Transcription
Why invent mediocrity when you can copy genius?
In today's video, I do want to touch on DLO, one of the big potential multibaggers that I personally own in my portfolio. It's a company that honestly does deserve way more coverage. I've been talking about this company for quite a long time and it's nice to see that more and more people are starting to talk about this company. It's a high-quality fintech company in Latin America, but does operate a payment platform, payment processing platform in the emerging markets, more specifically the global south.
Now, DLO is a company worth $4 billion. Its CEO right now is Pedro Arnal, previously CFO of Mercado Libre. I'll talk a little bit more about him and I'll also show you a little snippet from a recent interview. It's in Spanish, but there are English subtitles. DLO is a company with a trading P of 28.6 times, forward P of 19 times, price earnings to growth of 0.9. This is a company that is profitable today. Okay, it's a company that is still expected to grow quite rapidly top and bottom line compounded for the next two years. And again, I repeat here, only $4 billion in market cap. For those that are unaware, more than two-thirds of global growth over the next decade will come from emerging markets.
And with that, I do want to play a little clip from Pedro's latest podcast. This is exactly what I like in a CEO, especially a CEO of such a small company, but a small company that plays in a huge, huge global market. And so before I continue, if you enjoy this type of videos, hit the thumbs up button, especially also the notification bell so you don't miss any of the future videos and the live streams. And if you want to support me even further, do check out the link down in the description and in the pin comment, "The 10 Best Stocks to Buy Now" or go to cotchinvestor.com/cotchinvestor. Thank you very much.
So, a bit more about Pedro. This here is Pedro Arnal. He has spent 23 years and 9 months at Mercado Libre. He started back in 1999 as VP of marketing and sales. Then in 2003, he went to become VP customer operations for 3 years and 10 months. Then became VP planning, treasury, and investor relations. The company also went public during that period. And then he ended his career at Mercado Libre being EVP and CFO for 12 years and 3 months. He's currently CEO of DLO for the past two years and 7 months. And you know me, I love Mercado Libre. And yes, it did play a huge part in me actually keeping and investing way more into DLO when I heard that Pedro will become the CEO of the company.
Now, in the most recent quarter, these were the results. So, TPV, revenue, and adjusted EBITDA were all growing above 50% year-over-year. TPV actually grew 53% year-over-year, revenue 50%, gross profit 42%, adjusted EBITDA 64% year-over-year. Net income did drop year-over-year and quarter-over-quarter. Growth impacted by the Argentine peso devaluation and related expatriation cost. They have reduced their Argentinian bond position by over 80%. And free cash flow was up 156% year-over-year and 22% quarter-over-quarter.
Now, the story here, of course, around DLO previously was, well, take rates are high, but take rates will be coming down, and so that's bad for the business. But in the meantime, we have here TPV still growing above 50% year-over-year for the last three quarters. And as we look at gross profit margin and gross profit, this is when the stock got completely crushed because not only was gross profit margin going down, but gross profit dollars were going down here as well. After that, we did see a recovery happening. They were still investing quite a lot in the business. They were investing for the future of the company, as we've just discussed. He's not thinking about short-term actions. He's thinking decades out, which is exactly what you should be doing when you see this type of opportunity.
Now, you might say, "Okay, cool. Gross profit dollars kept on increasing. But why is gross profit margin coming down?" Well, this happens, of course, when we go back here. You see gross profit went up 42%, revenue went up and grew faster than that, which is why you're getting this little decline right here. And yes, they kept on talking about the same thing again and again: take rate will continue to come down a little bit, but TPV, total payment volume, should continue to go up and up and up, and that would, of course, mean that gross profit dollars continues to go up more and more.
More recently, they were at a Goldman Sachs analyst conference. I already covered this in the portfolio update, but for those that missed that, here it is again. So, management believes high levels of TPV growth are sustainable due to the vast addressable market and diversified growth vectors. They anticipate that TPV growth will continue to sufficiently offset take rate compression, leading to very healthy gross profit dollar growth and strong EBITDA and earnings growth, potentially reaching or exceeding 75% adjusted EBITDA to gross profit margins in the midterm. Despite inherent emerging market volatility, increased scale and diversification are expected to smooth the impact of country-specific weakness, such as the anticipated slowdown in Egypt. So here again, they're telling us, we are fully aware of what's happening, but these are the steps that we've taken, and we think that the business will continue to grow and grow in a very profitable way as well.
Now, during that podcast, he did talk more about DLO. He also talked about Mercado Libre and talked about the global south. So, he describes DLO as a middleware layer that connects global companies with local payment systems in emerging markets or the global south. The company's main competitive advantage is its operational excellence in navigating the complex and varied payment ecosystems in these regions, which often involve cash, digital wallets, and local systems in addition to credit cards. He also mentioned that DLO is exploring the use of blockchain, specifically stablecoins, for cross-border settlements and is using AI to improve internal operations. He views, of course, the one DLO API, which is just one API, as a not a vertical integration type of company like Adyen, or should I say, vertical solution company like Adyen or Stripe. They're seeing themselves as a horizontal one, which is why that one API works all around the world with companies like Netflix and smaller companies in Egypt or other countries in Africa.
On investing in the global south, Pedro Arnal's investment perspective is focused on the long-term. He believes that the global south, including Latin America, parts of the Middle East, Asia, and Africa, is where the real growth opportunities lie due to favorable demographics, population growth, and their position on the technology adoption curve. He contrasts this with the short-term pessimism that financial markets may show towards these regions, emphasizing that a long-term view reveals the immense potential. He also advises that for this type of investment, it's more strategic to allocate capital to professional funds rather than attempting to invest directly. I'll include the podcast in the description in the pin comment as well, but I did plug it into Gemini to see where exactly he talked about specific things. So, here are the timestamps.
So, he predicts that there will be a significant consolidation in the fintech space over the next 5 years, with many companies disappearing. He notes that while DLO is open to a buy versus build strategy, merging different technology stacks and company cultures is challenging. This suggests that DLO's growth may involve strategic acquisitions. He reiterates that DLO's primary strength is not just its technology, but its operational excellence and underground teams in over 40 markets. This local expertise in handling different payment ecosystems is what allows them to act as an effective middleware layer for global companies entering the global south. He also explained that a company's core value is providing a single simple integration for merchants, which then gives them access to many countries without a complicated user experience.
And so right now, looking at the stock, of course, after the last earnings report, the stock shot up. We went to $16.50 or so. Then we've seen a pullback also after the secondary offering that happened. This was a buy the dip opportunity like there is no tomorrow. So the stock did rebound. We did close that small gap right here. And now we're back to these levels that we've seen at the start of the month. Is it expensive? I don't think it is. Like I said in yesterday's video, I will continue to accumulate more shares because yes, again, $4 billion in market cap, fast-growing company, profitable, huge total addressable market, good leadership, plenty of tailwinds. What's not to like? What's not to like? Yes. Yes. Yes. This has been a volatile ride. I agree. But this is a company that is expected to generate just over a billion dollars in revenue for this fiscal year, and then $1.5 billion in fiscal year 2027, still growing 21%. I think these numbers are also a bit conservative there. So again, when you look at the numbers, when you look at the size of the company, when you look at the growth rate, the profitability, don't forget, starting next year, they will use a portion of that free cash flow and pay a dividend. Yeah, I would have loved buybacks, but fine, if you want to pay a dividend, pay a dividend. That doesn't mean that they're not growing. They are growing, and they are also paying a dividend. But you put all of that together, and yes, I do think that you have here another gem.
Now, yes, we talked about a lot of fintech players on this channel, right? But most of the fintech players that we've talked about are usually US players. Adyen, of course, is a European one. But yeah, this one again, I like the Latin American market. I like emerging marketplaces. Actually, we've talked about Grab, we've talked about Sea Limited before. We've talked about Coupang, Alibaba. Okay, Alibaba is more of a global player here. But DLO, Mercado Libre, Nu Holdings, great companies, great companies that yeah, were created in South America. Great companies, great leadership, total addressable market is huge. Execution has been incredible. And so, yes, I went with these types of players. Although I did own Nu Holdings before. For those that don't know, I had Nu Holdings before. I just wanted to consolidate everything into Mercado Libre. Now with DLO, that's about it. I love it. I think the upside here is quite immense for the long-term investors because yes, management is thinking about the long-term potential of this company, not the short-term quarterly results.
And so, all in all, that's about it for me in this video. For those that are shocked, what this stock was worth $62? Yes, but this was back in 2021 where everything went up and up and up like there's no tomorrow. So don't focus on this right now. Focus on the business. Focus on the financials and the road ahead. That's about it for me in this video. Hit all the buttons. We'll see each other in the next one. Bye-bye.
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