TIP834: DLocal (DLO): Multibagger Potential with Decade-Long Runway w/ Daniel Mahncke & Shawn O’Malley

You're listening to TIP. Welcome back folks to the Investors Podcast episode 834 and the last stock IPH T-Shon was Pindu Ado by many measures the largest e-commerce company in the world trading at a low single digit earnings multiple and with about 60% off the market cap in cash. Fascinating company and opportunity, one of the most surprising things to me was the connection to Buffett and Berkshire and today's company I don't think has any surprise connections to Buffett that I'm not aware of. I wish it would but unfortunately it cannot offer that today but it's yet another name with lots of growth, high margins, trading at a mid-teen multiple so slightly more expensive but still relatively cheap I would say and also with a lot of cash on the balance sheet although it's not 60% off the market cap this time. And it's earlier in its life cycle so we could have a company here that generates exceptional returns for maybe decades to come. That's the idea. Since 2014 with more than 200 million downloads we have interviewed the world's best investors studied deeply the principles of value investing and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value investing accordingly and sharing everything we learn with you. This show is not investment advice, it's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own and they may have investment in the securities discussed. Now for your hosts, Sean O'Malley and Daniel Manca. For those who have followed along with the investors podcast you might know that Daniel and Kyle alternate on pitching me their favorite new stock idea each week so we can find opportunities for our intrinsic value portfolio of stocks that we manage which I should mention if you want to check out the portfolio, it's linked in the show notes below and updated weekly. You can also get updates on our portfolio for free by signing up for our intrinsic value newsletter and you can find that in the show notes too or just by going to the investorspodcast.com. I should mention that more often. I got a lot of questions all the time about where to actually find the portfolio that we always talk about but there's one more thing that we could say so maybe you want to complete our little advertising campaign here in the beginning and bring up our New York City conference. It's great that you bring it up. We'll be hosting our second and much larger intrinsic value conference in Midtown Manhattan this September on Saturday the 19th and if you want to join us and network with a great group of investors you can head to intrinsicvalueconference.com to purchase your tickets before they sell out and prices are going to increase over time ahead of the event so the sooner you purchase the better the deal you'll get. All right well today Daniel it's your turn to make a pitch and I got to say when I look at D-locals headline numbers and valuation I do see why you want to cover the company. It's growing revenue at 50% plus yet it's trading at 15 times earnings so that is a pretty nice setup but before we get further into the numbers you got to give me some background on what we're looking at here today because I don't think this is your average payments company. No it's not otherwise I also wouldn't have bought it because I know you're not the biggest fan of payments companies but I think there's a major difference between most companies that immediately come to one's mind and D-local is not one of them so for example it's a B2B business so business two business meaning they have big merchants that they serve and it's operating in emerging markets but it's good to know that it's customers are all companies that we know quite well so you have these global giants like Amazon, Meta, Netflix, Uber, Alibaba, also a Pinduador and all these sorts of companies that we know well and where you have the feeling well if those companies choose D-local as their main payment provider in that part of the world I assume that will make it a bit more attractive for you to look at this company today. Yeah that's probably true you would think these companies surely must do their due diligence when it comes to who they trust with around billions of dollars of payments through so that definitely gives this business some credibility but maybe you want to begin by just giving an elevator pitch on what D-local does and how it got started because I was suspect very few people in the audience are going to be familiar with the company. So the story starts in Uruguay in 2016 where a handful of people founded a company called AstroPay and in contrast to D-local AstroPay was a consumer facing companies and not business to business and it basically offered prepaid cards and payment methods that enabled people in Latin America and also Asia to some extent to pay on international websites when their local cards didn't work so I know it's difficult for us to sort of imagine and we talk about this before the show but you know not the entire world runs on visa and mastercard and they are you know accepted essentially anywhere in the west but that's not necessarily true for most emerging market payment solutions and that's sort of where the nation the market was that AstroPay and then later D-local tried to go after. It seems to be yet another story of emerging market founders figuring out that there's a problem for the people in their country or for the region they live in and then coming up with a solution that is at least partially inspired by the tech giants of North America in Europe and then adding their own innovative twist to it to complement the local economy and so that's very similar to what we've seen with New Bank and also Mercado Libre. Yeah I think that's a good way to describe it so what the founders realized over time is that generally the B2B market is just much more attractive than the B2C market you know most farmers is obviously staying within the country which means that the use case for AstroPay wasn't that massive and also it's just much harder to target tens of millions of individual consumers than you know just a couple dozen of these large companies that we discussed. And that's how they realize that the bigger opportunity is probably going to be in B2B offerings and so then they've founded D-local. Yes and no also to some extent because they did realize that the money is in the B2B offering but D-local was already a part of AstroPay so it was basically a subsidiary that they were already working on but then in I think it was 2016 they spun it off so you know probably they saw the potential for this to become a much bigger company at some point and that's what they did it and I think you know looking at it today it's fair to say that they were right D-local became the first URGAN unicorn ever and perhaps I should imagine that Unicorn is a privately held startup company valued at over one billion dollars I'm not sure if I needed to define this but I can imagine there may be some people out there thinking of I don't know mythical horse like creature which is to be honest completely fair but not the case when I talk about unicorns here on this show so anyway in 2016 D-local was still in the value early earnings but you know that was sort of the starting point for the company that we look at today. And so what exactly were they doing at that time so if it's the opposite of what AstroPay did then I would imagine they offer some form of product that enables merchants to receive payments from customers in emerging markets like Brazil but how you just walk me through it assuming I know nothing about this space which is not a big assumption to make and you know literally like I'm trying to figure out right now let's say what makes D-local different from Visa or MasterCard or even New Bank and Mercado Libre really from a first principles perspective what the heck these D-local do. Okay okay I think I know what you try to do a Met here so Visa and MasterCard are basically credit card dependent companies so you know we have this feeling just as before that they just magically move money across the world but that's obviously not the case Visa generally does not move money at least that's not the core part of the business so let's just say that I buy something here in Germany from a US website I'm going to use a Visa card to do so then the merchants bank so that is the bank of that US website sends a message into Visa's network saying that you know card X which is my card wants to pay $100 to a company in the US and then Visa just looks at the card number it sees that it was issued by a German bank and then it would start routing that message to that specific bank in Germany. So really the way to think about it is that Visa is really just a messaging network. Yeah I would say messaging and settling because you know the next step would be that my German bank would check my balance and then you know if there's enough money in the bank account it would say approved and then send a yes message back through the Visa network to the merchant so up until that point it's important to understand that no money has yet been moved but I have already purchased whatever item was that I you know wanted to buy on that US website and then at a fixed schedule and for example there could be end of the day Visa adds everything up owed between all the banks and then tells them who pays whom so my German bank would then still owe $100 to the system and then the US merchants bank has that $100 claim so only then the banks move the actual funds between each other and Visa then handles the currency conversions that means you know euros are my end and dollars on the merchant side and they use you know their own rates to do that so this is sort of where the local comes in because the local exists because the emerging market world doesn't use Visa or MasterCard system at least not to the same extent so it's obviously not totally fair but you know you could say that Visa or MasterCard are sort of a legacy system of the Western world obviously it's also you know operating in Brazil and some other places but not to the same extent as they do in the country zero at least both the last lift. So credit cards are not used to the same extent in most of those markets. And that's not just, I should say that, because those countries are not yet there. It's also to some extent because it just skipped that part entirely. So in Brazil, for example, you have pigs in India, you have UPI, and then in Nigeria, for example, which is also a big market for the local, you have what's called a verb. And those are all bank to bank transfers over payment rails, basically created by the local central bank. And while it makes a little sense for locals to use them because they are, you know, fast, reliable and cheap, they are created for local transactions. So one Brazilian to another Brazilian. And there's even a legal there right here. So where, for example, pigs does not touch currency conversion or cross border movement because moving Brazilian rail out of Brazil and turning them into dollars is just legally a completely different activity governed by, you know, Brazil's central bank and follow equals and not by pigs generally. I know we talked before about, where is all of the, you know, fragmentation and complexity even comes from? It's sort of regulation like this that makes it significantly higher than this also more that we can probably get into a late and the episode. And that's the value of of D local, which is a very quick high level summary is that they're able to help navigate the complexity of the international financial system and completing transactions for different businesses. So I guess we should think of visa and master card and credit card issuers as trying to expand into emerging markets. And then the question is, by doing so, are they threats to D local? I guess I repeat myself, but I have to say yes and no. So technically they are threat because there's nothing that stops them from getting into that market in theory and the emerging markets are also D local operates in. So if you just think about new bank and Macaulayba, which are two companies that we own in our portfolio, they offer credit cards and their credit cards, for example, run on visa and master card rates. So they are certainly in those parts of the world too. However, and that's sort of the main problem that D local addresses, a US or European merchant trying to run a Latin American visa card through a Western bank will mostly suffer from massive transaction decline rates. So sometimes we're talking up to 50 plus percent just due to strict anti fraud blocks. And that's actually one of the transactions that made D local's founder Sebastian Kanovic realize that there's a problem with the payment system. So even if you have a company like visa or master card present, you still need D local because these problems still exist. And there's also another intimidating factor, which is that these alternative payment methods like pigs, for example, in Brazil are growing even faster than credit cards. So merchants still benefit from a company that offers one solution for all of these different ways of paying. And that's sort of what D local office to rate. You can pay for credit cards, you can pay for cash, you can pay for your QR codes and D local has all of that in one product. How about we say that I'm Spotify and I want to get paid customers in Brazil, in Argentina, in Ecuador and so on. What is D local actually selling me? They sell you what's called an API. So it's basically one piece of software that enables Spotify on this example you to get paid in all of the countries that it wants to operate in. So before D local, what Spotify would have done is they basically need to set up a local payment processor and processes generally in every country that they operate in it. We know from your episode on Spotify that global expansion, especially into these emerging markets, is incredibly important for them, especially over the next decade. But without D local, they would need to integrate with so many different local acquirers in each market. You got to have local licenses, you got to manage dozens of different text worlds and different banking systems and all of that stuff. And in the end, you're still doing that for a part of the market that is 5% revenue or less for most of these major US companies right now. So it's one of those things that you know you need to be part of that market, but it's also not worth it to spend all of that money and especially the time to get into those markets. So that's sort of the main problem that D local is trying to solve for you and I know this all still sounds kind of abstract, but you know you have to imagine what goes into the fact that D local can actually offer just this one API. So they have more than 20 offices worldwide because you need physical presence boots on the ground in those countries to have a chance to actually get a local license, which once again is you know, relatively difficult to do in payments because there's so much regulation. And even then it can take many years until you actually get that license. So in total, D local has more than 1000 employees and all of those are local teams in you know the parts of the world with D local operate. So it's just a cost you know that is not worth it to D local's customers itself, especially today. It's not necessarily about the money that gets mostly about the time and the headaches that you have to think about that if you're Amazon, you're just going to pay a couple of basis points more to use D local instead of setting up local teams in markets where you basically have you know basis points in terms of the overall revenue. Let's take a quick break and hear from today's sponsors. Curious about online trading, but haven't taken the first step yet. You're not alone. And plus 500 futures is a great place to start. The futures markets are moving fast and with plus 500 you can explore popular assets like oil, gold, S&P 500, Bitcoin and more. From crypto to commodities, there is always something happening. The platform is super easy to use so you can trade on the go, right from your phone. You can get started with just $100 in jump into the action. See something interesting. Once your account is open, you can trade it in just a couple of clicks. 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If I were starting a business, I would absolutely use Shopify myself. It powers millions of businesses worldwide from names like Mattel and Jim Shark to founders just getting started at Shopify dot com slash TIP. With Shopify, nothing stands between your idea in a real business. So go make it one. Start your free trial at Shopify dot com slash TIP. All right, back to the show. The interesting thing about the investment case for D local, I think is that you're looking at this is that you're essentially participating in two mega trends. And so on the one hand, you're benefiting from the future growth of emerging markets and people becoming wealthier there. And then on the other hand, you benefit from all the major global tech giants trying to expand their market share in these very fast growing regions of the world. That's essentially the major thesis. And it's also what D local CEO Petroon is pointing out as a major advantage of D local and Petroon has maybe you know that already been a mechado leap or CFO for 12 years and he actually worked at that company for 25 years. So I think it's fair to say that he's, you know, why not officially being a founder very much part of the team that grew mechado leap from zero to you know, a hundred billion plus dollars in market cap. So you really got you know, a CEO that probably had one of the best jobs in South American tech and commerce, you know, going to D local choosing it over Mally, which to me, as someone who really likes Mally as a company, as you would know, is a huge bonus point for D local as a company. Petroon basically said that, you know, he wouldn't have left if he didn't believe D local is one of the most exciting place in the South American market today and actually found a clip of him giving some more detail on the opportunity and his motivation to join the company as CEO. So I think we should just listen to him explain it. One of the things I was thinking a lot about is, you know, can I leverage what I saw at Mercado Libre in early stage technology trend across the emerging world and somehow find something similar to that at an earlier stage and be able to to ride a similar secular wave. And so I thought payments as a clear example were seeing that in Mercado Pago with the emergence of all the neo banks in Latam. But then when I actually started to understand what the local was about, I realized there was a whole second leg to this, which is one of the most difficult things about picking emerging market winners is that it's very hard to know who will be the next new bank or the next malle and who will go by the wayside. I think, you know, death rate is even higher. But the local was a different take on riding the digital transformation and revolution of the emerging world, which is probably the single most precise proxy for how the magnificent seven and most of the world's largest and most successful digital companies are doing across Latam across Africa, across the Middle East, across Stasia. Because at the end of the day, our business today grows if the businesses of our large digital global clients grow in these markets. And so when I realized that there was almost like a double layer of making a bet on emerging market digital transformation, which was the secular trend itself, but the secular trend being able to ride the success of the companies you knew were going to be successful, right? The Microsoft, the Netflix, the Amazon, the Spotify's, the Googles of the world. And so that was really one of these. I've been saying a lot, be careful what you throw out into the universe because sometimes it throws something back at you that you can't say no to. And that was exactly the case. So I know you're not a big fan of payment companies, obviously, but I feel like this value proposition, especially those mega trans, a quite a good reason to like the local or at least look into it in a bit more detail, especially if you know it's trading at what I think can be considered a very fair price. Yeah, I don't have a great history with loving payments companies, but the setup is as compelling maybe as any payments company I've seen, which is a big compliment. I guess what I'd be interested in knowing is which markets the local as most of its business and in particular. So I like the idea of having this diversified player in emerging markets. So that if something happens in one market, there's still plenty of business and the others in it. Very unlikely that the emerging market growth trend will end for global tech businesses overall. But obviously there is a risk in any particular country. So Venezuela comes to mind, for example. That's a good point. And you know, I got to admit, concentration is one of the problems with the local to some extent because both in terms of the markets and the customers, it is a quite concentrated company. Let's know America, for example, accounts for about 80% of total revenue right now. So African Asia is still relatively small markets. And within Latin America, you obviously have the big three. So you have Brazil, Argentina and Mexico that make up about half of the total companies revenue and at about 80% of the revenue made or generated in Latin America. I guess we'll get to some of the geographic dynamics later. But maybe I should first talk a bit more about business dynamics in general. So one thing worth mentioning is the difference between what's called pay in and what's called pay out. So pay in basically means the merchant is getting money paid by its customer. So for example, it's Netflix in Brazil, you know, you subscribe to it and then you pay Netflix. That is called pay in. So that's what, you know, the vast majority of the locals volume is about 70% today. And then you also have pay out, which is sort of the reverse. So a merchant paying money out to people in these markets and a good example for that is one of our favorite companies, Uber. And so you can imagine it sort of as if Uber has a driver in, you know, Buenos Aires who needs to get paid in pesos into a local bank account and de-localize the company that handles that for Uber. The power business has actually been built just to support some of the big right-hand companies that had problems with, you know, this sort of payment in the past. So now pay out covers, you know, drivers, contractors, marketplace sellers, freelancers. And I think also to some extent remittance recipients. But it's still only 30% of the overall volume of the company. Well, it's good you bring up Uber because I'm actually working on a refreshed deep dive into Uber that will probably be published and maybe a few weeks or a month or two. But still, it's a business I'm really excited to dig back into since we first really looked at it on the podcast a year ago. And it looks like ride-hailing is already the fourth biggest vertical by payment volume for de-local. So we should probably thank de-local for doing such a great job at supporting Uber's international operations. And it's generally impressive to me to see the growth rates behind all their verticals. Right. I mean, e-commerce is the biggest already. And it's still almost tripled in the last two years. On-demand delivery is the second biggest vertical. And that has more than 4x and then remittances are becoming an increasingly bigger part of the pie as well. One thing you will see is that, you know, the TPV growth, the total payment volume is just amazing. And you know, again, it's sort of this double engine of Latin America and emerging markets generally growing at a fast pace, especially the tech companies. And then just, you know, the expansion of these big US companies, subscribing share in those markets and becoming customers of de-local. And obviously, the downside of having all of these big tech companies as your customer is that there are very few companies that can match that scale. So de-local has quite a lot of customer concentration. And while they have, you know, officially about 760 enterprise customers in total, just the top 10 make up 62% of revenue. So that's a lot. And two individual merchants, and you know, they didn't display which they were, but they made up 10% of the entire company's revenue back in 2024. I remember that because that was about the first time that I looked at the company and I wouldn't be too confident that this has maturely changed since then, although they don't give us any numbers on just, you know, the top two customers anymore because it's not the best thing for the business. So obviously, this introduces some risk because of one of those top 10 merchants decides to bring payments in-house or just route volume to a competitor, de-local would take a massive fit, especially in the short term. And one of the key metrics to sort of keep an eye out for monitoring this risk is net revenue retention. So, you know, basically it measures how much more revenue you get in any given year from the same merchants you had last year. So in 2023, for example, that number was 150%. And that basically means that the existing book will be by half again on its own, you know, no customer basically leaving de-local, but they have a lot more volume that they sort of ship through the de-local rails. And in 2024, they dropped to 113%, which sort of gave you some pause. You know, whenever that happens, it could be a sign that either a large merchant shows a competitor for some of their volume or it could have many other reasons. So perhaps, you know, it was just a phyllox impact, which offers you a lot of times in emerging markets. But you never really know, and that sort of, you know, the unsettling part whenever you see a dip. The good news though is that in 2025, it's now back at 145%, and it's been actually above 140% for false to eight quarters into 2026. So, I feel pretty good about, you know, the staying power of the customers. I would say it's probably something you just have to live with. If you're going to invest in a company like de-local, it'll certainly be a bumpy ride. And besides other macro factors, it's also only natural for a big merchant like Amazon to want to diversify their volumes over time. And as long as de-local offers the best service, they will retain the majority of volume from the largest the most important merchant sets. Sort of the framework I would use. And so even without diversification from larger merchants, de-local is already paying the price of working with the big boys by having to offer discounts. So this will probably be one of the tougher discussion points today. But we do need to talk about the take rate. And so one of my big problems with payments is I don't see how it's not a race to the bottom in the long run. I feel like structurally, there's no physical reason why there should be so many fees between transacting from one country to another. And so really competing on price seems sort of inevitable to me because payment processing should ultimately be a commodity. And so take rates should decline over time due to competition pressuring a company like de-locals margins. And that's just how I think of it as sort of a pessimist on payments. But as proof of that, if you look at the numbers, de-locals take rate did go down from 2.9% at a high in 2020 to just 0.9%. Today, so less than 1%. I mean, it's sort of brutal if you just look at the chart and it's probably the most controversial topic whenever it comes to any payment company. And I think it's generally interesting just because I don't know the answer. I talked to a massive amount member just two days ago and he's also invested through his fund in de-local and after spare tendency of always trying to poke holes into the thesis of the companies are like most. And it's not the difficult for its payment company because as you said, the take rate is declining. And obviously the CEO, Petro-Arnd, he's talking for quite a while now about how that's part of the strategy. And basically what's happening here is they do not get pressured by competition. What happens is that they want to onboard as much volume as possible through those big merchants and they give them discounts because they want to get as much volume as possible, which is why you see these tremendous growth rates in TPP and you could make an argument that what matters are the absolute numbers right now. So that means is de-local making more money than a year ago and they are making a lot more money than a year ago. And that happens because you have operating leverage but also you have so much more payment volume going through your system that a decline in the take rate doesn't matter that much. But obviously, the bear case would be that at some point, TPV growth will slow down. And if there's more competition, if you can't upper your take rate again, you just left with low take rate and significantly less growth in the TPV. I think we'll probably touch on that quite often today again. What I can tell you is that their companies that I believe will struggle more than others whenever it comes to the take rate, especially in the future, actually believe that B2B focused companies might struggle less. I mean, there's a B2C company that we looked at, which is PayPal, about a couple of months ago. And the environment for those companies just gets increasingly dire, especially in a market like the US where there's a lot of competition. And I don't know, I think delivering value at its services, which is sort of what every CEO would tell you, what to do that can drive up margins in the long term. But it's also very difficult to actually have the customer base, both in the B2B business but also in the B2C business, to actually find products where you can have a high margin and it is a value ad for your customers. While I say this, I should note that take rates and margins are two different things. I think that's very important to differentiate. So the take rate is calculated by dividing gross profit by TPV, so the total payment volume. So you could also calculate it with revenue, which in some industries makes sense. But in payments, a huge chunk of your revenue is just the cost that you basically pass through the system. So the money that you owe to the local cryro or maybe the cart network or the processor and all of those different parties. So I think it's important to make the distinction for the margins with payment businesses like the local still have quite a lot of operating leverage even when the take rate falls. So the way to think about this is that TPV, the total payment volume will always grow the most and then gross profit will grow less because of the take rate decline. But, and that sort of the important point here, net profits will grow faster, then gross profits because of the operating leverage. And that's sort of what you need to understand to still figure out why I believe payment businesses in the long term can still deliver a lot of value. Perhaps again, we should just listen to Petro-Arn, the CEO, explaining how he thinks about the issue and why he believes the local is not in a race to the bottom. And we're extremely convinced that we're managing the whole take rate issue the right way. And let me separate take rate from margin, right? First thing is there's a lot of operational leverage in this business going forward. Now that we're exiting our investment cycle. And there's more to come. So gross profit, revenue, TPV should all be able to grow more than opX as we leave the investment cycle further and further back. Now there is a monetization issue, which is for every dollar we process, you know, we're making less and less sense. But some of that is by strategic design. We're optimizing for TPV growth. We're telling the commercial teams to be both aggressive in the tearing that they offer merchants so that merchants really drive more traffic to us to gain those volume discounts. But we're also trying to make sure that we're not losing deals on price. And the logic is in large part driven by why I think that this is not a race to zero as the bears will try to position it, right? I'd rather have the merchant relationship be processing his payments, adding value for him because I trust that there are a couple of things that will begin to change going forward that certainly will allow take rates to bottom, but I can even theorize why they can raise if I have those merchant relationships, right? So let me walk you through some of those. So but just to be clear, so the strategy is bring the merchants through the door, build the trust, build the relationship, help them grow their emerging market businesses, even if that takes lower prices now, because that will give you the volume platform to then work on the monetization levers. And so after listening to that, what are the points that Pedro was teasing in that clip about this specific reasons for why he doesn't fear the take rate decline? There are three major points that he sort of wants to do as. And the first one is simply consolidation. So eventually, petrol things that the market will consolidate, which would mean that the local can transition from being price taker to what he calls a price influencer. You wouldn't go as far as saying a price setter, which basically means you know, you can up the take rate because you decide what price this should be, but if they're only four to five companies, you're in solid and oligopoly, it is easier to increase the pricing as if you know there are 20 companies that you compete with. So this sort of goes back to my B2C versus B2B point, where I think we can say that the B2C payment space has gone from being a very consolidated space back of the day into the other direction with you know, more and more players coming in. And in part, that's because every up nowadays, sort of has the ambition to expand into different verticals and build a loyal customer base. And obviously payments is a great vertical to do that, especially after looking at almost 90 companies for this show. I think you and I both looked at companies that sort of started a payments arm. We're just for like, it doesn't make any sense at first glance, but it's just, you know, a great business to be in for companies, at least in the short term. And I think it's slightly different in the B2B world, although that obviously can also be a booter place. But to stay with Paypal as an example, there B2B solution, Brentree had the exact same take rate problems and the product had very few differentiating factors. So this might be, and I hope it is different for the local. And one of the reasons might be that Petra's second point, which is that more scale and also to some extent, the evolution of AI become more opportunity for differentiation and also fragmentation, which basically means there's a lot of friction whenever you have payments in between different countries. And I think what he means is that sort of all of his new technology will further accelerate growth, but also fragmentation of emerging markets, which makes the local even more important. So for example, the idea would be that AI makes it possible for emerging markets that are not yet at Brazil's or Mexico's level of payments penetration to set up their own payment innovations, which would, as you said, be a net advantage for Deloque, because it creates even more markets for them to go into it. Is that sort of the right way to think about it? Yeah, although I'd say that it's sort of just the nature of the business opportunity for Deloque, and I don't see any competitive advantage coming from that. Not in a way that perhaps Petra aren't does. And if anything, I think the more attractive the market opportunity becomes probably, that's our capitalism work, the more competitors will try to get in. But then you obviously have the scale benefit of Deloque that we talked about. So this sort of goes back, at least in my mind, to Nick Sleeve and his model of scale economy is shared, which is that Deloque can pass on the lower cost to serve that comes from those volume discounts that it gives to its merchants. So that's a similar thing to what Y's, which is another company that we have an output for you is doing as well, sort of lowering the take rate as part of the value proposition to its users. And if Deloque can lower its own input cost faster than it lowers the merchant's pricing, well, then the net take rate would stabilize or even expand over time while the gross take rate. So the sticker price that basically the merchant has to pay would keep falling. The problem with this obviously is that there is a floor to cost to serve savings just as there's a ceiling for TPV growth. And you can either save on cost internally, not outgrow the falling take rate. And that's in the end the bearish take. So ultimately it does come down to the value added services you can deliver, or at least the value add generally. And in this case, that's most likely a conversion uplift. If you can sustainably demonstrate that conversion rates are higher with your service, then that is obviously going to be valuable to merchants that are routing billions of dollars through your payment rails. So what products does Deloque offer to guarantee this conversion uplift? One example is what it's called smart pigs or smart APMs. And what that does is pretty vital to how the subscription businesses generally work. So one difference between the payment infrastructure in the west, which is obviously based on credit cards and the payment rails in marks like Brazil picks, for example, these are credit cards can be saved as so-called tokens. So when you subscribe to Netflix and give it your credit card details, the Netflix will store your card and charge it every single month. And obviously it doesn't save your credit card number, but it creates a token that tells the system to charge this exact credit card every single month. And systems like pigs in Brazil or even, you know, UPI in India, they don't work that way. So with those systems, you need the customer to initiate the purchase every single time. So in theory, Netflix couldn't just charge your bank account every single month. You would need to ask you every single time before it does it. And as you can imagine, that is pretty bad for customer retention. If every single time you're being asked, "Hey, do you actually want to pay Netflix?" And you're feeling like, "I've not watched anything in two months." So nope, maybe I'll just pause and not pay this month. So DLocal's SmartPig's product is a software layer that basically sits on top of pigs and gives it the ability to charge a consumer automatically and repeatedly. So basically the same way that a store card would. And without, you know, the consumer having to approve each transaction manually. And they did the same conceptual thing for other alternative payment methods as well, which is, you know, what they call it, smart APMs and not only smart pigs. And that's sort of, you know, one of the major value ads that DLocal drives, especially for companies like Spotify and Netflix. Good business 101 is to try and remove friction. For customer payments as much as possible, you don't want it to be difficult for your customers to pay you. And so there is a huge difference in the earnings quality of a subscription business. I can automatically charge customers each month versus a business that needs to consult with the customer each time it charges rises. Can you imagine if you had a gym membership and they called you every month of, hey, would you want to keep paying 20 bucks for this membership and you confirm the payment? That would be terrible because you get a lot of cancellations, a lot of people realizing, yeah, you know, I'm not going to actually work out anymore. I'm giving up on the dream I haven't been in in six months. And so anyways, looking at D-locals numbers, the conversion uplift is pretty significant. Even if you use credit cards, local processing increases the conversion rate, meaningfully, if you compare that to international card transactions, D-locals, local service shows a 20 percentage point increase, which is very, very substantial. Another product that helps with conversion is D-locals so-called smart routing system. So in any given market, there are usually multiple possible paths to basically process a payment. So several different local acquires or maybe banks, D-locals connected to and not all of them perform equally well. So one acquire might approve 90% of a certain card type while another one only approves 80%. And that basically varies by many factors. It could be just the time of the day, it could be the card type, it could be transaction sizes and dozens of other factors. So smart routing basically means a D-local system dynamically picks the best path for each individual transaction to maximize the odds of approval. And even when a payment fails on the first try, it's often for a recoverable reason. So for example, it was a bank glitch or maybe just a timing issue. And then D-local system is sort of built in a way to recognize which failures are worth retrying. So how to modify the next attempts. And then they execute on it. So the firm, in case that's a company that you know basically has a good system for this as well. And it's in part where that company has, you know, some of the highest margins in payments. It never occurred to me that there was such an issue with routing payments to the best path. From a first principles perspective, I want to ask you why do payments even fail in the first place? And then why is doing something like changing the pathway? Help with that. What's actually going on there? You might guess that, you know, the main problem is just cross-border problem. So for ordinary domestic card payments, only about 1 to 5% of payments fail. So it's, you know, reasonable. But cross-border payment failure rates can easily go up to, you know, 15, 20, even 25%. So the main cause for the problem is that banks only have limited details on those transactions. So they only see, you know, basic details like card details, balance, amount, location, all those sort of things that don't really tell you if, you know, the merchant decry or whatever is actually trustworthy. And then, you know, the fort detection quickly jumps in because obviously it's generally a good thing if you stop one payment too much instead of one to few. And but on the other hand, it's obviously a big problem if you're a merchant. So about 35% of card holders are likely to abandon a merchant after experiencing a decline generally. Probably that data is not only true for, you know, company sex body for a Netflix because I as a consumer know it's a legitimate company, but it still shows you that once a payment fails, it's a huge upset for the merchant. And what the local does is figure out the cause for that problem and then counter it. So let's assume the problem was a timeout. Then the locals system recognized that and then tries again in an hour without anyone having to do anything. And if maybe the card used for the subscription was old and is no longer active, then D local automatically uses the new one, which for example, you use on your Spotify subscription. So then it knows there's a new card and now it will try that one for Netflix. And if a phone acquires the problem. So, you know, for example, Spotify's bank that sends the payment request, then D local routes it through a local acquire instead, which it partners with. One part of being an investor that I don't think it's enough attention is how hard it can be to continue to improve as an investment researcher. And for myself, I often find that when I finish a great conversation with some industry expert or fund manager, my head is full of ideas. But by the time I sit down to write it all up, half of them are already gone. That's why I've been using Plod node pro. It's a small device that sticks to the back of my phone and captures the conversation and hands me back a clean searchable recap. And so the key points, the follow-ups, the things I usually want to act on, it has all of that. And that allows me to stay present in the room and set a scribbling notes that I won't be able to read back later. And I notoriously have very bad handwriting. 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Although it seems that D-locals is very different from the usual ones because they're not a lender in itself. The credit risk still sits with specialized BNPL lending partners. It's not on their balance sheet. D-local is only responsible for the connected technology that plugs those BNPL lenders into its merchants' checkouts. You can basically think of it as an aggregator that gives the merchant access to many BNPL providers. Across emerging markets, basically via D-local's single existing integration. To provide that, in technological overlay, D-local then takes the share of the revenue that the BNL partners earn. That's how they make money on that intermediate transaction. It's not interesting, and D-local does not need to absorb any potential credit losses either. If you think about companies like Mally or S.F. New Bank, there's no credit risk in this payment company. When you think about all these products, do any of them stand out as being uncopable or uncolonable? How hard is it to mimic what they do? I assume the answer is no. To be completely honest, I don't think the mode is in the products or the differentiation. Smart APM is nice, and it's very valuable to merchants. But in Brazil, for example, the government is already rolling out what's called PICS Automatico, which enables recurring subscription payments that weren't possible without D-local before. Over time, there will be innovation that probably in that solve the bear case makes it easier to have payments in emerging markets. There's still some data advantage to the extent that SmartPICS is bundled with success rate intelligence, but it's not really a mode, I would say. It's part of it works slightly better, but you just got to figure out 10 years from now how much better is it actually, and how much can you charge for that. The key advantage is that I see a scale, regulation, and fragmentation. So D-local operates in more than 60 markets, has over 600 local payment integrations and 38 regulatory licenses. And a bit more than it does in still-emprocess, and as I said in the beginning, it can easily take years until you get those licenses. So if you have 38 of them and 12 to 15 outstanding, it will take a lot of time until any competitor can copy that. So when you think about the smart writing feature, for example, that only works with tons of data and many counterparties to switch to. So the local processors, you know, three and a half billion pay-end transactions every single year. It cost me over 40 plus 50 plus markets. And it's an advantage that just compounds over time. You have better routing and better routing leads to winning more merchants, which leads to more volume. And then in the end, that gives the local better data, which again, you know, the dual improves routing. How do you think about the risk that these big merchants with very deep pockets will just build payment solutions themselves, bring everything in-house to save this money. They would otherwise be paying to D-local. I think it was more worried about that when I first looked at D-local some years ago. And I don't look at it differently today because of anything that D-local did. It's mostly that since then I've looked at again close to 90 businesses for this show, most of them with you. And to consider a number of them, I actually D-local customers. If that taught me anything, it's that opportunity costs everywhere. And I just don't see Amazon on Netflix spending resources. And again, that's money and time on figuring out payment methods in the most firmament in part of the world. So, you know, Pedro Ard actually said in the latest earnings call that merchants tend to work even closer together with D-local when the business grows. You know, you could look at that differently. You could say, well, the bigger the business gets, the more important it gets, the more sense it makes them to bring those things in-house. But that's not what you see. So it used to be a merchant coming with you, you know, a narrow problem like help me fix pigs in Brazil and how I can get money out of that country. To now, where merchants are basically treating emerging market payments as a core strategic priority, a core, you know, the entire global south. And that's not just Brazil, it's not just Mexico. It's also the other 50 plus markets that, you know, D-local operates. And so you could argue that, well, what happens if only Brazil, Mexico, and Argentina matter in 10 years time. But the other side of it is, how do you not know that there are 10 African countries that will be significantly bigger and more important in 20, 30 years time than they are today? I mean, I just think of these, as jobs like Singapore. And obviously it's a totally different part of the world and totally different starting position. But what they achieved in just a couple of decades, if you see anything like that and just two or three of the markets in the entire world that D-local operates in, you would have huge potential in the wrong way. So these companies that D-local works with, they sort of have an incentive for D-local to not become a monopoly. And it sort of reminds me of our co-part episode of Wildback. There was a dynamic where insurance companies would split their volumes between co-part and co-parts main competitor, even if co-part was the better operator, because they didn't want co-part to become a monopoly, which is too much pricing power. That's a really good analogy, actually. I think the major difference that I could think of is that the insurance market, so co-parts cost my base, was a pretty consolidated space or is a pretty consolidated space. And so it didn't take many companies to agree on that approach. And the wider the customer base, the more difficult that would be. So it is a potential risk in the future, but I don't think it's the same as with co-part. At least not 100%. So not so much from a perspective of the customer as a group, but more so that a customer individually feels like he's in a better negotiating position when he can diversify volume. That's sort of the problem for D-local. And again, the local customer base is highly concentrated. So one other risk that I see is that the fragmentation argument just gets weak over time and we discuss this. So when there are only four markets and they are all that matter, two Netflix, two Spotify, two Amazon, obviously it will get harder for the local to justify the fragmentation argument that they currently have. And basically telling Amazon, well, you have to pay the prices because we do not only offer Brazil, Argentina and Mexico, but also for the other markets. If Amazon doesn't care about that, they won't pay up. So we basically know this phenomenon from Uber to stay with some analogies on the companies that we are in our portfolio. So the top 10 cities it operates in are basically responsible for a very significant chunk of the overall business. If that happens again to the most important markets in South America, that's also a problem that I see for the local. Maybe before we move on, another difference is that the local has taken the opposite approach up until now. So they didn't try to flex their muscle and get the highest margin deals. They prioritize volume and onboarding these large merchants, which is why I mentioned that before their take rate had this sharp decline. So this scale economy's share model also lowers, in my opinion, the likelihood of customers being afraid of price gorging at any point, then either you know, ship volume somewhere else or do it in-house. And so what would be your take on the big Western players? Stripe, ADN, and also PayPal and so on? How do they shape up? So the way it currently works is that merchants work with Stripe and ADN as well as D-Local. So the Western players take the Western market and then D-Local handles everything related to the emerging markets. And in the end, it only comes down to once again, I have to say that 10 times today, fragmentation. So if the markets stay as fragmented as they are today, it makes very little sense for Stripe or ADN to invest a lot of money there compared to projects in their home markets. I mean, there's a lot of competition, so you know, you have a competitor at scale with D-Local, which never makes it easier to get into your D-Local market. And you also have to explain to investors why margins will be structurally lower for many many years because of this investment cycle. And when you are a company that makes significantly higher margins than, you know, the average business, investors don't like when that changes. And you know, it's sort of different when D-Local does it because you know, that stock has been absolutely hammered over the last five years and will probably get into why that happened. But it's currently trading at 15 times earnings, and Adyen is still a company that's trading at 25 earnings. So my argument here is just that they have a bit more to lose in terms of the market sentiment. So to an extent, I mean, it comes back to opportunity costs. It's opportunity cost, yeah. And I think it's also the general setup of these companies. So what companies like Adyen or Stripe have done is they basically built their entire tax act on their own and focus very heavily on vertical integration, which, you know, in part, because many of their competitors have become older and less vertically integrated over time through M&A. I mean, you know, PayPal lost to them because they had so many battles to fight that they just sort of, you know, lost them all because they didn't know where to focus on. But the reason Stripe and Adyen could do that is that they are, you know, first and foremost merchant acquirers. So, you know, the payment infrastructure is already there. And everything is, you know, dominated by credit card rails. And that's obviously different in D-Local's markets. And because of that, D-Local is also built differently. So it's much more of a horizontal player where, you know, Netflix comes around and plugs in and then it's about getting rid of all of the, you know, complexity not necessarily through your own tax tag, but they just optimizing, you know, how to use what you have at hand in those markets. And that could be picks in Brazil, could be UPI in India, many, many other potential methods as well. So I guess the point being it's a very different value proposition. And if I can just bring up another analogy here, it's similar to how I amazement would need to invest tens of billions of dollars to compete with McHalleliber in Brazil or their main markets because, you know, e-commerce is not the same everywhere. And the customer needs a different and that's not the game that Amazon is used to playing. And it looks like the D-Local Adyen story is, is actually quite similar to that dynamic. I looked it up before our recording here and it looks like Adyen has been operating in Brazil for about a decade, which is actually longer than D-Local. So we could argue that they just haven't invested enough money in the market, and maybe it wasn't a priority. That's sort of the same argument that we've seen with Amazon investing in Brazil relative to McHalleliber that they just haven't put in enough money to really prioritize winning. And so ultimately, Mellie has pretty much won Brazil over Amazon and D-Local won it over Adyen. And so it might just be their understanding of the market and their product offering being better suited for that market. It's certainly not the first time we've seen that. It is a common theme from many of the companies that we've studied that have expanded globally. We shouldn't double down too much on the narrative though because in the end, we still need those Western merchants to win market chain and expand into the markets that D-Local is actually operating. And so not just the competitors in the payment space, we also need Amazon to still be in Brazil and not totally get lost there. I'm not concerned overall that companies like Spotify or Netflix or Amazon will take a lot of share in developing markets in the next few decades. But when I think about simplifying payments, which is to some extent, the D-Local bare thesis, then I also think of stablecoins. So to what extent do you feel concerned that stablecoins could be bad for business for D-Local? Well, D-Local launched a product they call stablecoins full in April of this year. So like most other payments companies as well, everybody's a stablecoin product by an hour. And they offer anything from on-ramp to off-ramp to settlement and so on. And what makes this especially interesting for D-Local is that two thirds of all stablecoins are held in emerging markets, basically as a hatch against the local currency falling apart. And Argentina alone did something like 34 billion dollars of stablecoin transactions in a single year. Most of it cross-border to get around capital controls. And the third for D-Local is that either companies will use stablecoins themselves to settle transactions or maybe that D-Local is doing so, but that's a significantly lower margins with the current high-for-express, basically not existing anymore. And you might remember my last my argument from the middle episode, we did a while back where in emerging markets, people don't save on investment in crypto the same way that people in the West do, where people invest there, especially if they have spare money, that they don't need red now. in emerging markets, it's pretty different way. People need that money to constantly pay for things. So someone in Argentina doesn't want a USTC balance sitting in a wallet. They need pass-offs in their bank account with all of the compliance done and then converting that stablecoin into local fear and actually pushing it into the local way. So be that. Pics and Brazil, a bank account and Buenos Aires, all of that is what DLocal is needed for. So stablecoins basically make the settlement cheaper, but you still need the top layer. So everything that actually turns the stablecoin into local currency for the customer, which in turn actually means it just reduces DLocal's cost of settling a payment. Right. Although I should say that this is my working theory and that makes most sense to me, but perhaps we'll look at it 10 years from now and it worked out differently and other than maybe you would take the other side of that bet. Okay. Well, before we get to the financials, the incentives and all that kind of stuff, there is one other parallel that DLocal has with one of the companies that we covered just recently. And so just like Caspi, DLocal was the target of a short report a couple of years ago. So anything we should know about that. Yeah, I think I might just have the one experiences with the short settle report because I feel like most of them just try to find the smallest things and then sort of create this narrative in order to make a quick profit. This one, I should say, worked out pretty well because it's dropped 50% in a single day after the report dropped. So to be fair, I think that generally shorting is an important function of the market when done right. And in this case, the short report came from a pretty reputable name, which is Money Waters. And it wasn't 22. We all know what happened in 2022, where the market tanked, who were a lot of way overvalued companies. And you know, if you are a short seller, you mostly pull out a short thesis before. So there were a lot of those flooding the market. And yet, I think it's fair to say that by now, that just wasn't much to it. If anything, actually, the claims were that TPV was overstated, that the take rate was too high to be realistic, back then was still high and not 0.9%. And the founders mixed up business accounts with the merchants money. And also, and that sort of the last point that inside us sold about 1 billion dollars in stock right after the lockup period that followed the IPO back in 2021. So you can already see that some claims are more severe than others. But I think back in 2021, again, most stocks, they traded at absurd variations. So, you know, selling some stock after the lockup period and that when the local was trading at a multiple of 350 makes a lot of sense if you ask me, if I was the CEO, I might also sell at least some shares. But you know, the other claims that we have seen that are more severe, they seem to be our right faults. I mean, deal local spot ran and independent review with outside investigators and on the specific client funds allegations and the review basically verified that you know, merchant cash and corporate cash set in separate accounts and matched, you know, the bank statements. And one thing that I should also add, and that's pretty astonishing, not a single merchant left back then. So the stock to 50%, you know, the short report was just there, not a single merchant left the company. Wow, that's not bad. And so looking at the take rate and how that's developed afterward, I guess I wouldn't be too concerned that there's anything wrong with that either. But jokes aside, I think you mentioned that muddy waters mainly compared D locals take rate to stripe. And therefore argued D locals take rate was un reasonably high. But with D local operating in markets like Argentina, Nigeria and Egypt with FX conversion, and installments layered in that is just a structurally higher take rate business, right. And so after all, the three years have passed T PV went from 10 billion to 45 billion. They do generate very real cash flow. They pay dividends and they're buying back stock. So things are definitely not really sketchy at all and certainly not as sketchy as the short report would have made it seem. I got it, but though that, you know, it seemed like the founders did make some beginners mistakes. That sort of I would say invited the sort of attention and whether short report definitely lacked substance. There was also a federal lawsuit regarding D local not adequately disclosing its Argentina for its control risk. And it appears that the Argentina operation has been somewhat of a mess since the beginning, especially in terms of how they communicated it. And I would say the positive effect of that is, you know, that nowadays you have a different CEO. And I don't think it's a coincidence that they took a CFO in Pedro and to become the new CEO. But I would actually, you know, I like that having Pedro as CEO is I think the best it could have happened to this company. It sounds like we got a real key man here. Pedro aren't as a vital part of the thesis, what you say. He is, but I want to mention it's not just because he was at Maccato Leber. I do think it is a positive, right. I mean, he looks like he's been there for 24 years. So he basically saw it go from a small startup to one of the biggest companies in Latin America. And as a CFO, he played a significant role in that. And he also studied at Oxford and worked for Bain Consulting. So when you take all that together, he does seem like the type of guy that you want to have as a CEO for a company that you're going to invest in. Especially because it was so clear that he only signed up for this because he believed in the vision of the company. He could have easily, you know, said what was one of the best positions, you know, where you can work in Latin America. And he also owns about 0.8% of the company in stock at DeLocal. So this might not sound like much in the beginning, but again, he's not part of the founding team. And he only joined three and a half years ago. So generally, the insider ownership in this company is massive. It's about 33% of the company is owned by the founder and the management team. So there's a lot of skin in the game. And how does that incentive system work? Well, unfortunately, we don't know a lot about the incentive system because while the local is operationally had quoted in Joe Gry, it's officially incorporated in the Cayman Islands. And that basically means it's legally exempt from, you know, the paid disclosures of the US company, or, you know, that the US company is usually as super published. So I can't really tell you what Petro-Arn is making, not exactly what his incentive program looks like. But what we have is sort of a blended number for the entire management team. So that was about 20 million dollars back in 2024, which was up from about five million dollars just two years earlier. And in terms of stock and options, DeLocal hands out three kinds of stocks. So it's options restricted stock and then performance units. And the mix, I gotta say, doesn't look too inspiring. I mean, the majority of the bonus is paid and restricted stock for which the management team doesn't need to do anything beyond just sticking around. And it's one of those things that you often point out as something that you don't like to see. And then, you know, the performance based stock options, they're just a very small part of the overall payout. So since we don't know anyone's individual contract, we still might assume that all of the performance based options sit with Petro-Arn, but obviously that would be speculation. And I think it's highly unlikely. I do want to quickly get back to Argentina. When you say that things have been messy there, what exactly does that mean? And how does the macro their impact DeLocal's business? Because in the end, Argentina is about 20% of Latin revenue. So it is not a small portion. Yeah, Argentina is a complicated market. So for a long time, it was one of DeLocal's most profitable markets, which to some extent was because of the complexity. And then for many years, Argentina had something called CIPO, which means Trap or Clamp if you were translated. And especially regulation about currency controls or exchange rates and all of that sort of stuff. So one difficult thing was basically getting money out of the country. And if you're a payments company collecting pesos inside Argentina, but you owe a global merchant dollars outside of Argentina, what that means you have to get that money out. And because it was DeLocal could charge high fees to merchants for its service of making it possible to be able to transact internationally. Right. But due to just the false pace of change in regulations like this, it could have been an advantage one year and then it's a disadvantage in the other year. So things change quickly. And if you look at the last couple of years and even just quarters, you will see just how volatile the margin of the Argentina business has actually been. Things have settled at least to some extent because of the policy changes that melee push through over time. So you basically get rid of all of the currency controls, which of course is good, but it's also to some extent bad for DeLocal, because that's where they made their money. And on one hand, the margin is now lower than it is before. On the other, you could also argue, you know, there's less volatility and also less political risk. So I see it as a margin headwind, but also quality of earnings upgrade. So when I have to summarize the case up until now, you would basically buy DeLocal to take advantage of two major tailwinds, the growth and digitalization of emerging markets, particularly Latam, and then just global tech giants expanding into those markets and increasing their market share and further reliance on DeLocal. And so DeLocal is the best way to play that trend because it has the most scale in those markets, the best relationships, the tech, and it's not as vertically integrated as Western competitors, which is usually seen as a negative, but in this geography, it actually can be a benefit because it helps with a more dynamic company and helps them to juggle the regulatory challenges and those geographies. I think that's pretty unpoined. And I think DeLocal will remain a highly volatile stock for a while. And in the end, the only thing that matters to me is sort of figuring it out whether anything could reasonably disrupt DeLocal status as sort of the main beneficiary of these mega trends. And I'm quite certain there will be competition over time as it always is. And some customers will probably shift part of the world. of the volume to that competition to sort of diversify, you know, the volume. And while that can create volatility in the short term, I also believe that, you know, the data advantages, as well as also the regulatory advantage of, you know, having experience in all of those markets, I don't want to say that's a mode generally, but I do think it's too much to completely disrupt them at this point. And I should say that whenever volatility causes the stock to decline, the local conducts to Tj share repurchases, which is something that I know you and I can appreciate. Strategic buybacks are something that always, I'm going to win some points with me, but it does look like the last meaningful share repurchases happened in 2023 and 2024. So it has been a few years. Is there a new buyback program looming? Well, before I answer this, I want to quickly add that if the thesis eventually turns out to be wrong, my suspicion is that an inability to monetize would be the reason not necessarily lost volume, but getting back to capital allocation. As you said, you know, the last meaningful buybacks were in 2023 and 2024, which was about $100 million in each year. And earlier this year, the board authorized another $300 million buyback program. So I think it was a March when the stock still traded closer to $3 billion. And now it's about $4 billion, but that's still, you know, 7 to 8% of the company repurchased in the next two to three years. And with the volatility of the local, it might be more than that if they just wait for the right moments and then buy the stock. So that's one part. And then also beyond the buybacks, you are being paid through a dividend, which is about 30% of free cash flow, resulting in a year of about three to four percent. To be fair, I mean, do you look as a relatively asset light business? And what that means is there aren't that many investment opportunities. They don't need that many assets to support what they do. So it can make sense to pay a dividend, although I would rather see that being used for strategic buybacks, as well if the stock is as cheap as it seems. I would also favor buybacks, but you know, I guess part of the reason for the dividends is that the founders are getting paid that way. I mean, they've sort of a low salary. And I don't think they plan to sell any stock, which is also a positive. So they also want to signal to investors, hey, we are confident in, you know, the ability to generate cash flow. And that's why we're paying a dividend. Plus, you know, we want to get paid. What about the M&A front? Do they have an history of making acquisitions? Not really. I mean, DeLocal recently wanted by other finance, AESA, which is a Kenya based and Africa focused cross-border payments provider that had been valued at roughly $150 million in a 2024 finding round. But the deal sort of took longer than the initially planned. And then, DeLocal eventually only acquired one asset or sort of technology from that company for about $23 million. So beyond that case, I think, you know, there's pretty much no M&A history or even ambition right now. So if I had to summarize, you have a capitalite business, a highly profitable paying back shareholders through buybacks and dividends. And I think there are worse things than that, right? M&A does, of course, in other reputation, and rightfully so, that it destroys value. Most acquisitions have not been good for shareholders. Serial acquires like Constellation software and Berkshire, of course, in a league of their own. But whenever your ordinary tech or payment company is going for M&A, it's probably not going to work out. Well, so yeah, I am glad that it's not a game that DeLocal is keen on playing. But how do you think about things on the stock-based compensation front? Are the buybacks actually reducing the share account materially or is DeLocal issuing so many shares that it basically offsets the buybacks that they're doing? So I could tell you that a stock-based call is only 0.2% of revenue, which sounds very good at first, but that's not how you should look at it because in this business, as I mentioned before, gross profit is much more important than revenue and SPC measured against gross profit. It is now gradually high, either, but it's about 5%. So it's certainly not immaterial. But in the last five years, the share account has been more or less flat, but that obviously should change now within you would purchase program. All right. Well, how about we do some digging in the weeds here and looking at the financials and then talking valuation? What are the metrics and the numbers that matter for DeLocal that investors should be aware of and that you would look at to keep track of whether DeLocal is on the right path because this does seem to be a long-term thesis that we'll want to be monitoring. Yeah, I mean, it certainly isn't. I think the first thing to look at is obviously TPV total payment volume. Last year, TPV was about 40 billion dollars. So up 60% year over year. And since 2019, the K-GRAW has actually been almost 80%. And just in the last few quarters, GROTH has accelerated, again, after we quad-N-24. So you see the right trend going forward. And as I said earlier, TPV will always grow faster than, for example, gross profit simply due to the take rate dynamic where, the take rate declines so the gross profit grows more slowly than the underlying TPV. Generally, DeLocal's financials, I think you can sort of explain them as looking like the letter of a V. So it goes upwards and then it goes downwards. And the part of the V that drops is sort of the dynamic that I describe. The way you know, TPV is going the fastest, then gross profit is going slower. But then you get to the operating leverage side of things. So while gross profit goes slower than TPV, the underlying profits grow faster than gross profits. That's sort of the upward trend of the other side of the V. I don't know of that help, but maybe, you know, it was an analogy that at least some of you guys resonated with. And I would say going to the metrics, I could want to track the operating leverage is the ratio of EBIT, so you know, the earnings before interest in taxes to gross profit. Because what that measures is basically of every dollar of gross profit that DeLocal keeps how much survives operating expenses and drops actually down to at the bottom. When the cone investments like lands, this metric should show a clear upward trend, which has already started. What about metrics regarding the customer base? I mean, it would still make me somewhat nervous to know that DeLocal is so dependent on a handful of just its biggest customers and a few different markets. So are there any trends on that end that you would want to follow with the hope of seeing more diversification? DeLocal discloses two metrics for its top 50 merchants that are interesting to check in that regard. And that's the average number of countries served per merchant and then also the average number of payment methods served per merchant. So countries per merchant grew by 40 plus percent year over year and the payment methods per merchant grew about 50%. So that's not yet diversification away from the top merchants, but it does show that the top existing merchants integrate deeper into the ecosystem over time. That's also why net revenue retention stays as high as it currently is. In terms of geography, you already see a slow trend toward more diversification. In 2023, for example, a couple years back, the top three markets made up 55% revenue. Now it's 50%. It's slight improvement, I would say, on that front. Obviously, that's not because the other markets are shrinking, but because the other markets are outgoing the top three. Okay. I think it's that time where you tell us what the valuation is for this business and how to think about valuing it and whether it should be in addition to our intrinsic value portfolio. Well, today instead of forecasting whatever you, we care about TPPV and the net take grade for the top of our model. So I have TPPV going at 38%. So close to 40% through 2028 and then decelerating to 20% after that for the next 223 years. And then de-local zone guidance for 2026 is still 60% TPPV growth and considering past growth rates and the still low penetration of all, I do think a haircut it here quite a bit and we could see more growth than that. And I have the take rate decrease going on for a while, although I wouldn't be surprised if we see a sort of stabilization in the next three years and perhaps even quarters, although I know that you would probably look at that a bit more skeptically. But some of the calls and interviews that I listen to from Pedro Ande made it seem like he thinks bottom should be coming soon, but I'm skeptic too, so I still have the take rate decreasing to slightly below 0.7% within the next five years. And these assumptions are basically a continuation of that the dynamic that we just discussed, right? I mean TPPV grows fastest, but the take rate declines and thus grows profit grows slower. And so they see that de-local is guiding for about 30% growth profit growth for 2026 and then you're assuming a gross profit keger compound annual growth rate of 19 to 20% looking forward. Right. And you know that basically starts the other side of the V to stay with that example. Where you know the investment cycle is more or less done or at least it has peaked. So we should see operating leverage push the EBITDA and also the EBITDA march and stop resulting obviously more profits so that net income is compounding at least a percentage point or two faster than gross profit. Honestly, it's surprisingly part of the return will likely also come from dividends and the buybacks. So that's the sort of special thing about your local. It's not only growing fast, but it's also a cash-printing machine. And if it keeps the 30% pair ratio, which is planned, I should say, and keeps buying back shares at a similar pace to what has been announced recently, you could easily have 700 to 800 million dollars off buybacks over just the next five years. And given that I expect quite a volatile stock and deal local's management is good at alokena capital and I'd just proven that in the past. I think they will execute those buybacks at pretty good price. So I assume the shared decline rate of about 2.5% per year, which would, you know, some would be 17 to $18 per share. So if we take all that together and we try to be conservative by expecting a low teens exit multiple, and that's what I'm saying in your model right now, where does that leave us? The expected return under these assumptions and with a margin of safety of about 20% is about 22% from today's levels. That's a case in the base case, I should say. So I also model a bear and a bull case as we always do. I won't go through them here because I think that would just be a bit too many numbers for today. But I can't tell you that in the bear case, when which growth is still quite reasonable, but the margins start declining instead of growing the stock can quickly half from today's prices. And so what would happen is you basically lose the V shape and instead of EBITDA and profit margins outgrowing gross profit, they are going to be pressured just like gross profit is. So it's a scenario where basically you don't have any operating leverage kick-in. Which to be fair is sort of anti-thetical because we already see the operating leverage kick-in right now. And with that scenario, again, where does that leave us overall with the local? As I said earlier, I own the local and my personal portfolio and I believe my average cost base there's close to $10 and right now it's trading for about $14 to $15. But I still consider it quite cheap. So just due to its volatility and for morning and for a while, I know there's a good chance that there will be plenty of opportunities to probably also buy it after some form of bad news or fear in the market. So I guess my idea would be to buy a small position today also because we like cash and then buy more on weakness. It's probably no secret that I have hesitations about payment businesses, but the metrics you walk through sound very promising. I can't see why the overall story is compelling too in terms of emerging markets growth and international companies expanding their market share in emerging markets, which would likely lead to more alliance on on D local. And so if you have it in your personal portfolio, Daniel, that I know you've done a ton of homework on the company to be recommending it. And so we've talked about having a goal of owning 15 to 20 companies in the portfolio. And at the moment, we have exactly 15. So I don't necessarily feel like we have to add more businesses just for the sake of diversification. But I also don't think that we're at such a large number of companies to keep track of that we can't do so responsibly between me, you and our colleague Kyle. And if we make it a 2% position with wise also being a 2% position, my question for you is whether you think that's enough exposure to attractively valued payment companies, sort of ignoring whatever biases I may bring to the table, right? Because I know you like these businesses a lot and I know Kyle does too. And 4% overall portfolio exposure is not a massive amount. I know you and Kyle, for example, both like wise. And like I said, I'm pretty sure Kyle is going to be on board with D local. And I guess the question is, if you didn't have my hesitations to hold you back, would you actually argue for making it an even bigger position? In the long term, I might see us establishing a larger position than 2%, yes. But I think right now I feel very good about that sizing. Again, I sort of have my own biases going into this especially because of my lower cost base and my own portfolio. I probably have an ongoing bias, which I sort of struggle with quite often. So yeah, I feel like 2% now, and if we actually do see the stock going down significantly at any point without changes in the business, I think we can buy another 2% in that position. But we also want to be mindful of our exposure to emerging markets, which is not too small. If we think about my kind of labor, if we think about new bank and then also D local. So yeah, I think I'm pretty fine with that. Anything you want to add before I send us into the weekend with a quote by Sir John Templeton. No, I don't think so. We'll make it a small position. I'll keep doing homework to try to wrap my head around it and maybe we'll come back and make it a bigger position. But yeah, we can leave it there. All right. Then it's Sir John Templeton's time and he said, "I never ask if the market is going to go up or down because I don't know and besides, it doesn't matter. I search nation-off-dination for stocks asking, where's the one that is lowest price in relation to what I believe it's worth?" So for 40 years of experience, you can make money without ever knowing which way the market is going. And I actually got to say, I feel pretty good about the fact that by now we also search nation-off-dination here on the show to find the best stocks and perhaps also the next one will be an international one. We don't know yet, but you will find out pretty soon. So see you then. Thanks for listening to TI-P. Follow the Investors Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. The content is impersonal and does not consider objectives, financial situation or needs. Investing involves risk, including possible loss of principle and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. 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