Why DLocal's Toll Bridge to Emerging Markets is a Buy at 30% Undervaluation

The global payments landscape is undergoing a seismic shift, driven by the digitization of commerce in emerging markets (EM). DLocal (NASDAQ:DLO), a payments infrastructure leader, has positioned itself as the digital toll bridge for cross-border transactions in high-growth regions like Africa, Latin America, and Asia. Despite achieving 35% YoY revenue growth and stabilizing margins in Q1 2025, the stock trades at a 30% discount to its peers. This undervaluation, coupled with secular tailwinds in EM economies and a defensible moat, makes DLocal a compelling long-term investment.

### The Toll-Bridge Model: Network Effects and Regulatory Moats
DLocal's business operates like a digital toll road: it charges fees (take rates) on every transaction processed through its platform, which aggregates local payment methods (e.g., Nigeria's Flutterwave, Brazil's Pix) and connects them to global merchants. This model mirrors Visa/Mastercard's network of banks and merchants but with a critical twist: emerging markets' fragmented regulatory environments and lack of universal payment rails create a first-mover advantage for DLocal.

Here's why its moat is durable:
1. Regulatory Complexity: Navigating local licensing, currency controls, and compliance in 150+ markets is prohibitively expensive for competitors. DLocal holds 23 payment licenses, reducing reliance on third-party processors and enabling higher margins.
2. Network Effects: As more merchants and consumers use DLocal's platform, it becomes the default gateway for cross-border transactions. Its TPV grew 72% YoY (constant currency) in Q1 2025, amplifying economies of scale.
3. Local Payment Method Dominance: DLocal integrates over 900 payment methods, including cash-based solutions in Africa and mobile money in Kenya. This depth of integration is unmatched by Visa or Mastercard in frontier markets.

### Margin Stabilization: A Definitive Turnaround
DLocal's Q1 2025 results marked a critical inflection point in its margin trajectory:
- Gross Profit Margin: Improved to 39%, up from 34% in 2024, driven by higher-margin frontier markets (e.g., Chile, Colombia) offsetting headwinds in Brazil.
- Adjusted EBITDA Margin: Expanded to 27%, a 700-basis-point jump YoY, with operational leverage from AI-driven cost savings.
- Free Cash Flow (FCF): Surged 200% YoY to $39.7 million, enabling a $150 million extraordinary dividend—a signal of financial health.





### Strategic Partnerships: Expanding the Toll Road
DLocal's partnerships amplify its reach and defensibility:
- PayPal: A 2023 collaboration lets PayPal merchants access 40+ EM markets via DLocal's platform. This eliminates the need for local entities and reduces tech debt, directly boosting DLocal's TPV.
- Juspay (June 2025): A deal to integrate DLocal's 900+ payment methods with Juspay's orchestration platform unlocks B2B2B payment flows in India and Southeast Asia.
- Zepz (WorldRemit parent): Enhances cross-border remittance efficiency in Africa, a $200 billion market with high unmet demand.

These alliances mirror Visa's ecosystem of banks but in markets where Visa lacks local payment infrastructure—giving DLocal a unique edge.

### Valuation: 30% Undervalued, with 200% Upside Potential
At $10.20/share (June 2025), DLocal trades at a 16x forward P/E, far below its 5-year average of 48x. Key metrics:
- EV/EBITDA: 9.5x vs. a 5-year average of 35.5x.
- Consensus Target: $12.45 (22% upside), but bullish analysts like JPMorgan see $18/share.
- Dividend Yield: 5.1% post-Q2 payout, signaling confidence in cash flow.

However, investors should note that a historical backtest of buying on earnings announcement dates and holding for 30 days from 2020 to 2025 yielded a total return of -58.20%, underscoring the significance of the recent margin turnaround and strategic alliances in altering DLocal's trajectory. This historical underperformance contrasts with the current fundamentals, making the current valuation a compelling entry point.



### Why Now? Secular Tailwinds and Compounding Potential
1. EM Digital Payment Growth: EMs will account for 70% of global e-commerce growth by 2027, per McKinsey. DLocal is a pure-play beneficiary of this shift.
2. Trade Fragmentation: Geopolitical tensions are driving businesses to localize supply chains, increasing demand for cross-border payment solutions.
3. Moat vs. Visa: Visa's dominance in developed markets is unchallenged, but DLocal's $9B+ TPV run rate in EMs is a growth engine Visa can't replicate.

### Risks to Consider
- Currency Volatility: Argentina's FX swings boosted Q1 margins but are unpredictable.
- Regulatory Delays: Licensing in new markets (e.g., Egypt) could lag expectations.
- Competition: Local players like Flutterwave or Paystack may erode margins.
- Historical Earnings-Based Strategy Risk: A backtest from 2020–2025 showed that buying on earnings announcement dates and holding for 30 days resulted in a -58% total return, with a maximum drawdown of -70.18%. This underscores the importance of recent margin improvements and strategic partnerships in mitigating past underperformance.

### Conclusion: Buy the Toll Bridge at a Discount
DLocal's 30% undervaluation and 27% EBITDA margin expansion create a rare combination of safety and upside. Its toll-bridge model, fortified by regulatory moats and strategic partnerships, positions it to dominate EM payments for decades. With a 22% upside to consensus targets and 5% dividend yield, DLocal is a high-conviction buy for investors seeking long-term compounding.

Final Verdict: DLocal is a “Buy” with a 12-month target of $14/share, supported by margin expansion, EM tailwinds, and a fortress balance sheet. The risks are manageable, and the rewards—both in growth and valuation recovery—are substantial.