play in these other markets and expand in that direction, acquiring D-local would be the obvious play. In fact, both Adyen and Stripe are fierce

competitors of each other. And so it's not inconceivable that one moves to acquire D-local simply as a defensive maneuver to prevent the other one from doing so. And that dynamic plays into the D-local investment thesis as well. Will the Fed raise rates 25 basis points in June 2026? At IBKR Prediction Markets, the yes recently traded at $0.05, while the no traded at $0.90, but the markets can change quickly. Trade prediction markets on political, climate, and economic events with simple yes or no prediction-style contracts where prices reflect probability. Explore trending data, spot the trends, and if you get your prediction right, you earn $1 per contract at settlement. Plus, you'll earn a 3.14% APY on your investment with an interest-like incentive coupon, and you'll get $3 for signing up with IBKR Prediction Markets, which you can use for any purpose or to start trading. Prediction contracts are not suitable for all investors.

Go to IBKR.com slash predictions and turn your views into IBKR Prediction Contracts today. Last trading day for this contract is June 17th. No, I can totally understand how this could be a strategic asset for Stripe Agile or maybe in some other players out there. I'm looking at their total payment volume, which is not necessarily the same as the top line revenue, but, you know, correlates very highly. I'm seeing, you know, December 2019, well, year end 2019, they had $1.3 billion in TPV. It's grown at a 78% competitive growth rate to $47 billion. Again, I'm using our friends at Fiscal.ai. Use our link, fiscal.ai slash chitchat in the show notes.

Get 15% of any paid plan. but they're growing extremely quickly they put up this extreme growth at increasing scale why has that happened and do you think it can continue well it's happened because there are so many new markets to expand into as i said they've recently acquired this company in africa which suddenly has opened up you know kenya and and three other um african countries um and so So, you know, not only are they moving into new locations and getting new regulatory licenses, but they're also gaining new customers. You know, they're focused very heavily recently on larger, larger customers, which, you know, I'll speak about a little bit later. But, you know, if you're onboarding the likes of Amazon and Netflix we discussed earlier, then, you know, clearly you've got a high amount of recurring revenue.

those companies are largely kind of subscription type businesses netflix certainly is subscription amazon of course you've got prime and people who use amazon constantly ordering you know this and that and every one of the payments that goes to netflix or goes to amazon d local is taking a piece of that um which is you know great business to be that's why i called them a toll booth earlier so you know q1 2026 which was the most recent um numbers released by d local uh the the total process volume tpv it grew at 73 percent year on year now you know bear in mind this is a company that was founded 10 years ago and so a decade on it's still growing its tpv at those kind of rates 73 percent year on year and in fact you know that was the sixth consecutive quarter

above 50 growth um so it's winning these large stable tier one global merchants the likes of amazon netflix but also you know meta is another name to drop into the mix um all of which offer these subscription type services the promise high rates of recurring revenue but it's also expanding into new regions so in asia it's expanding into vietnam and indonesia in the middle east it's expanding into oman and kuwait and qatar we've already mentioned africa it's expanded into new countries there as well you know will it continue yes um but there is the there is a twist you know tpv will continue um robust growth uh but revenue and gross profit are now growing at a slower rate than tpv tpv and that's due to a mix shift um you know the

larger customers that are being onboarded onto delocal at the moment they've got more pricing power uh but not only that you know delocal offers them effectively volume discounts which is is reasonable to onboard them right so if they're paying a lower take rate then um the the the kind of mix of take rates is being diluted but that doesn't necessarily matter because the tpv is expanding at a much faster rate um and so you know net net the cash profits are growing pretty rapidly um so you know that's the twist so tpv will continue to grow but you know margins um are are coming down uh but the tpv is growing so quickly that none of that matters because you know profitability is growing rapidly uh you know the really exciting news is that um

the investment cycle is expected to moderate as i said earlier they've gone through this period of kind of heavy capex investment um and so the margins are expected to improve in each two of this year um so the earnings quality should start to catch up with with volume growth so although the rates of growth of tpv um and kind of gross margins are running at different rates i think we're going to see that narrow a little bit and into the at the end of this year uh and into 2027 let's talk the short report that came out a few years back i actually should have looked up exactly when it came out but muddy waters you know they're very uh loud i guess uh short firm um what did they say what what happened were they right about anything i know that management

changed a bit just take us through the short report how it impacted the company and what are your thoughts on that was a major impact you know yeah sure sellers serve a purpose for sure you know they can call out um issues with companies which serves a purpose you know brings real issues uh to the attention of investors that may not have otherwise uh discovered them but you You know, on the flip side, on the other hand, short sellers are really talking their own book as well. So they'll take a short position in a company and then they'll try and sour the sentiment, market sentiment against the company. They're short and hopefully profit that way. So you've got to treat the reports with some kind of caution.

Now, I've got a lot of respect for Muddy Waters. A lot of the work they've done is really, really good. And they wrote a short report back in 2022. And they alleged against Delocal discrepancies in the TPV rates and also receivable disclosures. And, you know, they were alleging third party related transactions, including a disclosed loan to one of the co-founders, an undisclosed loan to one of the co-founders. Sorry. So in response, Delocal implemented a full inquiry, had an independent audit committee, independent directors working alongside. That was overseen by forensic accountants, all of whom concluded that the allegations were entirely unfounded and unsubstantiated. And despite being kind of cleared of these allegations, the company suffered a blow to its perception and reputation.

You know what they say. Perception is reality. Right. And so it hit the reputation hard for a while. um now following that kind of unfortunate chapter in the company's history um the relatively inexperienced founders stepped aside and they made way for more seasoned corporate executives to come in so something good came out of all of this and it paved the way for pedro aunt to become the ceo and pedro is a really huge asset to d local and a key part of the investment thesis yeah let's talk about management i was looking researching uh the company before our discussion i saw i forget exactly who was who but mercato libre libre pedigree uh american payments companies i think an american express mastercard maybe talk me through management and how they've

professionalized things kind of in their you know coming on their 10th year here okay well you know following that short report in 2022 they declared their name and then they decided to professionalize and they've got now a really highly competent management team and it's one of their key assets so in 2023 pedro aren't joined he was the former cfo and one of the founders of mercado libra now that's a name that will be familiar to most listeners uh he was at mercado libra for 24 years and you know they grew from next to nothing to a global giant a huge success story um so um he stepped down the cfo of mercado libra to join d local um and um you know that was a fundamental shift um and he brings with him this kind of founder-led intensity to professional management

now um pedro was a key part of the team that made mercado libra such a huge success and a wonderful investment for those that were lucky enough to be invested early on uh but d local offered him a chance to apply his operating and finance experience in a newer company in a slightly different industry with a completely different growth profile he kind of wanted to replicate that success um himself as ceo and if he can replicate just a fraction of the success that mercado libra has experienced at the local then the shareholders are going to be very very happy so at the same time that pedro joined um the local the corporate board uh was upgraded um to some really high caliber independent directors like paco ibarra who was ex city bank uh nelson matos

who was ex google and ex ibm um so you know you're bringing some big hitters to to the board and then pedro uh brought in guillermo lopez perez as a cfo now um as an ex cfo himself i explained to you pedro was the cfo of mercado libra for decades um he would have had a clear view of the type of finance partner that he wanted working alongside him and so he brought in this guy guillermo um who'd previously worked at both american express and visa so you know he's got a lot of experience in the payments field at the top names um he also holds an mba from the university of chicago booth school of business so um they're very capable cfo um management Investment typically openly discusses the investment cycles and expects operating leverage to flow through the P&L more in H2 2026 as that heavy investment subsides and the margins improve.

And, you know, we should see some more transparency on the near term earnings quality. And so this, therefore, in my mind, is a really pivotal moment for the company. Not only have they upgraded their management, but, you know, they've finished this capital cycle and also the multiple contraction is done. You know, as I said earlier, I think the pendulum has swung too far and now the stock looks way too cheap. So, you know, all of those headwinds are gone and now it's got some really strong tailwinds at its back. And I think, you know, the years to come are going to be pretty strong. yeah i think at the same time you have this you know as you mentioned reputational hit from the short report uh it was only a few years after the wired card fiasco in europe uh which people i

think in the investment community are probably scared of especially you know d local emerging markets you know all these things that people just kind of go i want to stay away from this but they bring on all the as you mentioned i mean this is just at least from a uh track record standpoint, these new executives just have as good a pedigree as you could want. Let's move on to another topic, though. Valuation. I mentioned, and I think it can change by the time I release this or whatever multiple you use, but I saw 11 times EBITDA. How do you go about valuation? Why do you think the stock looks optically cheap for something that's growing at this fast of a rate okay well i mean the stock trades on an earnings multiple of around 17 times

and that's despite the business having compounded tpv at 80 88 kegger since it was founded in 2016 that's a decade compounding that you know total uh process volume at 88 a year it's just incredible um and even you know as i said in q1 2026 that tpv growth was still 73 it's still really really strong so you know tpv at the moment is 47 billion dollars um and and that grew at 73 percent year on year based on the most recent quarter revenue is running at 336 million dollars uh so that grew a slightly slower 50 55 percent um year on year and then gross profit 119 million grew at 40 percent year on year and that's really kind of the figure to focus on but i'll come back to that shortly so the difference in all of these rates as you progress down the income statement is due

to delocal trading margins for increased volume um you know as i said they engage in scale economic shared um and so because they're giving some of their um operating leverage back to the customers in order to keep the take rate down and to grow that volume uh the volume is growing far more quickly than you know the revenues in the gross profit and and so on and so forth so um it's got 800 million dollars of net cash sitting on the balance sheet it's got a capital light model and it's got really strong cash flows so you know why is it so cheap well we kind of touched on it a little bit earlier um there's been this margin compression um profit margins have fallen from kind of the mid-30s to the mid-teens as the company aggressively invested in growth um and

you know it's caused the market price of the stock um or at least the market to perceive the stock to be kind of broken because the market's quite myopic and generally now that i don't know if you know this this is an interesting fact but back in the 1970s the average holding period for an equity was over eight years you know people were effectively buying equities as they would invest in in a business now the average holding period is 156 days it's not even two quarters right so that's why people are so focused on on the next quarter so if you're only trading for very short term and you see the margins compress then what's likely to happen further down the road doesn't really matter to you and so most of the reaction in the market unfortunately

is short-end focused you know everyone's focused on kind of next earnings report but that creates a fantastic opportunity for long-term you know value investors because there's an arbitrage there you can pick up really good value stocks and if you're prepared to wait and you've got patience then you can kind of ride that through and as I said you know the multiple also collapsed when it IPO'd or soon after it was trading at 290 times earning I don't know how anybody could buy a stock at that kind of level and expect to make a good return but you know now way down to around 17 times today 17 times for a company which has gross margins uh increasing at 40 percent a year um and it's got its total process volume increasing at 70 odd percent a year

uh it's kind of mind-boggling um but you know more particularly on a normalized earnings run rate bear in mind that they've been investing very heavily in growth um the earnings number at the moment arguably is depressed so that 17 times multiple is on depressed earnings on a normalized run rate and that multiple is likely to be kind of low teens which is absolutely ridiculous for a company of this quality with you know almost a monopoly in being able to offer a single api gateway to 60 different markets across you know emerging markets which the big enterprises in the world the amazons the netflix the matters they want access to that and this really is a turnkey solution for them um so you know the the earnings multiple is probably on a normalized basis in the

low teens um and if you look at the enterprise value to earnings ratio it's even lower than that because this is a company with no debt and it's got 800 million dollars worth of cash sitting on the balance sheet um so you know you could be looking at a kind of high single digit there on enterprise value to earnings depending on uh you know how you run your numbers so you know this is a really wonderful setup that could provide outsized returns on assumptions that are not particularly aggressive so i mean if you assume that top line grows at about 30 annually which is prudently optimistic you know at the moment um as i said gross margins are growing at 40 percent so we're looking at my assumptions that growth rate contracting so it is it's quite a

cautious assumption there investment spending is going to moderate management have already told us that so that causes free cash flow to improve the margins to expand additional cash can enable more aggressive rates of share repurchases which will be highly accretive at current depressed valuations then all of this would result in a re-rating of the stock perhaps a valuation with a multiple closer to 21 i mean even 21 is cheap if you look at where visa and mastercard and other payment companies are trading even 21 is cheap um so you know all of these assumptions are quite prudent but with all of those assumptions by 2030 you could be looking at a share price close to 70 dollars trading around 12 today so that's about six and a half times where we're trading today

um and it's about a 42 percent kager for in in terms of shareholder returns if it achieves what i'm hoping it will achieve uh yeah if you look or go ahead yeah i don't know i was just gonna say you know this is an investment advice um um but uh you know all the usual cautions and disclaimers uh this is just the way i'm looking at it and please you know do your own uh research and uh get kind of independent advice before investing uh but this is just the way that i'm looking at it. Yeah. And one thing to add, I noticed doing some research reading up from their recent investor presentation yesterday is that, or I was reading yesterday, it came out a little while ago, the market cap is below $4 billion and they plan on buying back $300 million

in stock this year. I mean, that could be a decent chunk of the market cap coming down if the stock doesn't go anywhere. I think that can help with the downside protection as well. But as you mentioned uh you know no investment is risk-free do your own research let's talk about any downside why could an investment in d local fail okay um no i'll answer that but you know just just kind of coming back to the point that you just made about repurchases yes you know they could potentially repurchase 10 of the stock but um just a word of caution they do issue stock-based compensation. And so some of the repurchases are going to offsetting some of that stock-based comp. So not all of the repurchases are reducing the share count, but the share count is coming

down. And they do have the capacity based on current targets to bring that down significantly. And as I say, if margins increase and cash flows improve, the rate of repurchases could really be ramped up and it could make a substantial difference. But just be aware of that stock-based company um so in answer to your question you know why could an investment in d local fail you know let's let's add some balance to this so far i've been really really uh bullish on on the name d local but there are some bears out there um and i'll give you um some insight into some of the points that they raise so there's concentration risk so d local's top 10 customers currently account for 62% of his revenue. So that's quite highly concentrated. If any one of their top 10

customers, or more than one, decided to renegotiate their contract or to move to another provider, that could materially impact results. Bear in mind that D-Local is the only turnkey solution that opens up all emerging markets. There aren't really that many other companies to choose from, but it's a risk to call out so you know bear that one in mind um then you've got the risk of customer vertical integration so you've got these large merchants who are customers of delocal the likes of amazon or google or uber or another one meta now you know what would happen if any of them decided to build out their own local payment infrastructure rather than outsourcing to delocal it's possible but do they really want to do that in 60 different countries and then

climbing you know d local is now expanding into more than 60 i can't see it happening um you know as jeff bezos always used to say you know concentrate on what makes your beer taste better effectively focus on what you do best and then outsource everything out else so i can't see any of these companies on board in-house you know bringing everything in-house in terms of payments but it's a risk that some people like to call out um another risk is potentially emerging market e-commerce slowdown you know perhaps caused by recession which would impact top-line growth potentially um and you know if top-line growth slows or goes into reverse worse then the operating leverage that delocal currently enjoys would go into reverse so you know that's something else

to kind of bear in mind but you know also bear in mind if you've got a country like india at the moment which has got a rapidly expanding middle class um you know that it's got a huge population i think the second largest after china um and people are becoming more and more affluent um and so is it likely that there's going to be a decline in emerging markets i don't think if anything's going to go the other way even if there's a recession just because of the the growth in in the middle class in the middle class and the growth in spending i don't think it's a big risk And further margin compression is another risk. So, you know, as I said, margins have compressed because of investment spending. Management have said that's an end now. But if margins do compress further, the company could find itself growing revenue, but generating less absolute returns.

If the margins compress to a level where the volume growth doesn't compensate for that compression, then there's always operational and regulatory risk. So, you know, you could have a sudden currency control law or a tax ruling in a major market like Nigeria or Argentina, which could wipe out an entire quarter's profit potentially. And it's something to bear in mind. Always a risk when you're dealing in emerging markets. You know, Argentina have had their fair share of currency crises over the years. um and you know volatile currency exposure as well so the delocal is inherently exposed to emerging market macro risks so a sudden currency devaluation um like what happened in in the nigerian uh naira as their currency or the argentine argentinian peso it can crush reported revenue overnight um even if the underlying localized transaction volume remains

stable so the long story short there are risks um but i i don't think they're huge and i think the it's an asymmetric risk profile at the moment as far as i can see okay i know those are that's that's wonderful last question i have here before we wrap things up i think people look you know people investors can be cynical they look at a stock and they go well what what is james missing It's growing so quickly. It's at 10 times whatever forward earnings. What do you think investors get wrong about DLocal? What are they missing, in your opinion, by not seeing the opportunity in this stock? Yeah, well, you know, as I said, the market tends not to dig deep into, you know, they look at headline numbers.

It's very easy to pull up a spreadsheet on some kind of Internet app and, you know, look at the numbers and you see the margins contracting. You think, oh, it doesn't look good. Maybe there's a cost cost issue. And they don't take the time to actually understand that this is actually a conscious investment decision by management in order to invest in engineering and gaining new licenses and increasing headcount on the ground in order to capture the next wave of growth. They look at the share price and they say, well, it's down 85 percent over the last five years. Why do I want to invest in a company that's down 85? It might go down further. Again, they don't take the time to actually understand that that was actually pretty much all multiple compression because it was once valued at 290 or 300 times earnings, which is ridiculous. So, you know, this this take rate compression is the big one. I think that most people misunderstand and most of it's down to the mix shift effect.

So what do I mean by the mix shift effect? Well, in the early days when D-Local just got going, 2016, 2017, a new merchant was typically a smaller enterprise that may only be looking to access one or two markets. Maybe it was focused on Latin America and it wanted to access a couple of the countries in Latin America. Now, the take rates for those small customers are relatively high. You know, those companies don't have anywhere else to turn. D-Local is the only game in town to provide them with a solution. D-Local has all of the pricing power and so can charge accordingly. But then as it grows and as it looks to onboard global enterprises, we've already discussed Netflix, Amazon, etc.

That game is changing. So it becomes a question of volume discounts to grow volume. um and so effectively um what you're getting is a dilutive effect you're getting more volume but the take rate is the average take rate the basket of take rates is being diluted um but it doesn't matter because the volume is growing so so rapidly um so you know these diluted um blended take rates will tend towards the lower end of the range so they're going to tend towards the bigger customers the bigger enterprise customers but they're not going to go below that level and so you kind of got a floor there um and we're kind of heading towards that floor now i don't think we're going

to go very much lower so this isn't a race to zero as some would wrongly characterize it to be um and then as part of this mix shift there's also higher volume lower margin uh domestic instant payment routes like pix in brazil um and upi in india which are growing faster and compressing that blended take rate further but they bring an unmatched volume and share and so it's the same kind of situation you know the management is very much focused on volume and top line growth rather than optimizing the kind of profit today so this scale economic shared model works really wonderfully for payment companies so if the value of a business is at least academically the discounted sum of all future cash flows then the lifetime value

of each customer is more important than optimizing profits today and this is what so many businesses get wrong and this is where the likes of you know amazon and costco got it so right walmart is another fantastic example but these payment companies like the local they get it right as well you know this is one of the golden threads that runs through these these fantastic companies and i can see it in abundance in d local so um you know the company is now trading margin percentage points for volume scale and because it's such a sticky business that promises a you know lifetime value which will compound over time um and so um you know more than offsets the kind of lower rates what else does the market misunderstand um i think the disintermediation

risk is overstated um this isn't an easy business to replicate we already discussed earlier adyen and stripe um you know some people think well you know those big players are just going to come in and wipe the local out don't think that's going to happen if anything they might acquire the local but they can't disintermediate it um then d local has got a broadening portfolio of products it's not just about payments in and out um they've got other products that they're adding which is is is contributing to top line growth um so they've got something called um fuse which is a buy now pay later product um which is really interesting because uh studies have shown that particularly in emerging markets a lot of customers i think it's a 60 or 70 percent abandon their basket

their online uh basket at the checkout or before the checkout because they've got no way of actually paying for the products that they would like to buy so offering buy now pay later um effectively helps um conversion rates which is a fantastic selling point to the merchants that d local is trying to onboard but not only that if the merchants are selling more product um d local is is gaining more revenue because that toll booth every sale is is is a fee coming through to d local uh importantly on this buy now pay later d local isn't taking the credit risk it's effectively acting as an intermediary and that credits are being passed down the chain it's just taking a fee so not only does it get its fee on the sale on the payment it's getting its fee from the credit

institution on the buy now pay later so that that's now building um it's quite big in south africa for example but they're rolling that out quite strongly in latin america as well then it's got um stable coin settlement rails um so there's a problem of trapped cash in some countries in africa and india and argentina um there are cash controls you can only take so much money out um and stable coin in some ways helps to kind of circumvent that and d local has incorporated stable coin settlement rails into its infrastructure um and it's offering other kind of tokenized alternative payment methods as well um which can all be cross sold to the existing merchant base without incremental acquisition costs so you know share of wallets

going to increase over time and all of this drives incremental revenue uplifts and i think a lot of the market misses all of that that's all coming down the tracks um and then of course there the market's ignoring this optionality as we've discussed the loco is a potential acquisition target so you know the market is ripe for consolidation we've discussed adyen and stripe but there are other players in the payment space jp morgan payments is huge and you know hugely acquisitive as well um there were rumors that jp morgan payments was looking at wise which is um under a cross-border transfer company that you're probably familiar with uh but on the basis that it's looking at the likes of wise uh why wouldn't it also look at potentially delocal if it wants

exposure um to emerging markets or wants to be able to offer payment rails to its customer base and to access emerging markets delocal is fantastic for that and so you know i think there's a high degree of possibility d local may be acquired or at least the target of an acquisition at some point in the future it will be strategically valuable for any larger player seeking to instantly gain a footprint in the widest range of emerging markets there's no other option so the company's enterprise value to ebitda is currently around seven times now i mean that's almost unheard of for a public company but a public company with this kind of profile you know no debt loads of cash on the balance sheet huge cash flow

generation growing at really strong double digits no sign of slowing seven times EV to EBITDA it's just unbelievable mind-boggling and so you know that's got to make it really attractive as an acquisition target as well and you know on this point there's one thing worth mentioning so you may or may not be familiar with general atlantic they're kind of a private equity fund um they've been a cornerstone investor in the local since pre-ipo days and they still own 22 percent of the company uh and they may at some point seek an exit simply because their fund might be coming uh for maturity and they may need to return capital to their investor base um you know it could be any kind of legitimate number of reasons at the end of 2025 they had a secondary

replacement and they sold 15 million of their shares um for reasons which are beyond me they sold them at a discount to uh the closing price in the market the the day before perhaps it was a volume thing in order to clear that volume they had to discount them um but it impacted the share price of of d local at that particular time the share price dropped about eight percent as a result of General Atlantic divesting 15 million of their shares. But they do still hold 22 percent. And back at the end of 2024, they asked Morgan Stanley to investigate different options for, you know, whether or not there might be any interested parties to acquire the local as a potential exit strategy for them.

So, you know, if they choose to be an activist or they choose to exit, that again could um accelerate an acquisition of delocal at some point uh but you know the gross profit is growing at 35 to 40 percent and that implies that it's going to double every two years um you know the rule of 72 um it's going to double around every 72 years and this kind of growth is incredibly rare but it's unheard of at these kind of valuations uh this is a capital light compounding machine um and so uh you know just to kind of sum up what we've got here in delocal is a really high quality business with a genuine durable moat trading through a temporary but painful phase of margin compression uh because of its investment but it offers this favorable

asymmetric setup because the current price is discounting a low growth margin eroding future Well, you know, the reality, backed by $47 billion in quarterly TBV, is that DLocal remains the most important tollbooth for global e-commerce in kind of rapidly emerging, rapidly growing emerging markets. And so it just looks really good to me. James, that's a great way to wrap things up. I think listeners really will enjoy and find a lot of value from this episode. But for anyone that wants to know more about your work, give the 30-second elevator pitch on the sub stack, which, again, the name is, let me make sure I get it right, Rock and Turner Investment Analysis and the book, Fabric of Success, The Golden Threads Running Through the Tapestry of Ever Great Business. Links will be in the show notes for both, but give the elevator pitch for the listeners. I will do.

But actually, before I do, there's one other thing I'd like to just throw in there that some people throw out as a challenge to D-Local, which is probably worth just kind of discussing very, very briefly, because it may have crossed the minds of some listeners. So stable coins, I kind of touched on it briefly before, but some people say, well, stable coins are going to disrupt a business like D-Local. But I don't believe that's the case at all. And I'll explain why. So governments can't avoid stablecoins. They've become kind of a fact of life. Any cryptocurrency is kind of unstoppable. It's deregulated by definition. And so governments around the world are kind of settling for the fact that these things exist and they're simply going to be regulating them. And D-Local is the corporate embodiment of that regulatory capture. So by D-Local building compliance and reporting and licensed partners into the whole process, D-Local kind of offers governments in these emerging countries the ability to properly tax and monitor flows of stable coins, which they really, really welcome.

um and so d local has launched something called stable coin 4 which is an enterprise grade api that allows global merchants to accept stable coins at the checkout um and to settle in dollars or stable coins or whatever they want and to send payouts across multiple emerging markets as well also in stable coin so effectively d local is treating stable coin as just another local payment method it's another payment route so it kind of strengthens the proposition rather than undermining it so i just wanted to put that out there in case anybody was concerned about that um in terms of kind of wrapping up um so yeah i've written a book i've called the fabric of success the golden threads running through the tapestry of every successful business effectively every chapter

of the book deals with um a different um theme in the operation of a business so it could be capital allocation it could be recruitment it could be customer acquisition um and in each chapter i look at how the very best businesses over time have dealt with all of those aspects you know you could look at the way berkshire hathaway or apple or um costco um and and what you tend to find is there are um these golden threads in common um and let me give you a great analogy which might help you kind of visualize this so i don't know if you're familiar with evolution but you know a shark and a dolphin have come down different evolutionary paths one's a mammal and one's a fish but they look really quite similar right uh they've both got

the same shape the dorsal fins the same coloring why because as a as a kind of a a level one predator in the sea that's clearly the optimal model and what you tend to find when you analyze businesses is that it doesn't matter what industry they're in or where they're located geographically or even in which era they operate it you know whether it was standard oil back in the day or you know an AI company today what you tend to find is those companies that really succeed have these traits in common because that's the optimal model they've all converged in the same place having started at very different places and that's exactly what I pull out in the book And I use those golden threads to try and spot new investment opportunities.

And, you know, I see a lot of those golden threads in DeLocal that were discussed today. In terms of my sub stack, it's called Rock and Turner. Why is it called Rock and Turner? Well, Peter Lynch and Warren Buffett always said that the best investors are those that turn over the most rocks. You turn over lots of rocks during an investment career. Most of the time you don't find anything. Occasionally you find a hidden gem. They both use that metaphor and I love that metaphor. So I called my Substack Rock and Turner. And, you know, I give out investment theses, timeless wisdom on investing, topical investment pieces. I try and publish one or two pieces every week. So if you want to have a look, it's rockandturner.substack.com. all right thank you once again for joining uh before we get out of here as a reminder for listeners we are not financial advisors anything we say on the show is not formal advice or

recommendation uh me or any podcast guests james today may hold securities discussed in this podcast may have held them in the past i may buy sell or hold them in the future thank you everyone for listening and we'll see you next time Thank you.