Summary
Muddy Waters Research, a prominent activist short seller led by Carson Block, published a scathing report on DLocal Ltd. (NASDAQ: DLO), a Uruguay-based payment processing company. The report alleges that DLocal is likely a fraud, citing contradictory financial disclosures, inflated take rates, questionable foreign exchange revenues, and serious governance deficiencies that raise concerns about the company's reported stellar growth and profitability.
Who is DLocal Ltd.
DLocal Ltd. is a fast-growing cross-border payment processing company based in Uruguay that went public on NASDAQ in June 2021. The company provides payment solutions for global merchants operating in emerging markets across Latin America, Africa, and Asia, processing both pay-ins and pay-outs for major clients. DLocal spun out from AstroPay, a high-risk payment processor, in August 2018. The company focuses primarily on large "Global Merchants" which comprised over 90% of its customer base, offering cross-border payment processing as well as local-to-local services. At the time of the report, DLocal had a market capitalization of approximately $6.3 billion and processed billions of dollars in Total Processing Volume annually.
Key Points from Report
Contradictory Financial Disclosures Suggest Cooked Books
- DLocal reported radically different TPV figures for the same merchant cohorts across different filings, with the 2019 cohort dropping 88% from $471 million to $56 million, and the 2020 cohort falling 24% from $343 million to $260 million, all without explanation
- The company disclosed two conflicting sets of foreign currency receivables in the same F-1 filing, with discrepancies of approximately 10% or over $4 million, suggesting difficulty keeping manipulated numbers consistent
Fraudulent Accounting to Hide Insider Loans
- Evidence shows DLocal altered its accounting records to disguise a $31.5 million pre-IPO loan made to CEO Sebastian Kanovich and President Jacobo Singer for stock option exercises
- Subsidiary filings in Malta prove the options were exercised and shares allotted in December 2020, contradicting the company's later claims that exercises occurred in March-April 2021 and were funded with outside capital rather than company loans
Implausibly High Take Rates and Foreign Exchange Revenue
- DLocal's net take rate of 3.4% significantly exceeds competitors like Ebanx at 1.4% and payment giants like Adyen at 0.9%, raising red flags about whether figures are "too good to be true"
- Foreign exchange gains and fees constitute approximately 40-50% of DLocal's revenue, with the company apparently earning around 3% of cross-border TPV on FX alone in 2020 when industry standards suggest it should be no more than 1.5%
- Former executives confirmed that DLocal's pricing was comparable to or even slightly more expensive than competitors, contradicting the company's superior profitability margins
Take Rates Should Have Declined But Mysteriously Increased
- In 2020, DLocal's take rate grew 17.5% despite conditions that should have caused compression, including the fastest-growing merchant cohorts (2018 and 2020) having the lowest take rates
- The company added Google as its largest customer in mid-2020, but at razor-thin gross take rates of just 0.1-0.3% for local-to-local transactions in Brazil, initially operating at a loss
- DLocal shifted significantly toward local-to-local payment processing which carries much lower margins since it eliminates lucrative foreign exchange spreads, yet overall margins improved
Client Funds Reconciliation Raises Misappropriation Concerns
- When adjusting DLocal's 2020 cash flows to separate merchant funds from company funds, there is a $3.3 million deficit in the company's ability to fund its $15 million pre-IPO dividend to shareholders
- At the Malta Operating subsidiary level, which generated 45% of 2020 revenue, a similar reconciliation shows a $4.1 million deficit in the subsidiary's ability to fund its $25.8 million dividend payment
- These discrepancies raise the troubling possibility that DLocal may have improperly dipped into segregated client funds to pay insiders
Egregious Governance Failures Create Fraud Opportunities
- DLocal operates as a multi-billion dollar fintech company heavily reliant on manual spreadsheet processes rather than automated, integrated systems for payment processing and treasury functions
- The company's Malta subsidiary breached regulatory Tier 1 capital requirements in both 2020 and 2021, with management providing no explanation for the 2021 shortfall despite having raised over $150 million through its IPO
- DLocal appears to deliberately avoid UK Financial Conduct Authority registration for its two UK subsidiaries that collectively accounted for 45.6% of 2020 revenue, despite having material operations and employees there
Questionable Auditor Independence
- DLocal uses PwC Argentina as its consolidated auditor despite primary operations being in Malta and the UK, raising concerns about audit resources and quality
- The two critical UK subsidiaries are audited by MHA MacIntyre Hudson, a firm known for taking clients dropped by Big Four auditors and whose work was under investigation by UK's FRC
- The same audit partner at MHA MacIntyre Hudson audits both DLocal's UK entities and multiple AstroPay-affiliated companies, creating significant conflict of interest concerns
Massive Insider Selling and Executive Exodus
- Directors and management sold approximately $1 billion of shares within the first five months of DLocal going public, with the IPO and secondary offerings designed primarily to enrich insiders rather than raise capital
- Since June 2022, at least six high-level executives have resigned including the COO, CTO, CFO of the Malta entity, Global VP of Finance, and the General Manager for APAC
- General Atlantic, DLocal's largest outside investor, has already recouped its entire $153 million investment plus significant gains by selling $390 million worth of shares
Activ8 Analysis
The Muddy Waters report on DLocal presents a comprehensive case built on multiple layers of concerning evidence rather than a single smoking gun. The contradictory financial disclosures, particularly around TPV figures and foreign currency receivables, suggest either extreme incompetence or deliberate manipulation. The subsidiary-level evidence proving that management altered accounting records to hide the timing and funding source of executive stock option exercises is particularly damaging, as it demonstrates a willingness to falsify records. When combined with foreign exchange revenue that appears to be roughly double what industry benchmarks would suggest, and take rates that defied logic by increasing when they should have compressed, the financial picture becomes increasingly suspect.
Beyond the numbers, the governance red flags are extensive and troubling. Operating a global payment processor on spreadsheets, repeatedly breaching capital requirements, avoiding FCA oversight, using questionable auditors with conflicts of interest, and maintaining opacity around client fund segregation creates an environment where fraud could flourish unchecked. The cash flow reconciliation issues raise particularly serious concerns about whether client funds may have been inappropriately accessed. The massive insider selling and subsequent executive exodus suggest that those closest to the operations may have recognized fundamental problems. Investors should carefully consider whether DLocal's reported financial performance aligns with the underlying business economics and competitive dynamics of the payment processing industry.