DLocal (DLO): Investment Thesis Explained

This article was originally posted on X as a thread on February 17, 2025.

Until last week, my portfolio consisted only of founder-led stocks, but I finally made an exception by opening a position in DLocal (DLO).

Here’s an article breaking down my investment thesis and why I believe its CEO deserves my trust.

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Origins

DLocal was founded as a response to a pressing issue in Latin America: the difficulty of making online payments. The company’s origins trace back to Uruguay, where Sebastián Kanovich, one of the key founders, first encountered the problem firsthand. As a young economist with no prior background in technology, Sebastián stumbled into the fintech world by chance when he realized that making international online purchases was nearly impossible for consumers in his home country. His personal frustration — specifically, being unable to buy an NBA League Pass or shop online without borrowing a credit card — led him to recognize a larger systemic issue.

He joined forces with two partners who had already begun assembling an initial team to address these payment challenges. At the time, he was working at Santander Bank but was drawn to the opportunity to build something innovative. The founding team’s first venture into payments was a small-scale operation, focusing on a single solution for one customer. They initially operated with a kiosk model, solving local payment issues in Uruguay before expanding their scope.

The company’s first major breakthrough came with Brazil’s Boleto system, a widely used cash-based payment method. Traditionally, Brazilian consumers would generate a Boleto — a type of payment slip — and physically pay it at a bank or kiosk. DLocal developed a solution that digitized this process, allowing users to issue Boletos at checkout and complete transactions seamlessly. While the team initially believed they had solved a major problem, they soon realized that payment challenges extended far beyond Brazil and involved a wide array of localized payment methods across Latin America, Africa, and Asia.

DLO’s growth trajectory accelerated as global companies began seeking ways to expand into emerging markets. Initially, large U.S. firms like Facebook and Google were hesitant to invest in Latin American payment solutions, focusing instead on European expansion. However, as emerging markets gained importance in global business strategies, interest in DLO’s services grew. The company transitioned from offering just a single payment method to aggregating over 900 different payment solutions across various regions, all accessible through a single API. This comprehensive approach significantly increased DLO’s value proposition.

A pivotal moment came when GoDaddy became DLO’s first major U.S. client. Initially, the company attempted a direct-to-consumer (B2C) model, launching a prepaid card under its own brand. However, GoDaddy’s feedback was clear: customers didn’t care about the brand, they cared about seamless payment solutions. This insight pushed DLO to pivot towards a B2B model, positioning itself as an infrastructure provider rather than a consumer-facing brand. This shift proved to be a game-changer, enabling the company to secure more enterprise clients and scale its operations globally.

Current Operations

DLocal’s mission is to enable global merchants to connect seamlessly with billions of emerging market users.

The company provides payment solutions for some of the world’s largest enterprises, including Amazon, Uber, Microsoft, Shopify, Google, Spotify, Tencent, Shein, Salesforce, Nike, Booking, and Shopee, among others. By simplifying the complex payment landscapes of emerging markets, DLO helps businesses expand into high-growth regions without the typical friction associated with cross-border transactions.

How DLocal Makes Money

DLO operates a high-margin, scalable business model built around direct integrations with global merchants. Once onboarded, companies can access DLO’s full suite of payment solutions through a single API and contract, eliminating the need for multiple legacy providers. This direct connection serves as both a competitive advantage and a barrier to entry, making incremental transaction volume highly accretive (I'll address these topics later).

The company generates revenue primarily through transaction fees on pay-in (consumer payments) and pay-out (merchant disbursements) services. These fees can be a percentage of the transaction value, a fixed fee per transaction, or a spread on foreign exchange conversions. DLocal also charges for services like chargeback management and installment payments, which further contribute to its revenue stream.

Revenue Breakdown:

• Processing fees – Charged as a percentage of transaction value or a fixed fee per approved transaction.

• Installment fees – Fees applied to transactions where consumers opt for installment payments.

• Foreign exchange fees – A spread on currency conversions in cross-border transactions.

• Other transactional fees – Includes chargeback and refund fees, as well as ancillary services.

• Other revenues – Setup fees, maintenance fees, and other small service charges.

Cost Structure

DLO’s cost of services primarily consists of fees paid to financial institutions, such as banks and local acquirers, for processing payments. These costs vary depending on settlement periods and payment methods. Additional expenses include infrastructure costs, salaries of operational staff, and amortization of internally developed software.

One of the key risks in DLO’s model is foreign exchange exposure, as transactions often involve multiple currencies. However, the company mitigates this risk through hedging strategies, using derivatives to offset currency fluctuations.

Apart from COGS, DLocal’s main costs fall into two categories:

• Technology & Development: This includes salaries and wages for tech teams, infrastructure costs, information security expenses, software licenses, and other technology-related investments.

• SG&A: These are the regular operating expenses required to run the business.

Since the arrival of the new CEO, DLocal has increased spending on technology infrastructure and back-end capabilities to enhance its solutions and maintain its position as an innovator with a long-term mindset. While these investments initially pressured margins, they are strategically important for long-term value creation — I’ll revisit this when discussing the company’s future margin recovery.

Overall, DLO’s business model is highly scalable, with minimal incremental costs, positioning it to unlock significant operating leverage as it continues its impressive growth trajectory.

Key Performance Indicator: TPV Growth

Total Payment Volume (TPV) is probably the most important metric to gauge DLO’s relevance and execution over the past few years.

From 2016 to 2023, the company grew from just $136M in TPV to $17.7B — a CAGR of over 100%.

In 2024, growth is expected to exceed 40%, highlighting DLO’s continued expansion in emerging markets and its ability to attract major global enterprises seeking seamless payment solutions.

With a massive untapped market ahead, the company still has significant room to scale.

Competitive Advantage: One Integration, 40+ Markets

When assessing DLocal’s competitive advantages against its competitors, we can break them down into two main points:

1) Competing with Global Payment Giants (Adyen, Stripe, etc.)

At first glance, it might seem like DLO competes directly with major players like Adyen and Stripe. However, these companies are primarily focused on developed markets, whereas DLO specializes in emerging economies (they definitely compete in some regions, but DLO’s services are built from scratch to align with these markets' characteristics, whereas Stripe and Adyen were not). The CEO Pedro Arnt has made it clear that the company has no interest in expanding into developed regions because its solution is uniquely designed to thrive in the complex regulatory environments of emerging markets.

One of the biggest challenges of operating in these regions is the fragmented and highly localized nature of payment processing. Each country has different regulations, compliance requirements, and banking infrastructures. Traditionally, a merchant expanding into multiple emerging markets would need to integrate with separate payment systems for each country — one for Costa Rica, another for Côte d'Ivoire, another for Thailand, and so on.

DLO eliminates this complexity with One dLocal, its proprietary platform that enables merchants to expand into over 40 countries through a single integration. The system is already compliant with local regulations, saving merchants significant time, money, and effort. This streamlined approach makes DLO the preferred partner for global companies like Amazon, Uber, Microsoft, Shopify, Google, and Spotify. These enterprises often use Adyen or Stripe in developed markets but turn to DLO for seamless access to emerging economies.

A crucial part of this advantage is DLocal’s deep connectivity with local partners. The company has built relationships with over 900 local payment methods and financial institutions, giving merchants access to alternative payment methods (APMs) and locally issued cards across multiple regions. This deep integration ensures high conversion rates, reduces friction for end users, and helps merchants maximize revenue. Additionally, DLocal maintains close relationships with regulators, exchanges, and tax authorities, allowing it to swiftly adapt to shifting regulatory landscapes and offer a stable, compliant payment infrastructure.

2) Competing with Local Payment Providers (EBANX, PayU, PPRO, etc.)

When comparing DLocal to regional players focused exclusively on emerging markets, its main advantage comes from its first-mover position and scale. DLO has grown rapidly to become the largest payments provider specializing in these regions, giving it a cost advantage that smaller competitors struggle to match.

Payment processing works on an aggregate volume model, meaning that as transaction volumes grow, costs decrease. For example, if 10 people in Argentina buy something on Amazon, DLO can batch those transactions, convert pesos to dollars in a single step, and reduce foreign exchange costs. The more volume it processes, the more efficiently it operates — allowing the company to offer lower prices than its competitors.

DLocal also differentiates itself with a comprehensive product portfolio and data-driven value-added services. Beyond payment processing, the company provides fraud management, FX management, and tax compliance tools — helping merchants navigate the complexities of emerging markets with ease. Its machine learning-driven fraud prevention system detects and mitigates risks while improving approval rates. Additionally, its dynamic routing engine ensures transactions are directed to the best acquirer, balancing approval rates, costs, and latency. By leveraging data analytics, DLO provides merchants with actionable insights that enhance user experiences, optimize conversion rates, and improve decision-making.

The company’s strong financial position, with zero debt and a large cash pile, also positions it well for the upcoming market consolidation.

Why This Matters for Merchants

Operating in emerging markets involves extensive compliance and regulatory hurdles. DLO’s one-integration model allows merchants to bypass these challenges with minimal incremental effort. Instead of spending resources on expensive legal and operational work in each country, they can rely on DLO’s infrastructure.

This is why merchants are willing to pay a premium for DLO’s services (when compared to the usual take rates in developed markets) — it ultimately saves them more money than trying to manage integrations and compliance on their own.

The Flywheel Effect: Scale Drives Cost Leadership

DLocal’s growing processing volume creates a reinforcing cycle:

• Higher transaction volumes = Lower acquisition costs
• Lower costs = More competitive pricing
• More merchants join = Transaction volume increases

This dynamic solidifies the company's position as the dominant pure player in emerging market payments.

As CEO Pedro Arnt put it:

“The comprehensiveness of our One dLocal solution allows our merchants to add new markets and payment methods at a marginal incremental implementation cost, providing cost-effective and speedy geographic go-to-market strategies. This value supports the resilience of our business, despite operating in the volatile global south.”

With its technology, scale, and deep market expertise, DLO is well-positioned to maintain its leadership and capitalize on the continued digital payments expansion in emerging economies.

Note: Competitors like Adyen and Stripe remain a relevant factor to monitor.

Massive Market Opportunity

DLocal operates in some of the world’s fastest-growing digital economies, giving it exposure to a trillion-dollar opportunity in the long term. This is not a winner-takes-all industry. Instead, multiple key players will emerge, and DLO is poised to be one of the leaders.

Global Reach Across High-Growth Markets

DLO is deeply embedded in emerging markets across Latin America, Africa, the Middle East, and Asia — regions with a combined population of over 2B people who are still in the early stages of digital adoption. The company currently operates in 40+ countries, including:

• Africa & Middle East: Nigeria, South Africa, Egypt, Kenya, Turkey, Morocco, and more.
• Asia: India, Indonesia, Pakistan, Vietnam, Thailand, and the Philippines.
• Latin America: Argentina, Brazil, Mexico, Colombia, Peru, Chile, and others.

A Pure Play on the Digitalization of Emerging Markets

While Big Tech companies are expanding into emerging markets, these regions still represent a very small fraction of their overall business. For global giants like Amazon, Google, or Microsoft, the revenue generated in Latin America, Africa, and Southeast Asia barely moves the needle in their consolidated results.

DLO, on the other hand, is a pure-play focused entirely on these high-growth regions, making it a direct way to invest in the explosive growth of internet penetration, digital commerce, and fintech adoption.

Strong Tailwinds Supporting Long-Term Growth

• Payment digitalization is accelerating in emerging markets, where cash still accounts for more than 50% of transactions in many countries.

• The cross-border payments market is projected to reach $65T by 2030, with DLO positioned to capture a meaningful share of this growth.

• Africa and Asia are expanding rapidly within DLO’s revenue mix, growing at a much faster pace than Latin America, which has traditionally been its largest region.

With strong macro tailwinds and a business model designed specifically for emerging markets, DLO is positioned to be a key player in the future of digital payments across the Global South.

Growth Strategy

DLocal has built a growth strategy around five key pillars, each designed to reinforce its position as the leading online payments infrastructure provider in emerging markets. These interconnected strategies aim to deepen relationships with existing clients, expand into new regions, innovate its product offerings, and capture a larger share of the growing payments ecosystem.

Expanding Within Its Existing Enterprise Merchant Base

DLO serves some of the world’s largest enterprises across various sectors like retail, gaming, travel, e-commerce, and more. As digital payments adoption rises in emerging markets, transaction volumes from global merchants continue to increase, benefiting DLocal’s TPV and revenue.

The company’s strategy is to deepen relationships with its current enterprise clients by expanding the scope of services offered. For example, merchants currently using DLO’s pay-in solutions in one region might adopt its pay-out solutions or expand to other markets. By continually enhancing its platform and customer experience, DLO aims to increase its share of wallet among existing merchants.

Acquiring New Global Enterprise Merchants

DLocal actively seeks new enterprise merchants by leveraging its solid reputation, track record, and referenceable client base. The company’s sales team focuses on high-value merchants that need scalable, localized payment solutions in several emerging markets.

Given the complex nature of onboarding new global clients, DLO competes by offering superior approval rates, fraud management, security, and pricing transparency. While the onboarding process can take from two months to over two years, DLO accelerates this through targeted sales efforts, a streamlined sales process, and leveraging referrals from existing clients.

Geographic Expansion into New Emerging Markets

DLO’s technology is scalable and flexible, allowing it to enter new markets efficiently while addressing local regulatory, tax, and compliance challenges. The company takes a market-driven approach to expansion, focusing on regions where demand for payment solutions is high and where existing infrastructure presents opportunities for improvement.

Key to this strategy is understanding local regulations, securing the required licenses, and establishing relationships with alternative payment methods and financial institutions. For instance, DLO expanded into Egypt after a major social media platform requested it. The company’s goal is to expand its presence in all high-growth emerging markets where global enterprises need specialized payment solutions.

Broadening Its Product Offering

Innovation is at the core of DLocal’s growth strategy. By continuously evolving its product portfolio, the company meets the evolving payment needs of global merchants.

A prime example of innovation is DLO’s pay-out solution, originally developed for the 2016 Rio Olympics and later scaled across the platform. More recently, DLocal for Platforms was introduced — an end-to-end solution that simplifies onboarding, payment processing, and fund management for digital platforms.

By closely collaborating with merchants, the company gains insights into emerging challenges, enabling it to develop new solutions that keep its offerings competitive and relevant.

Pedro Arnt recently mentioned in an interview that he expects DLO to expand its offerings by adding 4 to 5 new solutions in the coming years. This will not only strengthen its relationships with existing merchants but also unlock additional value for shareholders.

Growth Through Strategic Acquisitions

While DLO’s primary growth focus is organic, it remains open to selective acquisitions that align with its goals.

Pedro Arnt recently mentioned that he expects the company to pursue some form of M&A in 2025, given the ongoing market consolidation. However, any potential acquisitions must be easy to integrate into the existing platform and complementary to its product and service offerings. They won’t consider options that could complicate the experience for their merchants.

By pursuing targeted M&A opportunities, DLocal can accelerate its expansion while maintaining its streamlined approach to payments infrastructure.

Why Is It Down >80% From ATH? Time for a Rebound

DLO’s stock has experienced a dramatic decline of over 80% from its all-time high, driven by several factors. Many of these were linked to broader market conditions, temporary setbacks, and misperceptions about the company’s prospects. Despite these challenges, DLO is well-positioned for a strong rebound. Here are the key reasons behind the decline and why it may be time to get bullish on the stock again.

1) The Short Report – A "Nothing Burger"

A key event that contributed to the selloff was a short report accusing DLocal of fraud. I’ve read it, and in my opinion, it’s a nothing burger — filled with overcomplicated jargon meant to make it seem like they’re being insightful, when in reality, they’re just falsely accusing the company of fraud.

The new CEO, Pedro Arnt, agrees with me. In his words, the report was filled with “colorful language” but lacked substantial evidence. Pedro expressed confidence in the business's fundamentals and saw the situation as an opportunity, noting his thorough due diligence. As he put it, the report felt more like an attempt to throw accusations out and see what stuck, but ultimately, there was nothing of substance.

2) Devaluation of Emerging Market Currencies

Another factor impacting DLO’s stock price was the devaluation of currencies in several emerging markets where the company operates. Currency volatility has put pressure on its financials, especially in regions like Argentina, a significant market for DLO. Despite the hurdles in the country, these macro factors could eventually turn into tailwinds for the company as it continues to expand in this high-potential market.

A good example of this turnaround is DLO’s performance during last quarter’s Black Friday: in Argentina, the company achieved three times the transaction volume compared to Black Friday 2023, showcasing the country's surging ecommerce demand.

3) Leadership Change – A Blessing in Disguise

The leadership change at DLO may have initially sparked concerns, especially since it’s typically seen as negative when a founder steps down as CEO. However, in hindsight, it’s evident that Pedro Arnt is a significant asset to the company. With an impressive track record, including his previous success at MercadoLibre, Pedro has proven to be the right leader to guide DLocal through tough times. His vision and ability to execute are now clear to investors, and his leadership represents a major catalyst for DLO’s recovery. I’ll address this in more detail later on.

Note: The market reacted very positively when Pedro Arnt was announced as the new CEO, but it had reacted quite negatively when the founder announced he was stepping back, that’s why I’m considering it as a factor that contributed to this decline.

4) Repricing with its Largest Client in Brazil – A One-Time Event

In Q1 2024, DLocal xperienced a repricing with its largest client in Brazil, which led to a decline in growth and margins. This was largely seen as an inevitable correction, as the client had a higher-than-usual take rate. The repricing was a one-time event and is not expected to recur. Additionally, in Q3 2024, DLocal faced a regulatory change in Brazil, creating further temporary disruption with another important merchant. However, these setbacks were relatively short-term and haven’t impacted the overall investment thesis for the company.

5) Decreasing Margins – Stabilizing and Improving

DLocal had faced margin pressure from a combination of lower take rates across the entire sector and the company’s strategy to continue investing in its technology, as well as a few one-time events that temporarily impacted its operations. However, signs are emerging that the company has stabilized its take rates and is maintaining solid margins, with operating leverage starting to kick in and expected to improve in the upcoming quarters.

Additionally, continued investment in technology signals DLO’s long-term vision, with its innovation further positioning it as a leader in the payments space. Pedro Arnt could have waited for the one-off events that pressured margins to subside before increasing the company’s investments in people and technology. But due to his impressive long-term mindset, he focused on what was best for DLO in the long run, regardless of short-term market reactions. This is exactly the kind of leadership I admire — focused on creating long-term shareholder value.

Time for a Rebound – Positive Momentum Building Despite a rough start to 2024, DLocal has shown significant positive momentum in recent quarters.

As CEO Arnt said:

“Our margins, cash position, and cash conversion have all improved QoQ throughout 2024. A year that started off weak has gained positive momentum.”

Here’s a look at the key highlights that suggest a rebound is in motion:

• Reaccelerated Growth: TPV is growing at a strong 40% YoY, driven by both expanding share of wallet with existing clients and onboarding new merchants. This growth is a direct indicator of DLO’s strength in the market and its ability to scale.

• Diversification Across Verticals and Countries: DLO is expanding rapidly across different verticals and regions, with notable performance in Africa and Asia, which will gradually account for a larger portion of the business.

• Stable Take Rates: After facing volatility, DLO has stabilized its average take rate, which is crucial for improving margins and sustaining growth in the long run.

• Technological Innovation: DLO continues to enhance its platform with advanced features like Smart Requests and new alternative payment methods. These innovations improve conversion rates and cost efficiency for merchants, further solidifying dLocal’s competitive edge.

Another key catalyst for reaccelerating revenue growth is DLO’s recent performance in the remittances sector. As the company’s founder noted:

“There are nine or ten major players that control over 80% of the market. Just as we serve giants like Facebook, Google, Netflix, Apple, Amazon, and Microsoft, we aim to serve the same leaders in the remittance space.”

Last quarter, TPV in this vertical surged more than 80% YoY.

All in all, DLocal stock was priced for perfection following its 2021 IPO, riding the wave of fintech hype and incredible growth. However, the market shifted from over-optimism to over-pessimism as the company faced some temporary headwinds. Despite the turbulence, the recovery trend is clear. With its strong leadership, DLO is in a prime position to rebound and deliver long-term growth. Given the company’s recent improvements and favorable tailwinds in emerging markets, a re-rating of the stock appears imminent.

Pedro Arnt – The Right Leader for DLocal

If you've been following me for a while, you probably know that I believe one of the most crucial value drivers for a small-cap company is its leadership. Growing a company from 0 to 10 is vastly different from growing it from 10 to 100, or even 100 to 1,000.

Pedro Arnt is a critical factor behind my high conviction in DLO. His impressive background and leadership make him a key asset to the company, and it's clear he has the right vision to propel DLocal into its next phase of growth.

Before joining DLocal, Pedro was the CFO of MercadoLibre (MELI), one of my favorite companies in the world due to its remarkable corporate culture and execution over the past decades. Pedro’s time at MELI was transformative – he joined in the company's first year and spent over 24 years there, playing a pivotal role in developing what is now the most valuable company in Latin America.

An interesting story about Pedro’s early days at MercadoLibre speaks volumes about his humble beginnings and entrepreneurial spirit. When he first arrived at the company's building, he was impressed by the exterior, but the elevator took him down, not up, and he walked into a garage where the company had set up shop with drywalled parking spaces. It was there that Pedro, Marcos (the founder), and Hernan worked across all aspects of the business, contributing to product, technology, sales, marketing, fraud prevention, and customer support – all hands on deck. This early experience gave Pedro a deep understanding of how a company can evolve across different domains, and it's a mentality that he brings to DLO today.

Pedro’s background is a unique one – originally studying political science and letters. But in the late 90s, while working as a management consultant in São Paulo, Pedro saw the transformative potential of the internet. After advising telcos on the coming digital revolution, he decided to leave consulting and join the early-stage startup world. Pedro’s path led him to MercadoLibre, where he became crucial in building what is today one of the largest digital wallets and e-commerce platforms globally.

Interestingly, it was through his work at MercadoLibre that Pedro first encountered DLO. He recalls how his team at MELI struggled to pitch their digital wallet to global enterprises, while DLO’s model was designed to serve those same enterprise clients in emerging markets. This realization helped Pedro understand the immense potential of dLocal's business.

One of the things I admire about Pedro is his long-term vision and focus on sustainable growth rather than short-term gains. His leadership style is characterized by a deep understanding of emerging markets, an unwavering commitment to integrity, and a passion for scaling businesses that drive real value. Also, Pedro’s ability to manage both people and company culture is unmatched.

He emphasizes the importance of maintaining focus on customers while staying vigilant about competitors. His approach is to learn from what others are doing but make decisions that are best for DLO’s customers in the long term. He has a strong belief in staying true to the company’s vision rather than chasing short-term trends just to outpace competitors. In his own words:

“Focus on your customers. Observe your competitors. But don’t fall into the short-term trap of reacting to what they do just to hurt them. Focus on what’s best for your customers, not just to outdo the competition.”

Pedro Arnt’s vision for DLocal is clear: to build a company that’s not only successful in the short term but also creates lasting value for shareholders, employees, and customers alike. His focus on execution, strong leadership, and deep knowledge of emerging markets make him the right person to guide DLO through the challenges ahead and capitalize on its growth potential.

To be honest, I’m really glad I understand Spanish because it allowed me to watch several hours of interviews with Pedro. I don’t think what I’m writing can fully capture the managerial powerhouse he is. Here is one of my favorite quotes from his most recent interview:

"Anyone working in rapidly developing digital spaces that are still in the early stages of adoption should not blame macro factors for failure. That’s an excuse. Your success in meeting or not meeting annual expectations depends on your own execution, the quality of your product/service, and not on a 2% GDP growth or interest rates being cut two or three times. Of course, those are not useless inputs, especially for our cash management since we deal with multiple currencies, but I don't believe they are what determines our success or failure."

Insider Ownership

If you’ve been following me for a while, you also know I put a lot of weight on founder-led companies where leadership has significant skin in the game. With DLO, I’m slightly bending that rule — none of the co-founders are the CEO anymore — but I believe Pedro Arnt is even better suited for the role.

That said, insider ownership remains strong. Co-founders still hold large stakes and play active roles in the company, with total insider ownership exceeding 45%. This ensures a high level of alignment between leadership and shareholders.

Former CEO and co-founder Sebastián Kanovich made it clear he’s not walking away from the company:

“Going nowhere, going to the board. I love this company too much, I’m going to still be around. We’re establishing a commercial and M&A committee that I’m going to be leading. But it’s time for me to step down as CEO, it’s been a huge ride and an incredible one but as a public company and looking ahead, I think Pedro is in much better position to do it. I’m going to be supporting the company, but from one step behind, which is a place I feel a little bit more comfortable with as well.”

He also spoke highly of Pedro Arnt taking over:

“You spoke about the market reaction when Pedro joined, I had the same reaction when I first thought of the possibility of getting Pedro to join. I’m not leaving the company, but I wouldn’t be leaving the leadership to anyone. As Pedro was saying, I just care too much about this, I sweat every single centimeter of growth that we’ve had. I really feel that we have the right team, the right person in charge and I’m also very excited to see what we build next.”

All in all, I feel very comfortable breaking my founder-led rule for Pedro. Time will tell if it’s the right call, but this factor doesn’t shake my conviction in the slightest.

The Numbers

DLocal’s growth trajectory has been nothing short of impressive. TPV has skyrocketed from $136M in 2016 to $17.7B in 2023, reflecting a CAGR of over 100%. Even in 2024, despite a larger base, TPV is still growing at 40%+, with a long runway ahead. Many of the markets DLO serves are still in the early stages of digital adoption, heavily reliant on cash, which presents a massive opportunity as digital payments accelerate.

Revenue has followed a similar trajectory, growing from $55.3M in 2019 to an estimated $750M in 2024, a 68% CAGR over the past five years. Analysts forecast 25% annual growth for both 2025 and 2026.

Both gross, net profit and FCF margins have trended downward due to factors discussed in post 6. However, based on recent quarters and management’s commentary, I believe the worst is behind them. While I’m not expecting margins to return to their previous peaks (40%+ for both net income and FCF), I see a realistic path to 25-30%, which would still be exceptional.

DLocal has a rock-solid balance sheet with over $670M in cash and zero debt. With strong financials and consistent FCF generation, the company is leveraging its undervalued stock price to execute a $200M buyback program. Additionally, and as I mentioned before, DLO remains open to M&A opportunities, expecting further market consolidation in the coming years.

All in all, the company operates a capex-light, highly scalable business model that allows it to grow efficiently while maintaining strong bottom-line margins. With an enormous market opportunity across emerging economies, I have every reason to believe that DLocal will continue to scale rapidly and create significant shareholder value through FCF per share growth.

Outlook & Valuation: Why I See Tremendous Upside Over the Next 5+ Years

DLO’s upside potential is built on strong secular trends, operational leverage, and an attractive valuation. While the company has faced margin pressures and short-term challenges, I believe the worst is behind it. Over the next few quarters and years, operating leverage is expected to kick in, and DLO’s capex-light model should allow it to scale efficiently.

As CEO Pedro Arnt explained:

“There's always inherent, I think, cost negotiation power as we grow our business and gain scale. A big part of what we do is aggregation theory in that rather than have global merchants have to negotiate with local processors on a case-by-case basis, we aggregate all of that volume. We negotiate based on that aggregate volume and even by keeping our spread, we're still able to continuously lower costs.

I don't know if it's for another two quarters, three quarters, four quarters, where we have to combine both continuing to lean into the business to build the right capabilities with the right directionality of progressing towards those mid-term targets. I think after we get through this phase, which is not now, and it's not in the beginning of 2025, but it's not in the very distant future either, you see the business potentially kicking into a whole entire gear of operational leverage, which is typical of a payments product.”

Management is investing in long-term growth, particularly in engineering talent and product expansion, which has temporarily pressured margins. However, the company is exiting 2024 in a much stronger position, and its performance continues to improve heading into 2025.

Let’s make a few assumptions to understand where this stock might be in 2030.

This was the worst year in DLO’s history in terms of revenue growth, yet its TPV growth will exceed 40%. Based on its track record and the secular trends the company is benefiting from, I believe its TPV will compound at least 30% per year until 2030 — putting it at ~$119.5B. This is a very reasonable target when compared to giants like Adyen and Stripe.

Since 2019, DLocal has consistently generated 3-5% of its TPV in revenue, with the lower end (3%) occurring in 2024, the company’s worst year ever for margins. As I expect operating leverage to improve, I assume the company will achieve at least 3.5% of its TPV in revenue by 2030, translating to an estimated revenue of ~$4.2B.

Pedro Arnt has been clear about his goal of expanding DLO’s offerings to four or five new products over the coming years. Because of this, I believe revenue could be even higher, though I prefer to remain somewhat conservative when modeling expectations.

Reaching 24% FCF margins would allow the company to generate $1B in FCF by 2030. It’s worth noting that DLO’s FCF margins were significantly higher in the past, and the lowest they reached over a 12-month period was 19.3% (which has already rebounded to 23.1% TTM, even in a period of significant headwinds).

Given these assumptions, I believe $1B in FCF by 2030 is a reasonable estimate — one that could be surpassed if the company continues executing at the same level it has historically. And with Pedro Arnt at the helm, I fully expect that to happen.

Now, applying a 15-20x FCF multiple, we arrive at a $15-20B valuation, which is 4-5x the current market cap and implies a CAGR of 31-39% over the next five years.

Beyond these estimates, I’ve excluded any potential reduction in share count, which is highly likely to further enhance FCF/share growth. Diluted shares outstanding decreased by ~3.2% YoY last quarter, and with the buyback program still active, I expect this trend to continue. However, I am not factoring this into my estimates.

Final Thoughts

I firmly believe DLocal is set to rapidly expand its FCF/share over the coming years. With its attractive valuation, it presents a compelling opportunity to gain exposure to the digitalization of several emerging markets in the early stages of adoption.

Risks To Mention

As with every company, there are several risks investors should consider:

1) Merchant Concentration

One of the biggest risks for DLO is its concentration on a small group of large merchants. As of now, the company generates a significant portion of its revenue from a handful of global digital players. While this is improving gradually, the CEO acknowledges that reducing concentration among the top 10 and top 25 merchants is more of a midterm goal rather than an immediate shift:

“From a merchant perspective, the midterm vision is to reduce reliance on the top 10 and top 25 merchants. However, that might be a little bit more of a midterm play.”

The good news is that DLO’s expansion into new markets and additional product offerings should help mitigate this risk over time. As more Tier 2 and Tier 3 merchants begin expanding into emerging markets, DLocal is well-positioned to onboard them:

“The good thing there is that that's exactly why I'm so optimistic as to why dLocal can sustain growth for a very prolonged period of time going forward, because there's a whole bunch of merchants in the digital world that are emerging and that aren't really focused on their global south footprint and will be in a few years.”

That said, for now, large global players will continue to dominate DLO’s revenue mix, making the company somewhat vulnerable to shifts in their business strategies or payment processing preferences.

2) FX Risks

Operating in emerging markets comes with currency risk and exposure to economic instability. Fluctuations in local currencies can impact DLO’s revenue and profitability, especially in volatile economies where currency devaluations are common.

While the company benefits from natural hedging mechanisms, these risks remain a challenge, particularly in high-inflation environments where consumers and businesses may scale back spending.

3) Competitive Pressure

As digital payments expand across emerging markets, competition is increasing. Global giants like Adyen, Stripe, and PayPal are actively expanding their presence in these regions, potentially putting pressure on DLO’s pricing power and margins.

I already explained why I believe DLocal has competitive advantages in the regions where it operates, but this is still a risk worth considering.

Like any small-cap company, DLO faces risks that could challenge its long-term execution. My strategy isn’t about eliminating risk or uncertainty but identifying opportunities where the potential reward far outweighs them. In this case, I believe the market has already priced in most of the company’s risks, creating an attractive opportunity to buy a very healthy business with strong long-term potential.

Conclusion

• FCF/share is set for exponential growth over the next decade
• Capex-light, highly scalable business model with a long runway for reinvestment
• Exposure to 40+ emerging markets that are still in the early stages of digital adoption, providing a massive growth opportunity
• Strong competitive advantage should allow DLocal to maintain its leadership position in the regions where it operates
• Led by Pedro Arnt, one of my favorite leaders in the world and the ideal person to drive this turnaround
• A rock-solid financial position gives DLocal the flexibility to capitalize on market consolidation and reward shareholders
• Attractive valuation — after shifting from extreme optimism to excessive pessimism, the market now presents an opportunity to buy the company at a significant discount

That’s it! Thank you so much for reading.

Last week, I started a position in DLO at $13.38. For context, I originally bought it at $7.50 last year but later sold it to initiate my RKLB position at $4.82 — a move that proved to be highly successful. However, I still see a compelling opportunity at its current price.