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Shares of financial technology (fintech) company DLocal (NASDAQ: DLO) were crushed on Wednesday after the company released financial results for the first quarter of 2024. As of 12:15 p.m. ET, DLocal stock was down 24%.

DLocal is losing pricing power

DLocal primarily makes it easier for companies to do business without worrying about foreign currency exchange. From a volume perspective, business is booming. In Q1, the company’s total payment volume was up a whopping 49% year over year to $5.3 billion — not bad. Unfortunately, as I’ll explain, this didn’t benefit the business much.

As a smaller company, DLocal has customer concentration risk. In 2023, 60% of the company’s revenue came from its top 10 customers, and one customer accounted for more than 10% of revenue. One of its big customers renegotiated its contract with DLocal during Q1, reducing its take rate.

DLocal’s operating income came in at just $27 million in Q1. This represented a 32% year-over-year drop in profitability — starkly contrasting with its 49% growth in payment volume. This illustrates how big of a deal its declining take rate can be.

Rising risk-reward scenario?

For its part, DLocal’s management doesn’t appear worried. It plans to take advantage of its balance sheet and lower stock price by authorizing the repurchase of $200 million of its shares.

To me, this ups the ante for DLocal’s shareholders. On one hand, the company is still growing and profitable. That’s not a dire situation. And if management is correctly assessing the seriousness of its Q1 problems, then repurchasing shares here could be good for investors.

On the other hand, if DLocal’s management is wrong and this is an early manifestation of a bigger trend — increased competition in the fintech space — the company could be putting itself in a tough spot by using its limited resources on buybacks.

Given how often it happens, I’ll say that investors are overreacting a little today. That said, investors will need to closely monitor the competitive landscape and DLocal’s key financial metrics in the coming quarters because these could become bigger problems.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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