Why DLocal stock plummeted today
Volumes are soaring, but profits are falling.
Stocks of financial technology (fintech) companies DLocal (water -25.59%) It collapsed on Wednesday after the company released its first quarter 2024 financial results. As of 12:15 PM ET, DLocal stock was down 24%.
DLocal is losing pricing power.
DLocal primarily makes it easier for companies to do business without worrying about foreign currency exchange. In terms of volume, business is booming. In the first quarter, the company’s total payments increased a whopping 49% year-over-year to $5.3 billion, which isn’t bad. Unfortunately, as we’ll see later, this didn’t really help the business.
As a small company, DLocal carries customer concentration risk. By 2023, 60% of the company’s revenue will come from its top 10 customers, with one customer accounting for more than 10% of its revenue. One of our large customers renegotiated its contract with DLocal in the first quarter, resulting in lower take rates.
DLocal’s first quarter operating income was just $27 million. This represents a 32% decrease in profitability compared to the same period last year and is in stark contrast to the 49% increase in payments. This shows just how big the transaction decline rate is.
Rising risk-reward scenario?
DLocal’s management doesn’t seem worried. It plans to leverage its balance sheet and low stock price by authorizing $200 million in stock buybacks.
To me, this enhances the interests of DLocal shareholders. On the one hand, the company is still growing and highly profitable. It’s not that serious. And if management is correctly assessing the severity of the first quarter’s problems, buying back shares here could be good for investors.
On the other hand, if DLocal’s management is at fault and this is an early sign of a larger trend of increased competition in the fintech space, the company could find itself in a difficult situation by using its limited resources to buy back shares.
Considering how often this happens, I’d say investors today are a bit overreacting. That said, investors will likely want to closely monitor the competitive environment and DLocal’s key financial metrics in the coming quarters. Because this could become a bigger problem.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
