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On Wednesday, JPMorgan analyst Guilherme Grespan issued an upgrade for DLocal Limited (NASDAQ: DLO), changing the stock rating from Neutral to Overweight and raising the price target from $14.00 to $18.00. The upgrade marks a significant shift in JPMorgan’s stance on the company, as this is the first time DLocal has been rated Overweight since its initial public offering approximately four years ago. According to InvestingPro data, DLocal’s stock has shown strong momentum with a 51% surge over the past six months, and analysis suggests the stock is currently trading below its Fair Value, supporting JPMorgan’s bullish stance.
In the past, the firm had maintained a Neutral rating due to several concerns, including high market expectations for total payment volume (TPV) growth and net take rates, the company’s exposure to foreign exchange and geographic risks, and the assumption that its cost of equity was on par with developed market peers, warranting similar multiples to those of companies such as Adyen (AS:ADYEN). Despite trading at a P/E ratio of 31.3x, InvestingPro data reveals the company maintains a strong financial health score and has demonstrated robust revenue growth of 25.6% in the last twelve months.
However, Grespan noted that the situation has evolved. DLocal’s stock has declined by roughly 40%, while the S&P 500 index increased by 50%. Market sentiment has become bearish following disruptions in select profit pools. JPMorgan now sees this as an opportune moment for investment, with lower market expectations and a promising growth trajectory ahead for DLocal.
The analyst highlighted several factors contributing to the improved outlook. Argentina is expected to transition from a headwind to a tailwind, with system card TPV potentially growing close to 100% in USD terms. Brazil, which has previously posed challenges due to its competitive digital payments market, now represents a smaller portion of DLocal’s gross profit, down to about 20% from 37% a year ago. Furthermore, Egypt, Africa, and smaller Latin American countries are anticipated to continue driving TPV growth, and large foreign exchange spreads are likely to enhance gross profit contributions. Grespan added that they do not foresee a devaluation of the Egyptian pound in the short term, which should keep spreads stable.
This upgraded rating and price target reflect JPMorgan’s reassessment of DLocal’s prospects, considering the company’s recent performance and market conditions.
In other recent news, DLocal Limited has been at the center of attention due to several significant developments. A detailed report by Hollenden Square Research raised concerns about the company’s financial practices, suggesting potential irregularities and comparing DLocal’s operations to past financial scandals. The report questions the reliability of DLocal’s financial statements and highlights an ongoing investigation by Argentine regulators into potential capital control evasion. Despite these allegations, CEO Pedro Arnt discussed the company’s strategic direction, indicating a focus on potential acquisitions to enhance its product offerings and market share, particularly outside Latin America. Arnt emphasized that DLocal is not currently exploring a sale, despite past takeover proposals. However, reports have surfaced that DLocal is considering a potential sale, working with Morgan Stanley (NYSE:MS) to gauge interest from prospective buyers, although no sale is certain. Analyst Jamie Friedman from Susquehanna International Group maintains a positive outlook on DLocal, citing its competitive advantages in emerging markets payments. The company is also planning to invest in new products and digital infrastructure to support future growth.
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