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

18:28Daniel Mahncke: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.

18:45Shawn O’Malley:That's essentially the major thesis. And it's also what DLocal CEO Petru Arndt is pointing out as the major advantage of DLocal. And Petru Arndt has, maybe you know that already, been a Mercado Libre 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, while not officially being a founder, very much part of the team that grew McCullough Leeper from zero to a hundred billion plus dollars in market cap. So you really got a CEO that probably had one of the best jobs in South American tech and commerce, going to D-Local, choosing it over Melly, which to me, as someone who really likes Melly as a company, as you would know, is a huge bonus point for D-Local as a company.

19:26Shawn O’Malley:And Petro basically said that, you know, he wouldn't have left if he didn't believe DLocal is one of the most exciting place in the South American market today. And I 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.

19:43Daniel Mahncke:One of the things I was thinking a lot about is, you know, can I leverage what I saw at MercadoLibre, an early stage technology trend across the emerging world and somehow find something similar to that at an earlier stage and be able to ride a similar secular wave, right? And so I thought, you know, payments is a clear example. We're seeing that in Mercado Pago with the emergence of all the neobanks in LATAM. But then when I actually started to understand what Delocal 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 Melly and who will go by the wayside.

20:31Daniel Mahncke:I think, you know, death rate is even higher. But DLocal was a different take on riding the digital transformation and revolution of the emerging world, which it's probably the single most precise proxy for how the 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 Asia. 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?

21:27Daniel Mahncke:The Microsofts, the Netflix, the Amazons, 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.

21:44Shawn O’Malley:So I know you're not a big fan of payment companies, obviously, but I feel like this value proposition, especially those megatrends, are quite a good reason to like Delocal or at least look into it in a bit more detail, especially if it's trading at what I think can be considered a very fair price.

22:00Daniel Mahncke: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 D-local has most of its business 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 in the others. And it's 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.

22:37Daniel Mahncke:So Venezuela comes to mind for example.

22:41Shawn O’Malley:That's a good point. And I got to admit, concentration is one of the problems with eLocal to some extent, because both in terms of the markets and the customers, it is a quite concentrated company. Latin America, for example, accounts for about 80 % of total revenue right now. So Africa and Asia are 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 company's revenue and about 80 % of the revenue made or generated in Latin American. 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.

23:18Shawn O’Malley: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 subscribe to it, and then you pay Netflix. That is called pay-in. So that's what the vast majority of D-locals volume is, about 70 % today. And then you also have payout, 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 Buenos Aires, who needs to get paid in pesos into a local bank account, then D-local is a company that handles that for Uber.

24:02Shawn O’Malley:The payout business has actually been built just to support some of the big right-handing companies that had problems with this sort of payment in the past. So now payout covers 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.

24:22Daniel Mahncke: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 in 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 D-Local. So we should probably thank D-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?

24:58Daniel Mahncke: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.

25:14Shawn O’Malley:Yeah. One thing that you will see is that the TPV growth, the total payment volume is just amazing. And 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 grabbing share in those markets and becoming customers of D-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 D-Local has quite a lot of customer concentration. While they have, you know, officially about 760 enterprise customers in total, just the top 10 make up 62 % of revenue.

25:52Shawn O’Malley:So that's a lot. And two individual merchants, and they didn't displace 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 materially changed since then, although they don't give us any numbers on just the top two customers anymore, because it's not the best thing for the business. So obviously, this introduces some risk because if one of those top 10 merchants decides to bring payments in-house or just volume to a competitor, DLocal would take a massive fit, especially in the short term.

26:26Shawn O’Malley:And one of the key metrics to sort of keep an eye out for monitoring this risk is net revenue retention. So 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 buy half again on its own. No customer basically leaving DLocal, but they have a lot more volume that they sort of ship through the local rails. And in 2024, it dropped to 113%, which sort of gave you some pause. Whenever that happens, it could be a sign that either a large merchant chose a competitor for some of their volume, or it could have many other reasons.

27:06Shawn O’Malley:So perhaps it was just a forex impact, which obviously you have a lot of times in emerging markets, but you never really know. And that's sort of 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 four straight quarters into 2026. So I feel pretty good about the staying power of the customers.

27:29Daniel Mahncke:I'd say it's probably something you just have to live with if you're going to invest in a company like D-Local. It'll certainly be a bumpy ride. And besides all the 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 D-Local offers the best service, they will retain the majority of volume from the largest and most important merchants. That's sort of the framework I would use. And so even without diversification from larger merchants, D-Local is already paying the price of working with the big boys by having to offer discounts.

28:07Daniel Mahncke: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 Dlocal's margins. And that's just how I think of it as sort of a pessimist on payments.

28:51Daniel Mahncke:But as proof of that, if you look at the numbers, Dlocal's take rate did go down from 2.9 % at a high in 2020 to just 0.9 % today, so less than 1%.

29:03Shawn O’Malley: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 mastermind member just two days ago, and he's also invested through his fund in Dlocal. And I have this bad tendency of always trying to poke holes into the thesis of the companies I like most. And it's not that difficult if it's a payment company, because as you said, the takeout is declining. And obviously the CEO, Petro Arndt, he's talking for quite a while now about how that's part of the strategy.

29:32Shawn O’Malley: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 TPV. And you could make an argument that what matters are the absolute numbers right now. So that means, is D-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.

30:04Shawn O’Malley:But obviously, the bare 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're just left with a 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 there are companies that I believe will struggle more than others whenever it comes to the take rate, especially in the future. And I actually believe that B2B-focused companies might struggle less. I mean, you know, there's a B2C company that we looked at, which is PayPal about a couple of months ago.

30:38Shawn O’Malley: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 added 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 add for your customers. And while I say this, I should know that take rates and margins are two different things.

31:06Shawn O’Malley: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 make 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 acquirer 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 because payment businesses like D-Local still have quite a lot of operating leverage, even when the take rate falls.

31:39Shawn O’Malley:So the way to think about this is the 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's sort of the important point here, net profits will grow faster than 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 Petrohan, the CEO, explaining how he thinks about the issue and why he believes D-Local is not in a race to the bottom.

32:14Daniel Mahncke: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 OPEX as we leave the investment cycle further and further back. Now, there is a monetization issue, which is for every dollar we process, we're making less and less sense. But some of that is by strategic design. We're optimizing for TPV growth.

32:54Daniel Mahncke:We're telling the commercial teams to be both aggressive in the tiering 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.

33:35Daniel Mahncke: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. 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 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 the specific reasons for why he doesn't fear the take rate decline?

34:16Shawn O’Malley:There are three major points that he sort of wants to address. And the first one is simply consolidation. So eventually, Pedro thinks that the market will consolidate, which would mean that 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 tape grade because you decide what price this should be. But if there are only, you know, four to five companies, you're in sort of an oligopoly, it is easier to increase the pricing as if, you know, there are 20 companies that you compete with.

34:45Shawn O’Malley:So this sort of goes back to my B2C versus B2B point where, you know, I think we can say that the B2C payment space has gone from being a very consolidated space back in the day into the other direction with more and more players coming in. And in part, that's because every app 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 where you just felt like, it doesn't make any sense at first glance, but it's just a great business to be in for companies, at least in the short term.

35:22Shawn O’Malley:And I think it's slightly different in the B2B world, although that obviously can also be a brutal place. But to stay with PayPal as an example, their B2B solution, Braintree, had the exact same takeaway problems, and the product had very few differentiating factors. So this might be, and I hope it is, different for Dlocal. And one of the reasons might be that Pedro'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.

35:54Shawn O’Malley:And I think what he means is that sort of all of this new technology will further accelerate growth, but also fragmentation of emerging markets, which makes the local even more important.

36:06Daniel Mahncke: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 Dlocal because it creates even more markets for them to go into. Is that sort of the right way to think about it?

36:30Shawn O’Malley:Yeah, though, I'd say that it's sort of just the nature of the business opportunity for Dlocal. And I don't see any competitive advantage coming from that, not in the same way that perhaps Petro Arndt does. And if anything, I think the more attractive the market opportunity becomes probably, you know, that's how capitalism works, the more competitors will try to get in. But then you obviously have the scale benefit of D-Local that we talked about. So this sort of goes back, at least in my mind, to Nick Sleep and his model of scale economies shared, which is that D-Local can pass on the lower cost to serve that comes from those volume discounts that it gives to its merchants.

37:03Shawn O’Malley:So that's a similar thing to what Wise, which is another company that we have in our portfolio, is doing as well, sort of lowering the take rate as part of the value proposition to its users. And if DLocal can lower its own input costs 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 flaw to cost to serve savings, just as there's a ceiling for TPV growth. And you can neither save on costs eternally, not outgrow the falling tape.

37:40Shawn O’Malley:And that's in the end, the bearish take.

37:43Daniel Mahncke: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 DLocal offer to guarantee this conversion uplift?

38:14Shawn O’Malley: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 markets like Brazil, PIX, for example, is how credit cards can be saved as so-called tokens. So when you subscribe to Netflix and give it your credit card details, then 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.

38:51Shawn O’Malley:And systems like PIX in Brazil, or even 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. It 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 haven't watched anything in two months. So nope, maybe I'll just pause and not pay this month. So D-Local's SmartPix product is a software layer that basically sits on top of PIX and gives it the ability to charge a consumer automatically and repeatedly.

39:31Shawn O’Malley:So basically the same way that a stored 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, why they call it Smart APMs and not only SmartPix. And that's sort of, you know, one of the major value adds that D-Local drives, especially for companies like Spotify and Netflix.

39:52Daniel Mahncke: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 that can automatically charge customers each month versus a business that needs to consult with the customer each time a charge arises. 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? Can you confirm the payment? That would be terrible because you'd get a lot of cancellations, a lot of people realizing, yeah, I'm not going to actually work out anymore.

40:31Daniel Mahncke:I'm giving up on the dream. I haven't been in six months. And so anyways, looking at Dlocal's 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, Dlocal's local service shows a 20 percentage point increase, which is very, very substantial.

40:59Shawn O’Malley:Another product that helps with conversion is Dlocal's 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 acquirers, or maybe banks D-local is connected to, and not all of them perform equally well. So one acquirer might approve 90 % of a certain car 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 car 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.

41:40Shawn O’Malley: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's 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 a 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 some of the highest margins in payments.

42:08Daniel Mahncke:It never occurred to me that there was such an issue with routing payments to the best path, right? 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?

42:27Shawn O’Malley:You might guess that the main problem is just a cross-border problem. So for ordinary domestic card payments, only about one to 5 % of payments fail. So it's 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 the acquirer whatever is actually trustworthy and then you know the fraud detection quickly jumps in because obviously it's generally a good if you stop one payment too much instead of one too few.

43:08Shawn O’Malley:But on the other hand, it's obviously a big problem if you're a merchant. So about 35 % of cardholders are likely to abandon a merchant after experiencing a decline generally. Probably the data is not really true for companies like Spotify and 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 DeLocal does is figure out the cause for that problem and then counter it. So let's assume the problem was a timeout. Then Dlocal's system recognized that and then tries again in an hour without anyone having to do anything.

43:42Shawn O’Malley:And if maybe the card used for the subscription was old and is no longer active, then Dlocal 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 foreign acquirer is a problem, so for example, Spotify's bank that sends the payment request, then D-Local routes it through a local acquirer instead, which it partners with.

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47:28Daniel Mahncke:I feel like there's no payment company in 2026 that does not offer a BNPL solution. Although it seems that D-Local's 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. So it's not on their balance sheet. DLocal is only responsible for the connected technology that plugs those BNPL lenders into its merchants' checkouts. Right.

48:02Shawn O’Malley:So you can basically think of it as an aggregator that gives a merchant access to many BNPL providers, across emerging markets, basically via D-Local's single existing integration. And to provide that technological overlay, D-Local then takes the share of the revenue that the B &L partners earn. So that's sort of how they make money on that intermediate transaction. So it's not interest income and D-Local does not need to absorb any potential credit losses either. So if you think about companies like Mellie or like NewBank, there's no credit risk in this payments company.

48:33Daniel Mahncke:And so when you think about all these products, do any of them stand out as being uncopyable or unclonable? I mean, how hard is it to mimic what they do?

48:43Shawn O’Malley:I assume the answer is no. And to be completely honest, I don't think the motives in the products are 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 Pix Automatico, which enables recurring subscription payments that weren't possible without Delocal before. So, you know, over time, there will be innovation that probably, and that's sort of the bear case, makes it easier to have payments in emerging markets. And there's still some data advantage to the extent that, you know, SmartPix is bundled with success rate intelligence, but it's not really a moat, I would say.

49:17Shawn O’Malley:You know, 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? So the key advantages that I see are 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 a dozen still in process. 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.

49:50Shawn O’Malley: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 D-local processes, you know, three and a half billion pay-in transactions every single year across, you know, 40 plus, 50 plus markets. And it's an advantage that just compounds over time. You know, you have better routing and better routing leads to winning more merchants, which leads to more volume. And then in the end, that gives D-local better data, which again, you know, the drill improves routing.

50:19Daniel Mahncke: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 Dlocal?

50:32Shawn O’Malley:I think I was more worried about that when I first looked at Dlocal some years ago. And I don't look at it differently today because of anything that Dlocal 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 a considerable number of them are actually Dlocal customers. And if that taught me anything, It's that opportunity costs everywhere. And I just don't see Amazon or Netflix spending resources. And again, that's money and time on figuring out payment methods in the most fragmented part of the world. So, you know, Petrard actually said in the late Cerning's call that merchants tend to work even closer together with D-Local when the business grows.

51:09Shawn O’Malley: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 for them to bring those things in-house. But that's not what you see. So it used to be a merchant coming with 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 across the entire global south. And that's not just Brazil. It's not just Mexico. It's also the other 50 plus markets that D-Local operates in. So you could argue that, well, what happens if only Brazil, Mexico, and Argentina matter in 10 years' time?

51:45Shawn O’Malley: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 stories 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 in just two or three of the markets in the entire world that D-Local operates in, you would have huge potential in the long run.

52:11Daniel Mahncke:Preston Pysh So these companies that DLocal works with, they sort of have an incentive for DLocal to not become a monopoly. And it sort of reminds me of our Copart episode a while back. There was this dynamic where insurance companies would split their volumes between Copart and Copart's main competitor, even if Copart was the better operator, because they didn't want Copart to become a monopoly with just too much pricing power.

52:38Shawn O’Malley:That's a really good analogy, actually. I think the major difference that I could think of is that the insurance market, so Copart's customer base, was a pretty consolidated space or is a pretty consolidated space. 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 Copart, 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.

53:15Shawn O’Malley:That's sort of the problem for Dlocal. And again, Dlocal's customer base is highly concentrated. So one other risk that I see is that the fragmentation argument just gets weaker over time. And we discussed this. So when there are only four markets and they are all that matter to Netflix, to Spotify, to 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.

53:47Shawn O’Malley:So we basically know this phenomenon from Uber to stay with some analogies on the companies that we own in our portfolio. So the top 10 cities it operates in are basically responsible for a very significant chunk of the overall business. So if that happens, again, to the most important markets in South America, that's also a problem that I see for D-Local. And maybe before we move on, another difference is that D-Local has taken the opposite approach up until now. So they didn't try to flex their muscle and sort of get the highest margin deals. They prioritized volume and onboarding these large merchants, which is why I mentioned that before, that take rate had this sharp decline.

54:24Shawn O’Malley:So this scale economy's share model also lowers, in my opinion, the likelihood of customers being afraid of price gouging at any point, then either ship volume somewhere else or do it in-house.

54:35Daniel Mahncke: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?

54:45Shawn O’Malley:So the way it currently works is that merchants work with Stripe and Ateon as well as Dlocal. So, you know, the Western players take the Western market and then Dlocal handles everything related to the emerging markets. And in the end, it really comes down to once again, I have to say that like 10 times a day fragmentation. So if the markets stay as fragmented as they are today, it makes very little sense for Stripe or Ateon to invest a lot of money there compared to projects in their home markets. I mean, there's a lot of competition. So you have a competitor at scale with Dlocal, which never makes it easier to get into a new market.

55:18Shawn O’Malley: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're a company that makes significantly higher margins than the average business, investors don't like when that changes. And it's sort of different when Dlocal does it, because that stock has been absolutely hammered over the last five years. And we'll probably get into why that happened. But it's currently trading at 15 times earnings. And Adyen is still a company that's running at 25 earnings. So my argument here is just that they have a bit more to lose in terms of the market sentiment.

55:49Daniel Mahncke:So to an extent, I mean, it comes back to opportunity costs.

55:52Shawn O’Malley:It's opportunity costs. 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 tech stack on their own and focus very heavily on vertical integration, which in part, because many of their competitors have become older and less vertically integrated over time through M &A. I mean, PayPal lost to them because they had so many battles to fight that they just sort of 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 first and foremost merchant acquirers.

56:26Shawn O’Malley:So the payment infrastructure is already there and everything is dominated by credit card rails. And that's obviously different in Dlocal's markets. And because of that, Dlocal is also built differently. So it's much more of a horizontal player where Netflix comes around and plugs in. And then it's about getting rid of all of the complexity, not necessarily through your own tech stack, but by just optimizing how to use what you have at hand in those markets. And that could be PIX in Brazil, could be UPI in India, and many, many other potential methods as well. So I guess the point being, it's a very different value proposition.

56:59Shawn O’Malley:And if I can just bring up another analogy here, It's similar to how Amazon would need to invest tens of billions of dollars to compete with MercadoLibre in Brazil or their main markets because e-commerce is not the same everywhere. And the customer needs are different. And that's not the game that Amazon is used to playing.

57:16Daniel Mahncke:And it looks like the D-local ADN story is actually quite similar to that dynamic. I looked it up before our recording here, and it looks like ADN 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 MercadoLibre, that they just haven't put in enough money to really prioritize winning. And so ultimately, Melli has pretty much won Brazil over Amazon and D-Local won it over audience.

57:57Daniel Mahncke: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.

58:14Shawn O’Malley:We shouldn't double down too much on the narrative though, because in the end, we still need those Western merchants to win market share and expand into the markets that Delocal is actually operating in. So not just the competitors in the payment space, we also need Amazon to still be in Brazil and not totally get lost there.

58:31Daniel Mahncke: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 Delocal bear thesis, then I also think of stable coins. So to what extent do you feel concerned that stablecoins could be bad for business for DLocal?

58:58Shawn O’Malley:Well, DLocal launched a product they call stablecoins full in April of this year. So like most other payments companies as well, everybody is a stablecoin product by now. And they offer anything from on-ramp to off-ramp to settlement and so on. And what makes this especially interesting for DLocal is that two thirds of all stablecoins are held in emerging markets, basically as a hedge against the local currency falling apart. And Argentina alone did something like$34 billion of stablecoin transactions in a single year, most of it cross-border to get around capital controls. And the threat for Delocal is that either companies will use stablecoins themselves to settle transactions, or maybe that Delocal is doing so, but at significantly lower margins, with the current high forex spreads basically not existing anymore.

59:44Shawn O’Malley:And you might remember my last mile argument from the Remedley episode we did a while back where in emerging markets, people don't save or invest money 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 right now. And in emerging markets, it's pretty different where people need that money to constantly pay for things. So someone in Argentina doesn't want a USDC balance sitting in a wallet, they need pesos in their bank account with the tax handle, with all of the compliance done, and then converting that stablecoin into local fiat and actually pushing it into the local way.

1:00:20Shawn O’Malley:So be that. PIX in Brazil, a bank account in Buenos Aires, all of that is what D-local is needed for.

1:00:26Daniel Mahncke:Preston Pysh 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.

1:00:45Shawn O’Malley:Right. Although I should say that this is my working theory and that makes more sense to me, but perhaps we'll look at it 10 years from now and it worked out differently. And I know that maybe you would take the other side of that bet. Okay.

1:00:57Daniel Mahncke:Well, before we get to the financials, the incentives and all that kind of stuff, there is one other parallel that D-Local has with one of the companies that we covered just recently. And so just like Caspi, D-Local was the target of a short report a couple of years ago. So anything we should know about that?

1:01:16Shawn O’Malley:Yeah, I think I might just have the wrong experiences, the short seller reports, 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 the stock 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 Muddy Waters. And it was in 2022. We all know what happened in 2022, where the market tanked, there were a lot of way over valued companies.

1:01:49Shawn O’Malley:And 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, there just wasn't much to it, if anything, actually. I mean, the claims were that TPV was overstated, that the take rate was too high to be realistic. Back then it was still high, not 0.9%. And the founders mixed up business accounts with the merchant's money. And also, and that's sort of the last point, that insiders sold about$1 billion 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.

1:02:24Shawn O’Malley:But I think back in 2021, again, most stocks, they traded at absurd valuations. So, you know, selling some stock after the lockup period ended when D-Local was trading at a multiple of 350 makes a lot of sense, if you ask me. You know, 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 outright false. I mean, D-Local's bought ran an independent review with outside investigators and on the specific client funds allegations. And the review basically verified that merchant cash and corporate cash sat in separate accounts and matched the bank statements.

1:03:00Shawn O’Malley:And one thing that I should also add, and that's pretty astonishing, not a single merchant left back then. So the stock took 50%. The short report was just there. Not a single merchant left the company.

1:03:11Daniel Mahncke: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 Dlocal's take rate to Stripe and therefore argued Dlocal's take rate was unreasonably high. But with Dlocal 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, three years have passed. TPV went from 10 billion to 45 billion.

1:03:51Daniel Mahncke: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.

1:04:04Shawn O’Malley:I got to admit though that it seemed like the founders did make some beginner's mistakes that sort of, I would say, invited this sort of attention. And while the short report definitely lacked substance. There was also a federal lawsuit regarding the local not adequately, you know, disclosing its Argentina Forex 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 Arndt to become the new CEO.

1:04:38Shawn O’Malley:But I would actually, you know, I like that having Pedro as CEO is, I think, the best that could have happened to this company.

1:04:43Daniel Mahncke:It sounds like we got a real key man here. Pedro Arndt is a vital part of the thesis, would you say?

1:04:50Shawn O’Malley:He is, but I want to mention it's not just because he was at MercadoLibre.

1:04:54Daniel Mahncke: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 the CFO, he played a significant role in that. And he also studied at Oxford and and worked for Bain Consulting. So when you take all of 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.

1:05:19Shawn O’Malley: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 D-Local. 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.

1:05:50Shawn O’Malley:And how does that incentive system work? Well, unfortunately, we don't know a lot about the incentive system because while Delocal is operationally headquartered in Uruguay, it's officially incorporated in the Cayman Islands. And that basically means it's legally exempt from, you know, the paid disclosures of a U.S. company or, you know, that a U.S. company usually has to publish. So I can't really tell you what Petro Arndt 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 back in 2024, which was up from about$5 million just two years earlier.

1:06:26Shawn O’Malley:And in terms of stock and options, D-Local hands out three kinds of stocks. So it's options, restricted stock, and then performance units. And the mix, I got to say, it doesn't look too inspiring. I mean, the majority of the bonus is paid in 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 Pedro Arndt.

1:07:00Shawn O’Malley:But obviously, that would be speculation. And I think it's highly unlikely.

1:07:04Daniel Mahncke: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 there impact Dlocal's business? Because in the end, Argentina is about 20 % of lat ham revenue. So it is not a small portion.

1:07:23Shawn O’Malley:Yeah, Argentina is a complicated market. So for a long time, it was one of Dlocal's most profitable markets, which to some extent was because of the complexity. And then for many years, Argentina had something called SIPO, which means trap or clamp, if you would translate it. And it's basically a 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, well, that means you have to get that money out.

1:07:56Daniel Mahncke:And because it was difficult, Dlocal could charge high fees to merchants for its service of making it possible to be able to transact internationally.

1:08:07Shawn O’Malley:Right. But due to just the fast 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. And things have settled, at least to some extent, because of the policy changes that Millet pushed through over time. So he basically got rid of all of the currency controls, which of course is good, but it's also to some extent bad for the local because that's where they made their money.

1:08:38Shawn O’Malley:And on one hand, the margin is now lower than it is before. On the other, you could also argue there's less volatility and also less political risk. So I see it as a margin headwind, but also a quality of earnings upgrade.

1:08:51Daniel Mahncke:Preston Pysh So when I have to summarize the case up until now, you would basically buy D-Local 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 D-Local. And so D-Local 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 in those geographies.

1:09:37Shawn O’Malley:I think that's pretty on point. And I think the local 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 the local status as sort of the main beneficiary of these megatrends. And I'm quite certain there will be competition over time, as there always is. And some customers will probably shift part 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.

1:10:14Shawn O’Malley:I don't want to say that's a moat 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, DeLocal conducts strategic share repurchases, which is something that I know you and I can appreciate.

1:10:30Daniel Mahncke:Strategic buybacks are something that always are 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?

1:10:45Shawn O’Malley: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, 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 in March when the stock still traded closer to$3 billion. And now it's about$4 billion, but that's still 7 % to 8 % of the company repurchase in the next two to three years.

1:11:21Shawn O’Malley:And with the volatility of D-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 yield of about 3 % to 4%.

1:11:37Daniel Mahncke:To be fair, I mean, Delocal is a relatively asset-light business. And what that means is there aren't that many reinvestment 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.

1:12:00Shawn O’Malley:I would also favor buybacks. But I guess part of the reason for the dividends is that the founders are getting paid that way. I mean, they have 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 the ability to generate cash flow, and that's why we're paying a dividend. Plus, we want to get paid.

1:12:21Daniel Mahncke:What about the M &A front? Do they have any history of making

1:12:24Shawn O’Malley:acquisitions? Not really. I mean, D-Local recently won to buy Aza Finance, AZA, 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 they initially planned. And then Elogal 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 capitalized business, highly profitable, paying back shareholders, through buybacks and dividends.

1:13:02Shawn O’Malley:And I think there are worse things than that, right?

1:13:04Daniel Mahncke:M &A does, of course, tend to have the reputation, and rightfully so, that it destroys value. Most acquisitions have not been good for shareholders. And serial acquirers like Constellation Software and Berkshire are, 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 DLocal is keen on playing. But how do you think about things on the stock-based compensation front? Are the buybacks actually reducing the share count materially? Or is DLocal issuing so many shares that it basically offsets the buybacks that they're doing?

1:13:48Shawn O’Malley:So I could tell you that a stock-based comp 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 SBC measured against gross profit isn't outrageously high either, but it's about 5%. So it's certainly not immaterial. And in the last five years, the share count has been more or less flat, but that obviously should change now with a new repurchase program.

1:14:15Daniel Mahncke: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 D-Local that investors should be aware of, and that you would look at to keep track of whether D-Local is on the right path? Because this does seem to be a long-term thesis that we'll want to be monitoring.

1:14:37Shawn O’Malley:Yeah, I mean, it certainly is. And I think the first thing to look at is obviously TPV, total payment volume. Last year, TPV was about$40 billion, so up 60 % year over year. And since 2019, the CAGR has actually been almost 80%. And just in the last few quarters, growth has accelerated again after a weak quarter in 2024. So you see the red 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, D-Locals financials, I think you can sort of explain them as looking like the letter of a V.

1:15:18Shawn O’Malley:So you know, it goes upwards, and then it goes downwards. And the part of the V that drops is sort of the dynamic that I described where, 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 helped, but maybe, you know, was an analogy that at least some of you guys resonated with. And I would say going to the metrics, a good one to track the operating leverage is the ratio of EBIT.

1:15:52Shawn O’Malley:So, you know, the earnings before interest and taxes to gross profit, because what that measures is basically of every dollar of gross profit, the D local keeps how much survives operating expenses and drops actually down toward the bottom. And when the current investment cycle ends, this metric should show a clear upward trend, which has already started.

1:16:12Daniel Mahncke:What about metrics regarding the customer base? I mean, it would still make me somewhat nervous to know that DLocal 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?

1:16:31Shawn O’Malley:DLocal 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 percent. 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. And that's also why net revenue retention stays as high as it currently is. And in terms of geography, you already see a slow trend toward more diversification.

1:17:10Shawn O’Malley:I mean, in 2023, for example, a couple of years back, the top three markets made up 55 % of revenue. Now it's 50%. It's slight improvement, I would say, on that front. And obviously, that's not because the other markets are shrinking, but because the other markets are outgrowing the top three.

1:17:26Daniel Mahncke: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.

1:17:41Shawn O’Malley:Well, today, instead of forecasting revenue, we care about TPV and the net take rate for the top of our model. So I have TPV growing at 38%, so close to 40 % through 2028, and then decelerating to 20 % after that for the next two to three years. And then Delocal's own guidance for 2026 is still 60 % TPV growth. and considering past growth rates and the still low penetration overall, I do think I haircutted here quite a bit and we could see more growth than that. And I have the tailgate decrease going on for a while, although I wouldn't be surprised if we see a sort of stabilization in the next few years and perhaps even quarters, although I know that you would probably look at that a bit more skeptically.

1:18:23Shawn O’Malley:But some of the calls and interviews that I listened to from Pedro Arndt made it seem like he thinks a bottom should be coming soon. But, you know, I'm a skeptic too, So I still have the take rate decreasing to slightly below 0.7 % within the next five years.

1:18:37Daniel Mahncke:And these assumptions are basically a continuation of that V dynamic that we just discussed, right? I mean, TPV grows fastest, but the take rate declines and thus gross profit grows slower. And so I see that D-local is guiding for about 30 % gross profit growth for 2026. and then you're assuming a gross profit CAGR compound annual growth rate of 19 % to 20 % looking forward.

1:19:05Shawn O’Malley:Right. And that basically starts the other side of the V, to stay with that example, where 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 EBIT margins up, resulting obviously in more profits so that net income is compounding at least a percentage point or two faster than gross profit. And honestly, a surprisingly part of the return will likely also come from dividends and the buybacks. So that's the sort of special thing about Dlocal. It's not only growing fast, but it's also a cash printing machine. And if it keeps the 30 % pay 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 of buybacks over just the next five years.

1:19:50Shawn O’Malley:And given that I expect quite a volatile stock and D-locals management is good at allocating capital, and I've proven that in the past, I think they will execute those buybacks at pretty good prices. So I assume the share decline rate of about 2.5 % per year, which would somewhat be$17 to$18 per share.

1:20:07Daniel Mahncke: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 seeing in your model right now, where does that leave us?

1:20:18Shawn O’Malley:The expected return under these assumptions, and with a margin of safety of about 20%, is about 22 % from today's levels. That's the 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 tell you that in the bear case, in which growth is still quite reasonable, but the margins start declining instead of growing, the stock can quickly half from today's prices.

1:20:46Daniel Mahncke: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. And so it's a scenario where basically you don't have any operating leverage kick in.

1:21:02Shawn O’Malley:Which to be fair is sort of antithetical because we already see the operating leverage kick in right now.

1:21:08Daniel Mahncke:And with that scenario, again, where does that leave us overall with DLocal?

1:21:15Shawn O’Malley:As I said earlier, I own DLocal in my personal portfolio, and I believe my average cost base there is 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 from owning it 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 lack cash, and then buy more on weakness.

1:21:45Daniel Mahncke:It's probably no secret that I have hesitations about payment businesses, but the metrics you walk through sound very promising. And 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 reliance 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.

1:22:22Daniel Mahncke: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, 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.

1:23:04Daniel Mahncke:And 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?

1:23:22Shawn O’Malley: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 anchoring 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.

1:23:56Shawn O’Malley:If we think about Mercado Libra, if you think about Nubank, and then also Dlocal. 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?

1:24:08Daniel Mahncke: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,

1:24:17Shawn O’Malley: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 after nation 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 have taught me, 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 after nation here on the show to find the best stocks. And perhaps also the next one will be an international one.

1:24:52Shawn O’Malley:We don't know yet, but you will find out pretty soon. So see you then. Thanks for listening to TIP. 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 your 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 nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product hosts guests and the investors podcast network may hold positions in securities discussed and may change those positions at any time without notice references to any third-party products services or advertisers do not constitute endorsements and the Investors Podcast Network is not responsible for any claims made by them.

1:25:48Shawn O’Malley:Copyright by the Investors Podcast Network. All rights reserved.