The Intrinsic Value Podcast 对 $DLO 的判断变化

Today's company is trading at a mid- teens multiple despite growing the top line by 50% annually being highly profitable and having a pretty strong balance sheet. And the thing is it's sitting at the intersection of two mega trends over the next two decades. The growth and digitalization of emerging markets and the expansion of global tech leaders like the mag 7 into those markets.

So, I like the financials. I like the valuation which looks pretty attractive and I couldn't imagine a better CEO for the company.

And I got to say, when I look at DLO's headline numbers and valuation, I do see why you want to cover the company. It's growing revenue at 50% plus, yet it's trading at 15 times earnings. So, that is a pretty nice setup.

No. No, it's not. Otherwise, I also wouldn't have brought it because I know you're not the biggest fan of payments companies, but I think there's a major difference between most companies that you know immediately come to one's mind and Dlo is not one of them.

So, for example, it's a B2B business. So, business to business, meaning they have big merchants that they serve and it's operating in emerging markets, but it's, you know, good to know that its customers are all companies that we know quite well. So you have these global giants like Amazon, Meta, Netflix, Uber, Alibaba also pinuo and all these sorts of companies that we know well and where you have the feeling well if those companies choose DLO as their main payment provider in that part of the world. I assume that will make it a bit more attractive for you to look at this company today.

So this is sort of where the local comes in because Dlo exists because the emerging market world doesn't use Visas or Mastercard system at least not to the same extent. So it's obviously not totally fair but you know you could say that Visa and Mastercard are sort of a legacy system of the western world. Obviously, it's also operating in Brazil and some other places, but not to the same extent as they do in the countries where at least the both of us live.

And that's the value ad of DLOC. Just a very quick highlevel summary is that they're able to help navigate the complexity of the international financial system and completing transactions for different businesses. So I guess we should think of Visa and Mastercard and credit card issuers as trying to expand into emerging markets. And then the question is by doing so are they threats to DLO?

I guess I repeat myself but I have to say yes and no. So technically they are a threat because there's nothing that stops them from getting into that market in theory in the emerging markets that also Dlo operates in.

However, and that's sort of the main problem that Dlo addresses, a US or European merchant trying to run a Latin American Visa card through a Western bank will mostly suffer from a massive transaction decline rate. So sometimes we're talking up to 50 plus% just due to strict anti-fraud blocks.

And there's also another I would say mitigating factor which is that these alternative payment methods like PICSS for example in Brazil are growing even faster than credit cards. So merchants still benefit from a company that offers one solution for all of these different ways of paying and that's sort of what Dlo offers to you, right? You can pay via credit card. You can pay via cash. You can pay via QR codes. And DLO has all of that in one product.

They sell you what's called an API. So it's basically one piece of software that enables Spotify on this example you to get paid in all of the countries that it wants to operate in. So before the local what Spotify would have done is they basically need to set up a local payment processes generally in every country that they operate in. And we know from your episode on Spotify that global expansion especially into these emerging markets is incredibly important for them especially over the next decade. But without DLO, they would need to integrate with so many different local acquirers in each market. You got to have local licences. You got to manage dozens of different tax rules and different banking systems and all of that stuff. And in the end, you're still doing that for part of the market that is 5% revenue or less for most of these major US companies right now. So, it's one of those things that you know you need to be part of that market, but it's also not worth it to spend all of that money and especially the time to get into those markets. So that's sort of the main problem that DLO is trying to solve for you.

And I know this all still sounds kind of abstract, but you you have to imagine what goes into the fact that DLO can actually offer just this one API. So they have more than 20 offices worldwide because you need physical presence, boots on the ground in those countries to have a chance to actually get a local license which once again is relatively difficult to do in payments because there's so much regulation and even then it can take many years until you actually get that license. So um in total DLO has more than 1,000 employees and all of those are local teams in the parts of the world where DLO operates.

So it's just a cost, you know, that's not worth it to the local customers itself, especially today. It's not necessarily about the money. I think it's mostly about the time and the headaches that you have to think about that if you're Amazon, you're just going to pay a couple of basis points more to use DLO instead of setting up local teams in markets where you basically have, you know, basis points in terms of your overall revenue.

The interesting thing about the investment case for DLO I I think is that you're looking at this is that you're essentially participating in two mega trends. And so on the one hand you're benefiting from the future growth of emerging markets and people becoming wealthier there. And then on the other hand you benefit from all the major global tech giants trying to expand their market share in these very fast growing regions of the world.

That's essentially the major thesis and it's also what DLO CEO Pedro is pointing out as a major advantage of DLO and Pedro has maybe you know that already been a Mac Libra CFO for 12 years and he actually worked at that company for 25 years. So I think it's fair to say that he's you know while not officially being a founder very much part of the team that grew macaru from zero to 100 billion plus dollars in market cap.

You already got a CEO that probably had one of the best jobs in South American tech and commerce going to DLO choosing it over Melly which to me as someone who really likes Melly as a company as you would know is a huge bonus point for DLO as a company and Petro basically said that he wouldn't have left if he didn't believe DLO is one of the most exciting place in the South American market today

But then when I actually started to understand what DLO was about, I realized there was a whole second leg to this which is one of the most difficult things about picking emerging market winners is that it's very hard to know who will be the next new bank or the next Melly and who will go by the wayside. I think you know death rate is even higher but DLO was a different take on riding the digital transformation and revolution of the emerging world which it's probably the single most precise proxy for how the magnificent seven and most of the world's largest and most successful digital companies are doing across Latam across Africa across the Middle East across Asia because at the end of the day our business today grows if the businesses of our large digital global clients grow in these markets.

And so when I realized that there was almost like a double layer of making a bet on emerging market digital transformation, which was the secular trend itself, but the secular trend being able to ride the success of the companies you knew were going to be successful, right? the Microsofts, the Netflix, the Amazons, the Spotify, the Googles of the world.

So, I know you're not a big fan of payment companies obviously, but I feel like this value proposition, especially those mega trends, a quite a good reason to like DLO or at least look into it in a bit more detail, especially if you know it's trading at what I think can be considered a very fair price.

Yeah, I don't have a great history with loving payments companies, but the setup is as compelling maybe as any payments company I've seen, which is a big compliment. I guess what I'd be interested in knowing is which markets delo as most of its business in in particular. So I like the idea of having this diversified player in emerging markets so that if something happens in one market, there's still plenty of business in the others and it's very unlikely that the emerging market growth trend will end for global tech businesses overall. But obviously there is a risk in any particular country. So Venezuela

That's a good point and yeah I got to admit concentration is one of the problems with the local to some extent because both in terms of the markets and the customers it is a quite concentrated company. Latin America for example accounts for about 80% of total revenue right now. So Africa and Asia are still relatively small markets and within Latin America you obviously have the big three. So you have Brazil, Argentina, and Mexico that make up about half of the total company's revenue and about 80% of the revenue made or generated in Latin American.

So payin basically means the merchant is getting money paid by its customer. So for example, it's Netflix in Brazil. You subscribe to it and then you pay. That is called pay in. So that's what the vast majority of DLO's volume is about 70% today.

And then you also have payout, which is sort of the reverse. So a merchant paying money out to people in these markets. And a good example for that is one of our favorite companies, Uber. And so you can imagine it sort of as if Uber has a driver in Buenosirus who needs to get paid in pesos into a local bank account. then de local is a company that handles that for Uber. The payout business has actually been built just to support some of the big right-handing companies that had problems with the sort of payment in the past. So now payout covers, you know, drivers, contractors, marketplace sellers, freelancers, and I think also to some extent remittance recipients, but it's still only 30% of the overall volume of the company.

And it looks like ride hailing is already the fourth biggest vertical by payment volume for DLO. So, we should probably thank Dlo for doing such a great job at supporting Uber's international operations. And it's generally impressive to me to see the growth rates behind all their verticals, right? I mean, e-commerce is the biggest already and it's still almost tripled in the last two years. On demand delivery is the second biggest vertical and that has more than 4xed and then remittances are becoming an increasingly bigger part of the pie as well.

Yeah. But one thing you will see is that the TPV growth the total payment volume is just amazing. And you know again it's sort of this double engine of Latin America and emerging markets generally growing at a fast pace especially the tech companies and then just the expansion of these big US companies grabbing share in those markets and becoming customers of DLO.

And obviously the downside of having all of these big tech companies as your customer is that there are very few companies that can match that scale. So DLO has quite a lot of customer concentration. While they have, you know, officially about 760 enterprise customers in total, just the top 10 make up 62% of revenue. So that's a lot. And two individual merchants and they didn't displace, which they were, but they made up 10% of the entire company's revenue back in 2024. I remember that because that was about the first time that I looked at the company. And I wouldn't be too confident that this has materially changed since then. Although they don't give us any numbers on just the top two customers anymore because it's not the best thing for the business.

So obviously this introduces some risk because if one of those top 10 merchants decides to bring payments inhouse or just route volume to a competitor DLO would take a massive hit especially in the short term and one of the key metrics to sort of keep an eye out for monitoring this risk is net revenue retention.

So you know basically it measures how much more revenue you get in any given year from the same merchants you had last year. So in 2023 for example that number was 150%. And that basically means that the existing book grew by half again on its own. No customer basically leaving the local but they have a lot more volume that they sort of ship through the DLO rails. And in 2024 it dropped to 113% which sort of gave you some pause. Whenever that happens, it could be a sign that either a large merchant chose a competitor for some of their volume or it could have many other reasons. So perhaps it was just a forex impact, which obviously you have a lot of times in emerging markets, but you never really know. And that's sort of the unsettling part whenever you see a dip. The good news though is that in 2025, it's now back at 145% and it's been actually above 140% for four straight quarters into 2026. So I feel pretty good about the staying power of the customers.

I'd say it's probably something you just have to live with if you're going to invest in a company like DLO. It'll certainly be a bumpy ride. And besides all the macro factors, it's also only natural for a big merchant like Amazon to want to diversify their volumes over time. And as long as DLO offers the best service, they will retain the majority of volume from the largest and most important merchants. That's sort of the framework I would use.

And so even without diversification from larger merchants, DLO is already paying the price of working with the big boys by having to offer discounts. So this will probably be one of the tougher discussion points today, but we do need to talk about the take rate.

And so one of my big problems with payments is that I just I don't see how it's not a race to the bottom in the long run. And I feel like structurally there's no physical reason why there should be so many fees between transacting from one country to another. And so really competing on price seems sort of inevitable to me because payment processing should ultimately be a commodity. And so take rates should decline over time due to competition pressuring a company like DLO's margins. And that's just how I think of it as sort of a pessimist on payments.

But as proof of that, if you look at the numbers, DLO's take rate did go down from 2.9% at a high in 2020 to just.9% today. So less than 1%. It's sort of brutal if you if you just look at the chart and it's probably the most controversial topic whenever it comes to any payment company.

And I think it's generally interesting just because I don't know the answer. I talked to a mastermind member just two days ago and he's also invested through his fund in dlo and I have this bad tendency of always trying to poke holes into the thesis of the companies I like most and it's not that difficult if it's a payment company because as you said you know the take is declining and obviously the CEO Petra he's talking for quite a while now about how that's part of the strategy and basically what's happening here is they do not get pressured by competition what happens is that they want to onboard as much volume as possible to those big merchants and they give them discounts because they want to get as much volume as possible which is why you see these tremendous growth rates in TPV and you could make an argument that what matters are the absolute numbers right now. So that means is DLO making more money than a year ago and they are making a lot more money than a year ago and that happens because you have operating leverage but also you have so much more payment volume going through your system that a decline in the take rate doesn't matter that much but obviously the bare case would be that at some point TPV growth will slow down and you know if there's more competition if you can't upper your take rate again you're just left with you know a low take rate and significantly less growth in the TPV.

And while I say this, I should note that take rates and margins are two different things. And I think that's very important to differentiate. So the take rate is calculated by dividing gross profit by TPV. So the total payment volume. So you could also calculate it with revenue which in some industries makes sense. But in payments a huge chunk of your revenue is just the cost that you basically pass through the system. So the money that you owe to the local acquirer or maybe the card network or the processor and all of those different parties. So I think it's important to make the distinction for the margins because payment businesses like DLO still have quite a lot of operating leverage even when the take rate falls. So the way to think about this is that TPV the total payment volume will always grow the most and then gross profit will grow less because of the take rate decline. But and you know that's sort of the important point here net profits will grow faster than gross profits because of the operating leverage. And that's sort of what you need to understand to still figure out why I believe payments businesses in the long term can still deliver a lot of value.

And perhaps again we should just listen to Pedroan the CEO explaining how he thinks about the issue and why he believes the local is not in a race to the bottom.

>> And we're extremely convinced that we're managing the whole take rate issue the right way. And let me separate take rate from margin. Right? First thing is there's a lot of operational leverage in this business going forward now that we're exiting our investment cycle. Yeah. And there's more to come. So gross profit um revenue TPV should all be able to grow more than opex as we leave the investment cycle further and further back. Now there is a monetization issue which is for every dollar we process you know we're making less and less sense but some of that is by strategic design. We're we're optimizing for TPV growth. We're telling the commercial teams to be both aggressive in the tiering that they offer merchants so that merchants really drive more traffic to us to gain those volume discounts, but we're also trying to make sure that we're not losing deals on price. And the logic is in large part driven by why I think that this is not a race to zero as the bears will try to position it. Right? I'd rather have the merchant relationship be processing his payments adding value for him because I trust that there are a couple of things that will begin to change going forward that certainly will allow take rates to bottom. But I can even theorize why they can raise if I have those merchant relationships, right? Um, so let me walk you through some of those. And so, but but just to be clear, so the strategy is bring the merchants through the door, build the trust, build the relationship, help them grow their emerging market businesses, even if that takes lower prices now because that will give you the volume platform to then work on the monetization levers.

There are three major points that he sort of wants to address. And the first one is simply consolidation. So eventually Pedro thinks that the market will consolidate which would mean that Dlo can transition from being price taker to what he calls a price influencer. You wouldn't go as far as saying a price setter which basically means you know you can up the tail rate because you decide what price this should be but if there are only four to five companies you're in sol of an oligopoly it is easier to increase the pricing as if there are 20 companies that you compete with.

so this might be and I hope it is different for the local and one of the reasons might be that Pedro second point which is that more scale and also to some extent the evolution of AI become more opportunity for differentiation and also fragmentation which basically means there's a lot of friction whenever you have payments in between different countries and I think what he means is that sort of all of this new technology will further accelerate growth but also fragmentation of emerging markets which makes the local even more important.

So for example, the idea would be that AI makes it possible for emerging markets that are not yet at Brazil's or Mexico's level of payments penetration to set up their own payment innovations which would as you said be a net advantage for DLOC because it creates even more markets for them to go into.

Yeah, although I'd say that it's sort of just the nature of the business opportunity for the local and I don't see any competitive advantage coming from that. Not in the same way that perhaps Pedro AR does and if anything I think the more attractive the market opportunity becomes probably you know that's how capitalism work the more competitors will try to get in but then you obviously have the scale benefit of DLO that we talked about.

This sort of goes back at least in my mind to Nick Sleep and his model of scale economy shared which is that DLO can pass on the lower cost to serve that comes from those volume discounts that it gives to its merchants.

If the local can lower its own input costs faster than it lowers the merchants's pricing, well then the net take rate would stabilize or even expand over time while the gross take rate. So the sticker price that basically the merchant has to pay would keep falling.

The problem with this obviously is that there is a flaw to you know cost to serve savings just as there is a ceiling for TPV growth and you can neither save on cost internally nor outgrow the falling take and that's in the end the bearish take.

So ultimately it does come down to the value added services you can deliver or at least the value ad generally and in this case that's most likely a conversion uplift. So if you can sustainably demonstrate that conversion rates are higher with your service then that is obviously going to be valuable to merchants that are routing billions of dollars through your payment rails.

One example is what it's called smart pigs or smart APMS. And what that does is pretty vital to how the subscription businesses generally work.

So, DLO's smart pics product is a software layer that basically sits on top of pics and gives it the ability to charge a consumer automatically and repeatedly. So, basically the same way that a stored card would and without the consumer having to approve each transaction manually. And they did the same conceptual thing for other alternative payment methods as well, which is, you know, why they call it smart APMS and not only smart picss.

And that's sort of one of the major value ads that the local deres especially for companies like Spotify and Netflix.

looking at Dlo's numbers, the conversion uplift is pretty significant. Even if you use credit cards, local processing increases the conversion rate meaningfully. And if you compare that to international card transactions, DLO's local service shows a 20 percentage point increase, which is very very substantial.

Another product that helps with conversion is the local so-called smart routing system. So in any given market, there are usually multiple possible path to basically process a payment. So several different local acquirers or maybe banks the local is connected to and not all of them perform equally well. So one acquirer might approve 90% of a certain car type while another one only approves 80%. And that basically varies by you know many factors. It could be just the time of the day. It could be the car type, it could be transaction sizes and dozens of other factors. So smart routing basically means that DLOC system dynamically picks the best path for each individual transaction to maximize the odds of approval.

And even when a payment fails on the first try, it's often for a recoverable reason. So for example, was a bank glitch or maybe just a timing issue. And then DLO system is sort of built in a way to recognize which failures are worth retrying. So how to modify the next attempts and then they execute on it.

And what DLO does is figure out the cause for that problem and then counter it. So let's assume the problem was a timeout. Then DLO's system recognized that and then tries again in an hour without anyone having to do anything. And if maybe the card used for the subscription was old and is no longer active, then DLO automatically uses the new one which for example you use on your Spotify subscription. So then it knows there's a new card and now it will try that one for Netflix. And if a foreign acquirer is a problem, so for example, Spotify's bank that sends the payment request, then DLO routes it through a local acquirer instead, which it partners with.

And the last product is yet another buy now pay later BNPL product, right? I feel like there's no payment company in 2026 that does not offer a BNPL solution. Although it seems that DLOS is very different from the usual ones because they're not a lender in itself, the credit risk still sits with specialized BNPL lending partners. So it's not on their balance sheet. DLO is only responsible for the connected technology that plugs those BNPL lenders into its merchants checkouts.

So you can basically think of it as you know an aggregator that gives a merchant access to many BNPL providers across emerging markets basically via DLO single existing integration and to provide that technological overlay DLO then takes a share of the revenue that the BNL partners earn. So that's sort of how they make money on that intermediate transaction. So it's not an interest income and DLO does not need to absorb any potential credit losses either.

Assume the answer is no. And to be completely honest, I don't think the mode is in the products or the differentiation. You know, smart APM is nice and it's very valuable to merchants. But in Brazil, for example, the government is already rolling out what's called Pix Automatico, which enables recurring subscription payments that weren't possible without the local before. So over time, there will be innovation that probably in that solve the bear case makes it easier to have payments in emerging markets. And there's still some data advantage to the extent that smart pigs is bundled with success rate intelligence, but it's not really a mode, I would say. you know, it's part of it works slightly better, but you just got to figure out 10 years from now, how much better is it actually and how much can you charge for that.

So, the key advantages that I see are scale, regulation, and fragmentation. So, DLO operates in more than 60 markets, has over 600 local payment integrations and 38 regulatory licenses, and a bit more than it dozen still in process. And as I said in the beginning, it can easily take years until you get those licenses. So if you have 38 of them and you know 12 to 15 outstanding it will take a lot of time until any competitor can copy that.

So when you think about the smart writing feature for example that only works with tons of data and many counterparties to switch to. So the local processes you know 3 and a half billion pay transactions every single year across 40 plus 50 plus markets and it's an advantage that just compounds over time. you know you have better routing and better routing leads to winning more merchants which leads to more volume and then in the end that gives the local better data which again you know the drill improves routing.

How do you think about the risk that these big merchants with very deep pockets will just build payment solutions themselves bring everything inhouse to save this money they would otherwise be paying to DLO. I think I was more worried about that when I first looked at the local some years ago and I don't look at it differently today because of anything that DLO did.

It's mostly that since then I've looked at again close to 90 businesses for this show. Most of them with you and a considerable number of them are actually the local customers and if that taught me anything, it's that opportunity costs everywhere. And I just don't see Amazon or Netflix spending resources. And again, that's money and time on figuring out payment methods in the most fragmented part of the world.

So, Pedro actually said in the latest earnings call that merchants tend to work even closer together with DLO when the business grows. You could look at that differently. You could say, well, the bigger the business gets, the more important it gets, the more sense it makes for them to bring those things inhouse, but that's not what you see.

So, it used to be a merchant coming with a narrow problem like help me fix pigs in Brazil and how I can get money out of that country to now where merchants are basically treating emerging market payments as a core strategic priority across the entire global south. And that's not just Brazil, it's not just Mexico, it's also the other 50 plus markets that the local operates in.

So, you could argue that well, what happens if only Brazil, Mexico, and Argentina matter in 10 years time? The other side of it is how do you not know that there are 10 African countries that will be significantly bigger and more important in 20 30 years time than they are today. I mean I just think of these stories like Singapore and obviously it's a totally different part of the world and totally different starting position but what they achieved in just a couple of decades. If you see anything like that in just two or three of the markets in the entire world that DLO operates in you would have huge potential in the long run.

So these companies that DLO works with, they sort of have an incentive for DLO to not become a monopoly. And it sort of reminds me of our Copart episode a while back. There was this dynamic where insurance companies would split their volumes between Copart and Copart's main competitor, even if Copart was the better operator because they didn't want Copart to become a monopoly with just too much pricing power.

That's a really good analogy. Actually, I think the major difference that I could think of is that the insurance market, so Cobalt's customer base was a pretty consolidated space or is a pretty consolidated space and so it didn't take many companies to agree on that approach and the wider the customer base the more difficult that would be. So it is a potential risk in the future but I don't think it's the same as with Copart at least not 100%. So not so much from a perspective of the customer as a group but more so that a customer individually feels like he's in a better negotiating position when he can diversify volume. That's sort of the problem for DLO and again DLO's customer base is highly concentrated.

So one other risk that I see is that the fragmentation argument just gets weaker over time and we discussed this. So, you know, when there are only four markets and they are all that matter to Netflix, to Spotify, to Amazon, obviously, it will get harder for the local to justify, you know, the fragmentation argument that they currently have and basically telling Amazon, well, you have to pay the If Amazon doesn't care about that, they won't pay up.

So you know that happens again to the most important markets in South America. That's also a problem that I see for DLO. And maybe before we move on another difference is that DLO has taken the opposite approach up until now. So they didn't try to flex their muscle and sort of get the highest margin deals. They prioritize volume and onboarding these large merchants which is why I mentioned that before their take rate had this sharp decline.

So this scale economy shared model also lowers in my opinion the likelihood of customers being afraid of price guding at any point then either you know ship volume somewhere else or do it in house

so the way it currently works is that merchants work with stripe and adion as well as dlo so you know the western players take take the western market and then dlo handles everything related to the emerging markets

and in the end it really comes down to once again I have to say that like 10 times today fragmentation so if the markets stay as fragmented as they are today makes very little sense for stripe or aten to invest a lot of money there compared to projects in the home markets

I mean there's a lot of competition so you know you have a competitor at scale with the local which never makes it easier to get into a new market and you also have to explain to investors why margins will be structurally lower for many many years because of this investment cycle

and when you're a company that makes significantly higher margins than you know the average business investors don't like when that changes and you know it's sort of different when Dlo does it because you know that stock has been absolutely hammered over the last 5 years and we'll probably get into why that happened but it's currently trading at 15 times earnings

and because of that the local is also built differently. So it's much more of a horizontal player where you know Netflix comes around and plucks in and then it's about getting rid of all of the complexity not necessarily through your own tech stack but by just optimizing how to use what you have at hand in those markets

and that could be pics in Brazil could be UPI in India many many other potential methods as well so I guess the point being it's a very different value proposition

and it looks like the DLO Adian story is actually quite similar to that dynamic. I looked it up before our recording here and it looks like Eden has been operating in Brazil for about a decade which is actually longer than DLO.

And so, ultimately, Melly has pretty much won Brazil over Amazon and DLO won it over Audient. And so it might just be their understanding of the market and their product offering being better suited for that market.

We shouldn't double down too much on that narrative though because in the end we still need those western merchants to win market share and you know expand into the markets that DLC is actually operating in.

But when I think about simplifying payments, which is to some extent the delo bare thesis, then I also think of stable coins. So to what extent do you feel concerned that stable coins could be bad for business for DLOC?

Well, DLO launched a product they call stable coins full in April of this year. And what makes this especially interesting for the local is that 2/3 of all stable coins are held in emerging markets basically as a hedge against the local currency falling apart.

The threat for DLO is that either companies will use stable coins themselves to settle transactions or maybe that DLO is doing so but at significantly lower margins with the current high fork spreads basically not existing anymore.

And you might remember that my last mile argument from the remittley episode we did a while back where you know in emerging markets people don't save or invest money in crypto the same way that people in the west do where people you know invest there especially if they have spare money that they don't need right now and in emerging markets it's really different where you know people need that money to constantly pay for things.

So someone in Argentina doesn't want a USDC balance sitting in a wallet. They need pesos in their bank account with the you know tax handle with all of the compliance done and then converting that stable coin into local fiat and actually pushing it into the local way. So you know be that pixil a bank account in Buenosirus all of that is what DLO is needed for.

>> So stable coins basically make the settlement cheaper but you still need the top layer. So everything that actually turns the stable coin into local currency for the customer which in turn actually means it just reduces DLO's cost of settling a payment

right although I should say that this is my working theory and that makes most sense to me but perhaps we'll look at it 10 years from now and it worked out differently and I know that maybe you would take the other side of that bat.

Okay. Okay. Well, before we get to the financials, the incentives and all that kind of stuff, there is one other parallel that DLO has with one of the companies that we covered just recently. And so, just like Caspie, DLO was the target of a short report a couple years ago.

This one, I should say, worked out pretty well because the stock dropped 50% in a single day after the report dropped. And in this case, the short report came from a pretty reputable name, which is Muddy Waters. And it was in 2022. So we all know what happened in 2022 where the market tanked. were a lot of way overvalued companies and you know if you are a short seller you mostly pulled out a short thesis before so there were a lot of those flooding the market and yet I think it's fair to say that by now there just wasn't much to it if anything actually

I mean the claims were that TPV was overstated that the take rate was too high to be realistic back then it was still high not the founders you know mixed up business account with the merchants money and also and that's sort of the last point that insiders sold about $1 billion in stock right after the lockup period that followed the IPO back in 2021.

But I think back in 2021 again most stocks they traded at absurd valuations. So you know selling some stock after the lockup period ended when DLO was trading at a multiple of 350 makes a lot of sense if you ask me.

But you know the other claims that we have seen that are more severe they seem to be outright false. I mean DLO bought ran an independent review with outside investigators and on these specific client funds allegations and the review basically verified that no merchant cash and corporate cash set in separate accounts and matched the bank statements.

And one thing that I should also add and that's pretty astonishing not a single merchant left back then. So the stock 50% the short report was just there. Not a single merchant left the company.

And and so looking at the take rate and how that's developed afterward, I guess I wouldn't be too concerned that there's anything wrong with that either. But jokes aside, I think you mentioned that Muddy Waters mainly compared DLO's take rate to Stripe and therefore argued DLO's take rate was unreasonably high.

But with DLO operating in markets like Argentina, Nigeria and Egypt with FX conversion and installments layered in that is just a structurally higher take rate business, right? And so after all that the three years have passed. TPV went from 10 billion to 45 billion. They do generate very real cash flow. They pay dividends and they're buying back stock.

So things are definitely not really sketchy at all and certainly not as sketchy as the short report would have made it seem. >> I got to admit though that it seemed like the founders did make some beginner's mistakes that sort of I would say invited this sort of attention.

And while the short report definitely lacked substance, there was also a federal lawsuit regarding the local not adequately disclosing as Argentina forex control risk. And it appears that the Argentina operation has been somewhat of a mess since the beginning, especially in terms of how they communicated it.

And I would say the positive effect of that is, you know, that nowadays you have a different CEO. And I don't think it's a coincidence that they took a CFO in Pedro to become the new CEO.

But I would actually, you know, I like that having Pedro as CEO is, I think, the best that could have happened to this company. Pedro AR is a vital part of the thesis. Would you say >> he is, but I want to mention it's not just because he was at Marcato Liber.

>> I do think it is a positive, right? I mean, it looks like he's been there for 24 years. So, he basically saw it go from a small startup to one of the biggest companies in Latin America. And as a CFO, he played a significant role in that.

And he also studied at Oxford and and worked for Bane Consulting. So when you take all that together, he does seem like the type of guy that you want to have as a CEO for a company that you're going to invest in.

>> Especially because it was so clear that he only signed up for this because he believed in the vision of the company. He could have easily, you know, said what was one of the best positions where you can work in Latin America and he also owns about8% of the company in stock at the local.

So this might not sound like much in the beginning, but again, he's not part of the founding team and he only joined 3 and a half years ago. So generally the insider ownership in this company is massive. It's about 33% of the company is owned by the founder and the management team. So there's a lot of skin in the game.

>> And how does that incentive system work? Well, unfortunately, we don't know a lot about the incentive system because while the local is operationally headquartered in Uruguay, it's officially incorporated in the Cayman Islands and that basically means it's legally exempt from, you know, the paid disclosures of a US company or that a US company usually has to publish.

So, I can't really tell you what Pedro Arn is making nor exactly what his incentive program looks like, but what we have is sort of a blended number for the entire management team. So that was about $20 million back in 2024, which was up from about $5 million just 2 years earlier.

And in terms of stock and options, DLO hands out three kinds of stock. So it's options, restricted stock, and then performance units. And the mix, I got to say, doesn't look too inspiring.

I mean, the majority of the bonus is paid and restricted stock for which the management team doesn't need to do anything beyond just sticking around. And it's one of those things that you often point out as something that you don't like to see.

And then the performance-based stock options, they're just a very small part of the overall payout. So since we don't know anyone's individual contract, we still might assume that all of the performance-based options sit with Pedro, but obviously that would be speculation and I think it's highly unlikely.

>> I do want to quickly get back to Argentina. When you say that things have been messy there, what exactly does that mean and how does the macro there impact DLO's business? cuz in the end Argentina is about 20% of latam revenue. So it is not a small portion.

>> Yeah, Argentina is a complicated market. So for a long time it was one of the local most profitable markets which to some extent was because of the complexity and then for many years Argentina had something called which means trap or clamp if you were translated and it's basically regulation about currency controls or exchange rates and all of that sort of stuff.

So, one difficult thing was basically getting money out of the country. And if you're a payments company collecting pesos inside Argentina, but you owe a global merchant dollars outside of Argentina, well, that means you have to get that money out.

>> And because it was difficult, DLOC could charge high fees to merchants for its service of making it possible to be able to transact internationally,

>> right? But you know due to just the fast pace of change in regulations like this it could have been an advantage one year and then it's a disadvantage in the other year. So things change quickly and if you look at the last couple of years and even just quarters you will see just how volatile the margin of the Argentina business has actually been

you know things have settled at least to some extent because of the policy changes that MLE pushed through over time. So he basically got rid of all of the currency controls which of course is good but it's also to some extent bad for the local because that's where they made their money.

So when I have to summarize the case up until now you would basically buy DLO to take advantage of two major tailwinds. the growth in digitalization of emerging markets, particularly LA AM and then just global tech giants expanding into those markets and increasing their market share and further reliance on DLO and so DLO is the best way to play that trend because it has the most scale in those markets, the best relationships, the tech and it's not as vertically integrated as Western competitors which is usually seen as a negative but in this geography it actually can be a benefit because it helps with a more dynamic company and helps them to juggle the regulatory challenges in those geographies.

I think that's uh pretty on point and I think the local will remain a highly volatile stock for a while and in the end the only thing that matters to me is sort of figuring it out whether anything could reasonably disrupt the local status as sort of the main beneficiary of these mega trends and I'm quite certain there will be competition over time as there always is and some customers will probably shift part of the volume to that competition to sort of diversify the volume and while that can create volatility in the short term I also believe that the data advantages as well as also the regulatory advantage of you know having experience in all of those markets I don't want to say that's a mode generally but I do think it's too much to completely disrupt them at this point

and I should say that whenever volatility causes the stock to decline the local conduct strategic share repurchases which is something that I know you and I can appreciate strategic buybacks are something that always are going to win some points with me but it it does look like the last meaningful share repurchase has happened in 2023 and 2024. So, it has been a few years. Is there a new buyback program looming?

>> Well, before I answer this, I want to quickly add that if the thesis eventually turns out to be wrong. My suspicion is that an inability to monetize would be the reason, not necessarily lost volume.

But getting back to capital allocation, as you said, you know, the last meaningful buybacks were in 2023 and 2024, which was about $und00 million in each year. And earlier this year, the board authorized another $300 million buyback program. So I think it was in March when the stock still traded closer to $3 billion. And now it's about 4 billion, but that's still, you know, 7 to 8% of the company will purchase in the next 2 to 3 years. And with the volatility of the local, it might be more than that if they just wait for the right moments and then buy the stock.

So that's one part. And then also beyond the buybacks, you are being paid through a dividend which is about 30% of free cash flow resulting in a yield of about 3 to 4%. >> To be fair, I mean DLO is a relatively assetike business and what that means is there aren't that many reinvestment opportunities. They don't need that many assets to support what they do. So it can make sense to pay a dividend. Although I would rather see that being used for strategic buybacks as well if the stock is as cheap as it seems.

>> I would also favor buybacks but you know I guess part of the reason for the dividends is that the founders are getting paid that way. I mean they have sort of a low salary and I don't think they plan to sell any stock which is also a positive. So they also want to signal to investors, hey we are confident in the ability to generate cash flow and that's why we're paying a dividend plus you know we want to get paid.

What about the M&A front? Do they have any history of making acquisitions? >> Not really. I mean, DLC recently wanted to buy ALA Finance, AA, which is a Kenyab based and Africa focused crossber payments provider that had been valued at roughly $150 million in a 2024 funding round, but the deal sort of took longer than they initially planned. And then Ilo eventually only acquired one asset or sort of technology from that company for about $23 million.

So beyond that case, I think there's pretty much no M&A history or even ambition right now. So if I had to summarize, you have a capitalized business, highly profitable, paying back shareholders through buybacks and dividends. And I think there are worse things than that, right?

But whenever your ordinary tech or payment company is going for M&A, it's probably not going to work out well. So yeah, I am glad that it's not a game that DLO is keen on playing. But how do you think about things on the stockbased compensation front? Are the buybacks actually reducing the share count materially or is DLO issuing so many shares that it basically offsets the buybacks that they're doing?

So I could tell you that stockbased comp is only 02% of revenue which sounds very good at first but that's not how you should look at it because in this business as I mentioned before gross profit is much more important than revenue and SPC measured against gross profit isn't outrageously high either but it's about 5%. So it's certainly not immaterial in the last 5 years the share count has been more or less flat but that obviously should change now the new repurchase program.

All right. Well, how about we uh do some digging in the weeds here and looking at the financials and then talking valuation. What are the metrics and the numbers that matter for DLO that investors should be aware of and that you would look at to keep track of whether DLO is on the right path because this does seem to be a long-term thesis that we'll want to be monitoring.

>> Yeah, I mean it certainly is. And I think the first thing to look at is obviously TPV total payment volume. Last year, TPV was about $40 billion, so up 60% year-over-year. And since 2019, the KGO has actually been almost 80%. And just in the last few quarters, growth has accelerated again after a weak quarter in 2024. So, you see the red trend going forward.

And as I said earlier, you know, TPV will always grow faster than for example, gross profit simply due to the takeway dynamic where the takeway declines. So, the gross profit grows more slowly than the underlying TPV.

generally delocates financials I think you can sort of explain them as looking like the letter of a V. So you know that goes upwards and then it goes downwards and the part of the V that drops is sort of the dynamic that I described where TPV is growing the fastest then gross profit is going slower but then you get to the operating leverage side of things. So while gross profit goes slower than TPV the underlying profits grow faster than gross profits. That's sort of the upward trend of the other side of the V.

I don't know if that helped but maybe you know was an analogy that at least some of you guys resonated with and I would say going to the metrics a good one to track the operating leverage is the ratio of EBIT so you know the earnings before interest and taxes to gross profit because what that measures is basically of every dollar of gross profit the DLO keeps how much survives operating expenses and drops actually down toward the bottom and when the current investments are glance this metric should show a clear upward trend which has already saw it.

>> What about metrics regarding the customer base? I mean, it would still make me somewhat nervous to know that DLO is so dependent on a handful of just its biggest customers and a few different markets. So, are there any trends on that end that you would want to follow with the hope of seeing more diversification?

DLO discloses two metrics for its top 50 merchants that are interesting to check in that regard and that's the average number of countries served per merchant and then also the average number of payment methods served per merchant. So countries per merchant grew by 40 plus% year-over-year and the payment methods per merchant grew about 50%. So that's not yet diversification away from the top merchants, but it does show that the top existing merchants integrate deeper into the ecosystem over time. And you know that's also why net revenue retention stays as high as it currently is.

And in terms of geography, you already see a slow trend toward more diversification. I mean in 2023 for example a couple years back the top three markets made up 55% of revenue. Now it's 50%. you know it's slight improvement I would say on that front and obviously that's not because the other markets are shrinking but because the other markets are outgrowing the top three.

>> Okay, I think it's that time where you tell us what the valuation is for this business and and how to think about valuing it and whether it should be an addition to our intrinsic value portfolio.

Well, today instead of forecasting revenue, we care about TPV and the net take rate for the top of our model. So, I have TPV growing at 38%. So, close to 40% through 2028 and then decelerating to 20% after that for the next 2 to 3 years. And then DLO's own guidance for 2026 is still 60% TPV growth. And considering past growth rates and the still low penetration overall, I do think I cut it here quite a bit. And we could see more growth than that.

And I have the check rate decrease going on for a while. Although I wouldn't be surprised if we see a sort of stabilization in the next few years and perhaps even quarters. Although I know that you would probably look at that a bit more skeptically. But some of the calls and interviews that I listen to from Pedro AR made it seem like he thinks bottom should be coming soon. But you know I'm a skeptic too. So I still have the treate decreasing to slightly below 7% within the next 5 years.

And these assumptions are basically a continuation of that V dynamic that we just discussed, right? I mean TPV grows fastest but the take rate declines and thus gross profit grows slower. And so we see that DLO is guiding for about 30% gross profit growth for 2026. And then you're assuming a gross profit keer compound annual growth rate of 19 to 20% looking forward.

>> Right. And you know that basically starts the other side of the V to stay with that example where you know the investment cycle is more or less done or at least it has peaked. So we should see operating leverage push the EBID and also the EBIT margins up resulting obviously more profits so that net income is compounding at least a percentage point or two faster than gross profit.

And honestly a surprisingly part of the return will likely also come from you know dividends and the buybacks. So that's the sort of special thing about your local. It's not only growing fast, but it's also a cash printing machine. And if it keeps the 30% payout ratio, which is planned, I should say, and keeps buying back shares at a similar pace to what has been announced recently, you could easily have 700 to $800 million of buybacks over just the next 5 years.

And given that I expect quite a volatile stock and the local management is good at allocating capital and has proven that in the past, I think they will execute those buybacks at pretty good prices. So I assumed a share decline rate of about 2.5% per year which would some would be $17 to $18 per share.

>> So if we take all that together and we try to be conservative by expecting a low teens exit multiple and that's what I'm seeing in your model right now. Where does that leave us?

>> The expected return under these assumptions and with a margin of safety of about 20% is about 22% from today's levels. That's the case in the base case I should say. So I also model a bear and a bull case as we always do. I won't go through them here because I think that would just be a bit too many numbers for today.

But I can tell you that in the bare case when which growth is still quite reasonable but the margins start declining instead of growing the stock can quickly half from today's prices. >> And so what would happen is you basically lose the Vshape and instead of EBIDA and profit margins outgrowing gross profit, they are going to be pressured just like gross profit is. And so it's a scenario where basically you don't have any operating leverage kick in

>> which to be fair is sort of antithetical because we already see the operating leverage kick in right now >> and with that scenario again where does it leave us overall with DLO? As I said earlier, I own Dlo in my personal portfolio and I believe my average cost base there is close to $10 and right now it's trading for, you know, about $14 to $15. But I still consider it quite cheap. So just due to its volatility and from owning it for a while, I know there's a good chance that there will be plenty of opportunities to probably also buy it after some form of bad news or fear in the market. So I guess my idea would be to buy a small position today also because we lack cash and then buy more on weakness.

>> It's probably no secret that I have hesitations about payment businesses, but the metrics you walk through sound very promising and I can't see why the overall story is compelling too in terms of emerging markets growth and international companies expanding their market share in emerging markets which would likely lead to more reliance on DLO. And so if you have it in your personal portfolio, Daniel, that I know you've done a ton of homework on the company to be recommending it.

And so we've talked about having a goal of owning 15 to 20 companies in the portfolio. And at the moment, we have exactly 15. So I don't necessarily feel like we have to add more businesses just for the sake of diversification. But I also don't think that we are at such a large number of companies to keep track of that we can't do so responsibly between me, you, and our colleague Kyle. And if we make it a 2% position with Wise also being a 2% position, my question for you is whether you think that's enough exposure to attractively valued payment companies, sort of ignoring whatever biases I may bring to the table, right?

my question for you is whether you think that's enough exposure to attractively valued payment companies, sort of ignoring whatever biases I may bring to the table, right? because I know you like these businesses a lot and I know Kyle does too and 4% overall portfolio exposure is not a massive amount and I know you and Kyle for example both like Wise and like I said I'm pretty sure Kyle is going to be on board with DLO and I guess the question is if you didn't have my hesitations to hold you back would you actually argue for making it an even bigger position

>> in the long term I might see us establishing a larger position than 2%. Yes, but I think right now I feel very good about that sizing. Again, I sort of have my own biases going into this, especially because of my lower cost base and you know, my own portfolio, I probably have an anchoring bias, which I sort of struggle with quite often. So, yeah, I feel like 2% now and if we actually do see the stock going down significantly at any point without changes in the business, I think we can, you know, buy another 2% in that position.

But we also want to be mindful of our exposure to emerging markets which is not too small if we think about Mac Libra, if we think about new bank and then also the local. So yeah, I think I'm pretty fine with that.