Charting DLocal's Plunge On Short Report: What's Next For The Payments Stock?

For various reasons, short-selling reports have been less pronounced over the last few years. But the Muddy Waters Research firm is still at it. On Wednesday, they identified a new target, online payments company Dlocal Ltd DLO, and investors for now have reacted in a powerful way.

DLocal Volatile Since IPO: DLocal made its debut on Wall Street in June 2021. During its next eight sessions, it put in place a double bottom at the $29.60 area and embarked on an explosive rally.

The issue rallied nearly 150% when it peaked in September of that year at $73.43. By November it was back at the area from which the rally emanated. A vast majority of the price action since November has been in the range of $22-$35, with the one outlier being a dip to $15.19 in May, from where it rebounded and peaked again in August at $33.67.

Since August, the bears have been in control, and the bulls made their stand at the $20 area until Wednesday.

Heads Up: Interestingly, on the day prior to the short report being released, the issue had a horrible day. On double its average volume, the issue peaked at $24.65 early in the session Tuesday but weakened to close down over $1, after being up $3, with a closing price of $21.22.

The Ax: Shortly after noon on Wednesday, Muddy Waters Research released its scathing report. The firm stated that "DLO repeatedly makes contradictory statements about its historical TPVs. We believe that these contradictions exist because DLO is misstating its financials and TPV, and that the web of lies has become too complicated to be repeated consistently."

More concerning to the firm was the excessive insider selling within the first five months of the company going public. That just happened to coincide with the issue’s jaunt to its all-time high. This, coupled with the departure of high-level executives, was another red flag to Muddy Waters.

Investors sided with Waters and cut the issue in half on Wednesday, with shares going from $21.22 to $10.46 on monster volume.

DLocal's Response: After the close on Wednesday, the company responded to the accusations.

“The report contains numerous inaccurate statements, groundless claims, and speculation. Short seller reports are often designed to drive the stock price downwards to serve the short seller’s interests to the detriment of the company’s shareholders. We caution shareholders from making investment decisions based on this report. Local will rebut the allegations in the appropriate forum in due course.”

DLocal Moving Forward: Coming off the open Thursday, the issue breached Wednesday’s low ($10.29), falling to a new all-time low at $9.03, and sharply reversed course.

The stock ultimately gained back 1.34% Thursday, closing at $10.60. 

At this time, it appears that investors wanting to cover a short or attempt a long may not have the luxury of doing that in a rapidly declining market. Therefore, investors may shift their focus to the area between Wednesday’s low and close ($10.29-$10.46) as opposed to the low made earlier in the session.

Of course, how the company refutes the allegations will be the long-term determinant of future price action.