Equity Intelligence: dLocal (DLO): The Margin Illusion and the Structural Mispricing

Equity Intelligence: dLocal (DLO): The Margin Illusion and the Structural Mispricing

November 13, 2026

dLocal is a payments company that lets global merchants, mostly large software, ride-hailing, and e-commerce names, collect payments across more than 40 complex emerging markets in Latin America, Africa, and Asia through one API, one platform, and one contract. It shields those merchants from local tax, foreign exchange, and regulatory friction through proprietary smart routing, and it claims up to 1.2% additional revenue for merchants through higher authorization rates. Merchant stickiness is exceptional: net revenue retention was 153% as of the second quarter of 2026.

The market prices dLocal at roughly 12 times forward EV/EBIT, a multiple usually reserved for shrinking legacy businesses. We think that is a mispricing, and the third quarter of 2026 just validated the core of the case. Our price target is $22.50, 63% above the current price of $13.76.

The thesis: the market is watching the wrong number

The bear case on dLocal is the take rate. Gross profit divided by total payment volume has fallen from about 0.99% a year ago to 0.72%, and the market reads that compression as a loss of pricing power. That reading mistakes a mix shift for a margin problem.

Local-to-local flows, where dLocal processes a payment entirely inside one country, now account for 61% of total payment volume. Local volume carries a lower take rate than cross-border volume, so as local volume scales, the blended take rate falls by arithmetic. What matters is the absolute dollars: a 0.72% yield on $18.3 billion of quarterly volume generates far more gross profit than a 1.2% yield on a much smaller cross-border base. The take rate has now held flat at 0.72% for two consecutive quarters, and gross profit reached a record $132 million in the third quarter, up 28% year over year.

The second half of the thesis is operating leverage. dLocal spent heavily in a 2025 investment cycle, and management said those costs would scale. The third quarter proved it: operating profit climbed 37% year over year to $76.2 million, or 58% of gross profit, up from 50% in the second quarter and the highest conversion since the fourth quarter of 2023. Incremental gross profit dollars are now flowing almost entirely to the bottom line, because the infrastructure is highly automated and needs minimal additional operating expense to process volume surges. Adjusted free cash flow was $99.1 million in the quarter, up 163% year over year, a conversion rate above 125% of reported net income. Maintenance capital expenditure is near zero.

Q3 2026: the inflection confirmed, with a blemish

The third quarter, reported Thursday after the close, scored Bull case on our framework, with one clear caveat.

• Total payment volume $18.3 billion, up 77% year over year, the fourth consecutive quarter at or above 70% growth and the eighth straight above 50%. That is well above the 50% to 60% full-year guide.
• Gross profit $132.0 million, a record, up 28% year over year, just above the 27.5% high end of the guide. Take rate 0.72%, flat versus the second quarter.
• Operating profit $76.2 million, up 37% year over year, 58% of gross profit. The second-half operating leverage inflection management promised has materialized.
• Earnings per share $0.23 diluted, a record. Net income a record $68.0 million, up 31% year over year.
• Revenue $398.0 million, up 41% year over year, missed consensus of $407.24 million by about $9 million, and was flat versus the second quarter’s $399.7 million. That is the blemish, and it is why the stock fell after hours.
• Guidance: total payment volume tracking at the upper end of 60% to 70%, gross profit at the middle of 25% to 30%, but operating profit now tracking at the lower end of 27.5% to 32.5% on foreign exchange headwinds in Brazil, Mexico, and Argentina.

Two caveats sit inside the gross profit beat. Part of it came from one-offs: a Nigeria cost recovery, foreign exchange hedge gains, and lower Argentina advancement costs. And the take-rate floor at 0.72% is two quarters of flat readings, not a floor management has declared. On the call, there was no defensive language on volume discounting: the take-rate story is mix, not price cuts. Sequential gross profit growth was led by Africa and Asia, so the diversification story is now driving the incremental dollars, even though legacy Latin America still dominates the base.

On capital returns: dLocal repurchased 9.1 million Class A shares for $120.1 million under its $300 million authorization, about 40% used, with about $180 million remaining before it expires in March 2027. A new $150 million holding-company credit facility adds buyback liquidity without stranding cash in local subsidiaries. Earnings per share grew about 35% year over year, faster than net income, because of the buyback.

Valuation: how we get to $22.50

Our price target is $22.50, based on 18.0 times forward EV/EBIT on estimated next-twelve-months EBIT of $338 million, which assumes 30% growth on the trailing baseline. That 18.0 times multiple sits below dLocal’s historical median, deliberately, to allow for emerging-market foreign exchange and regulatory risk. At $13.76, the stock trades at about 12 times forward EV/EBIT. The market is pricing dLocal as if the Base case were the whole story, with no credit for the geographic expansion now scaling in Africa and Asia.

Download the dLocal deck (PDF).

Disclosure: I currently do not hold a position in DLO.

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