One of the biggest losers as of today's afternoon session is software company DLocal, a whose shares are down -45.4%, underperforming the Nasdaq by -44.0%.
At $11.59, DLO is 64.54% below its average analyst target price of $32.67.
The average analyst rating for the stock is buy. DLO lagged -44.7% behind the S&P 500 index today, and by -24.3% over the last year, returning -39.2%.
DLocal's trailing 12 month P/E ratio is 38.6, based on its trailing Eps of $0.3. The company has a forward P/E ratio of 17.8 according to its forward Eps of $0.65 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2022, the average Price to Earnings (P/E) ratio of US technology companies is 26.5, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide DLocal's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.98. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing DLO's growth potential .
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of DLocal's gross profit margin trends:
| Date Reported | Revenue ($) | Cost of Revenue ($) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 244,120,000.0 | 113,677,000.0 | 53.43 | -7.38 |
| 2020-12-31 | 104,143,000.0 | 44,065,000.0 | 57.69 | -11.1 |
| 2019-12-31 | 55,289,000.0 | 19,413,000.0 | 64.89 | n/a |
- Average gross margin: 58.7%
- Average gross margin growth rate: -9.2%
- Coefficient of variability (lower numbers indicating more stability): 9.9%
We can see from the above that DLocal's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From DLocal's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($) | Capital expenditures ($) | Free Cash Flow ($) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 108,486,000.0 | -1,949,000.0 | 106,537,000.0 | 21.6 |
| 2020-12-31 | 88,486,000.0 | -876,000.0 | 87,610,000.0 | 186.58 |
| 2019-12-31 | 30,723,000.0 | -152,000.0 | 30,571,000.0 | n/a |
- Average free cash flow: $74,906,000.00
- Average free cash flow growth rate: 104.1%
- Coefficient of variability (the lower the better): 52.8%
Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, DLO is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the third quarter of 2022, the mean P/B ratio of the technology sector is 5.57, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. DLocal's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 9, so it's likely that equity investors are over-valuing the company's assets.
As of third quarter of 2022, DLocal is likely overvalued because it has an inflated P/E ratio, an elevated P/B ratio, and an unconvincing cash flow history. The stock has decent growth indicators because of its PEG ratio of less than 1, and margins that remain strong despite their downwards trend. We hope this analysis will inspire you to do your own research into DLO's fundamental values -- especially their trends over time.
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