DLocal: Extremely Cheap, But Extremely Risky

Core Viewpoint - DLocal Limited has experienced significant payment volume growth but is facing deteriorating margins, leading to investor pessimism following the Q1 report that highlighted these challenges [1][11]. Payment Volume and Revenue Growth - DLocal reported Q1 payment volumes of $5.3 billion, continuing its growth trajectory [3]. - Revenues increased by 34.3% in Q1, driven by strong performance in Brazil, Mexico, and Egypt, although there were declines in Argentina and Nigeria [3][4]. Margin and Profitability Concerns - The company's margins have weakened, with Q1 gross margins dropping to 34.1% and operating margins at 14.6%, significantly below long-term levels [19]. - The take rate fell to approximately 3.5% in Q1, raising concerns about future profitability as it is critical for maintaining high margins [14][19]. Future Outlook and Guidance - DLocal's 2024 outlook includes projected payment volumes of $25-27 billion and gross profit of $320-360 million, but there is skepticism regarding the ability to meet these targets following weak Q1 results [15]. - The company anticipates a gross profit growth of at least 15.6% in 2024, despite only a 1.8% improvement in Q1 [15]. Valuation and Investment Considerations - The discounted cash flow (DCF) model estimates DLocal's fair value at $12.46, indicating a potential upside of 68% from the current stock price [9]. - Despite the attractive valuation, the investment carries significant downside risks due to margin pressures and geographical challenges, particularly in Argentina [11][17]. Risk Factors - The company faces elevated risks related to its take rate and overall margins, with the potential for further declines impacting the investment case [11][17]. - The presence in emerging markets, particularly Argentina, poses additional risks that have already affected earnings [14][17].