ADYEY - Adyen: Investments Will Slow Shares Will Soar

2023-11-10 09:02:35 ET

Summary

• Adyen, a Dutch fintech company, has suffered from deteriorating investor sentiment and has lost over two-thirds of its market value since September 2021.
• Adyen offers a unified platform for businesses to manage their payment needs, with a focus on simplifying global payments and providing seamless solutions.
• The company's global reach, scalability, and direct acquirer model contribute to its success and attract high-value customers. Adyen is poised for stellar growth in the long run.
• Mr. Market has been spooked by Adyen's aggressive investments in 2023 which has impacted EBITDA margins. Going by the commentary in the Q3 business update, this is about to reverse.

Being a fintech company has been tough in the last couple of years. Amid rising interest rates, deteriorating investor sentiment toward the tech sector, and fears of a recession continuing to linger, fintech stocks have delivered disappointing returns. Now, imagine being a fintech company based out of Europe, a region that has underperformed U.S. equities in the last decade due to waning investor enthusiasm toward the prospects for the regional economy. Adyen N.V. ( ADYEY ), a Dutch payments platform that operates globally, has suffered hefty blows from all these factors in the recent past. After flying high during the pandemic days, Adyen has lost more than two-thirds of its market value since September 2021. This year alone, Adyen stock has lost 27%.

Since publishing the third-quarter business update on November 8, Adyen stock has soared more than 40%, with investors cheering recent growth and new plans for the future despite the company slashing growth projections.

The Adyen Advantage

Since this is the first time I am covering Adyen on Seeking Alpha, I thought it best to provide a brief overview of why Adyen is well-positioned to succeed in the long run. Fellow SA analysts From Growth to Value and Louis Stevens have extensively discussed the company, its business model, and competitive advantages, so I will not dive into those details here. Instead, I will discuss the value proposition offered by Adyen to its clients to help readers understand why the company is poised to grow in the long run.

Adyen is a global payment company that provides businesses with a unified platform to accept payments, manage risk, and optimize revenue streams across multiple channels. The value proposition Adyen brings is centered around its ability to simplify the complexities of global payments, providing a seamless and integrated solution for businesses. A closer look at Adyen reveals several factors that have contributed to Adyen's success over the years.

Adyen's biggest selling point is the single, unified platform it offers, allowing businesses to manage all of their payment needs. This platform is truly cross-border in functionality and enables businesses to accept payments in various currencies and through various payment methods. Handling transactions across different channels is a breeze with Adyen, which is why tech giants such as Meta Platforms, Inc. ( META ), Microsoft Corporation ( MSFT ), and Netflix, Inc. ( NFLX ) trust Adyen to handle and manage payments.

Adyen's global reach constitutes another important part of the value proposition it offers clients. Through Adyen, businesses will gain access to a wide range of local payment methods, helping companies scale aggressively and cater to the preferences of a global market without having to complicate payment handling.

The ease of scalability of Adyen's platform is another main selling point. The single platform is designed to cater to the needs of both small and large-scale enterprises and can be tailored to fit the needs of different types of businesses as they scale.

A deeper dive into Adyen's business reveals its international strengths play a key role in helping it attract and retain high-value customers.

Adyen operates as a direct acquirer, holding acquiring licenses in several countries. This means that Adyen is directly connected to the card networks, allowing it to process transactions without relying on third parties. This model enables faster transaction processing and a more streamlined payment flow to Adyen's customers. Full-stack Adyen Acquiring is currently available in many key regions including Australia, Brazil, Canada, Japan, Malaysia, United Arab Emirates, and the United States.

The global presence of Adyen Acquiring

By holding its own licenses, Adyen reduces its reliance on third-party banks, which can result in greater control over the payment process, increased flexibility, and potentially lower costs. This also allows Adyen to offer a unified platform for merchants, simplifying their payment operations.

One of the main strengths of Adyen is how it facilitates and handles transactions from alternative payment methods that are popular in different regions of the world, which include bank transfers and digital wallets. Examples include Alipay in China, iDEAL in the Netherlands, and Boleto Bancario in Brazil. Adyen also allows businesses to customize and localize their checkout pages to align with the preferences and expectations of customers in specific regions. This includes displaying payment options in a user-friendly manner, offering different language choices, and adjusting the checkout layout to match local design conventions.

Adyen Is Nearing An Inflection Point

Adyen entered 2023 with plans to aggressively invest for growth. Although the company's growth ambitions were met with macroeconomic pressures such as surging inflation and elevated interest rates, Adyen did not slow down. In August, Adyen stock crashed as growth decelerated across the board while EBITDA fell 10% in H1 2023 compared to H1 2022. The hit to EBITDA came primarily on the back of aggressive hiring by the company as Adyen focused on building a high-quality talent pool to access new growth opportunities, especially in North America which has been identified as a potential growth driver. The below excerpt from the H1 shareholder letter explains the company's stance on aggressive investments in talent.

Beyond the current industry dynamics in North America, another factor that impacted our growth was one we wrote about at the end of 2021 too: the fact that we would have liked to grow our team at a higher pace but were unable to hire enough top-quality talent. We now see the impact of a sales team size that did not match our ambitions, particularly in North America. Since then, we have ramped up our investments. That being said, investments in the team and revenue never move simultaneously. Rather, the former drives the latter over time.

Adyen sets high standards for hiring new employees too, which enables the company to build high-quality products that perform well in a crowded marketplace. Adyen CEO Pieter van der Does, in a podcast discussing the hiring process at Adyen, once said:

The board still oversees every hire, regardless of the role. You cannot be hired at Adyen without speaking to one of the six board members. The reason we do it is to put the bar high to ensure that only the best talent join Adyen. With more than 100 different nationalities and more than 2000 employees, we have always had a high acceptance of quirky people, as we primarily look at the content of their contribution.

According to company filings, Adyen hired 551 full-time equivalent employees in the first half of 2023, bringing the total headcount to 3,883 FTEs. In the third quarter, the company added another 175 FTEs, continuing with the aggressive hiring push. As expected, Adyen's hiring push is finally coming to an end, with Q1 2024 expected to mark the end of this aggressive team-building strategy. In the Q3 business update, Adyen wrote:

We are in the final months of our accelerated investment phase. In Q3, we added 175 FTEs to the Adyen team with a continued focus on global expansion and scaling our tech teams.

With aggressive investments nearing an end, I believe Adyen is heading into 2024 on a strong footing to enjoy meaningful margin expansion on the back of an acceleration of revenue growth. I expect macroeconomic conditions to turn favorable by mid-2024 with payment volumes increasing sharply, and Adyen stock is likely to reflect this expected growth ahead of an improvement in the financial performance.

Takeaway

2023 has been a year of investments for Adyen. The company, amid challenging macroeconomic conditions, has remained laser-focused on investing for growth. Although growth decelerated in the first half of this year, this is not a sign of maturity in the global payments processing industry. As Adyen comes out of this investment phase - most likely by mid-2024 - I expect the company to be in a strong position to enjoy operating leverage, coinciding with favorable macro developments. I believe 2024 will be characterized by a return to above-average growth, margin expansion, and attractive shareholder returns.

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