Dlocal Ltd (NASDAQ: DLO) has seen its share price tumble this week after a scathing report from Muddy Waters (the short seller, not the Hoochie Coochie Man). The explosive report alleged that the company is “likely a fraud.”
But what does Dlocal do, and is DLO stock a good investment?
What is Dlocal?
DLocal Limited operates a payments platform in the United States, Europe, China, and internationally.
Its payments platform enables merchants to get paid and to make payments online. The company serves commerce, streaming, ride-hailing, financial services, advertising, software as a service (SAAS), travel, e-learning, on-demand delivery, gaming and crypto industries.
DLocal Limited was founded in 2016 and is headquartered in Montevideo, Uruguay.
How Does Dlocal Make Money?
The company earns its money by charging fees for its payment processing efforts, with the majority of these revenues coming from the Latin American region. For example, the business’ most recent quarter saw Latin America account for 78% of total revenues.
Additionally, the business can make money from changes in currency exchange rates.
DLO Stock Financials
Following the impact of the Muddy Waters report, DLO stock is now down by more than 70% across the year to date. It had fallen by around 35% since the start of 2022 before the report landed.
The company’s most recent quarterly earnings, which came out earlier this week, showed that revenues had increased by 63% year-on-year to climb to $111.9m. This followed revenue growth across all regions.
Cost of services increased too, climbing from $34.2m to $58.0m. Even so, gross profit rose by 56% to $53.9m.
Consequently, Dlocal said its profit for the period rose from $19.7m to $32.3m.
At the end of the period, the company had cash and cash equivalents of $542.3m, up from $336.2m at the same point 12 months prior.
Unfortunately, the veracity of these financials has been called into question by Muddy Waters’ new report.
Muddy Waters on Dlocal
The key areas that Muddy Waters has taken issue with are Dlocal’s reported total payment volume (TPV) and take rates.
It points to significant inconsistencies in the former, noting that the business claimed that its 2019 cohort of new merchants generated TPV of $471m in 2019. However, the report states that Dlocal said a year later that the TPV for the very same period had dropped by 88.1% to $56m.
Then the report suggests that revenues are being “materially overstated” as FX gains sound “too good to be true.”
Finally, Muddy Waters has pointed out that senior staff are leaving the company and selling their stock. At least five senior executives have stepped back in the last 12 months. Additionally, it noted that senior staff had sold more than $1bn worth of stock in Dlocal’s first five months after IPO.
Dlocal released a statement commenting on the report, stating:
“The report contains numerous inaccurate statements, groundless claims and speculation. Short seller reports are often designed to drive the stock price downwards to serve the short seller’s interests to the detriment of the company’s shareholders.
"We caution shareholders from making investment decisions based on this report. Dlocal will rebut the allegations in the appropriate forum in due course.”
DLO Growth Potential
DLO's offering is particularly catered towards improving outcomes for merchants dealing with international transactions in emerging markets. It’s a space in which the company has found itself working with some major players, including serving Microsoft (NASDAQ: MSFT) for transactions in Nigeria and Chinese ride-hailing app DiDi in Argentina.
One of the reasons that the company performs well in this regard is its openness to alternative payment methods, which may be popular in specific geographies but not known to merchants from overseas.
For example, Dlocal allows payments from Boleto to be processed. This is a Brazilian payment system that involves using vouchers instead of credit or debit cards. This makes the method very popular for people who don’t have a bank account, a community some 55 million strong in Brazil.
By catering its offering to local methods in new geographies, Dlocal aims to make itself an important asset to large merchants. Its services are available in an expanding number of countries too.
The company’s most recent quarter saw it expand into Nicaragua and Saudi Arabia, making it available in 39 countries overall. This gives the business plenty of scope for growth into new geographies, and further expansion is planned in the next year.
Is DLO Stock a Good Investment?
The key question when considering whether to invest in DLO stock right now is – can you trust Muddy Waters? Investors might be tempted to try and pick up DLO stock on the cheap after the research outfit has stormed in and wreaked havoc.
However, Muddy Waters has a history of exposing serious fraud and accounting issues at public companies. For example, the business outed Canadian-listed outfit Sino-Forest Corporation for fraud in 2012. That eventually led to the business filing for bankruptcy.
Just days ago, analysts were talking about DLO as an attractive growth stock. It seemed to be swimming against the tide and outperforming competitors. It seemed like a profitable business with room to grow.
However, those perceptions may have been built on foundations of sand. It’s unclear how damaging Muddy Waters’ report will be over the long term, but it will be hard for the company to bounce back if the allegations lodged turn out to be true.