2023-09-11 12:21:03 ET
Summary
- Adyen is a global payment company used by well-known companies like McDonald's, Uber, Netflix, and Spotify.
- The company experienced a significant stock crash, dropping 38.9% in one day. Its historical volatility suggests this was an extraordinary event.
- Reasons to consider Adyen as a good investment include its revenue growth, high returns on invested capital, founder-led management and profitability.
Adyen (ADYEY) is a global payment company that provides payment processing services to a wide range of businesses across various industries. Many well-known companies around the world use Adyen for their payment processing needs. As a matter of fact, Adyen most likely touched your money if you ever went to McDonald's (MCD), caught an Uber (UBER), watched Netflix (NFLX) or listened to your favorite investing podcast on Spotify (SPOT).
The crash
Last August 17th, 2023, the company released its results for H1 2023. In my opinion, the results were positive from a business perspective, but the market clearly thought differently.
Adyen's historical stock price (Seeking Alpha)
Somehow, the crash was not a complete surprise to me (its magnitude was impressive though). Just look at "similar" publicly traded stocks (e.g. PYPL, SQ, MQ). They all had >2 sigma moves recently. As I saw its peers crashing on ER, I wondered: Why is this not happening to Adyen? Are they superior or immune to reduced consumer spending? Of course not, business performance is somehow correlated, especially given the current inflationary climate. It was simply a matter of time. It only took the slightest disappointment in top line figures for the market to punish the stock. Just so that we understand the dimension of the crash. Unlike other high growing companies, Adyen's stock is not that volatile. Before the drop, its 1-Yr Beta was around 1.25 (for comparison, AAPL was 1.33 and SNOW was 1.75).These are Adyen's trading statistics based on daily data:
- Avg daily move = 0.06% (1,337 trading days)
- Avg positive = 1.94% with a 54% probability (719 trading days)
- Avg. negative = -2.13% with a 46% probability (618 trading days)
More about Adyen's historical volatility (using standard deviation):
- 1 sigma = 2.98% (78.9% distribution)
- 2 sigma = 5.95% (95.8% distribution)
- 3 sigma = 8.93% (99.1% distribution)
Now that you know what Adyen's historical three sigma move is, let me tell you that the stock plummeted by 38.9% (close to close) on August 17th, 2023. That's a 13 sigma move!!!
Adyen's historical distribution of returns (Own work)
Hence, from a statistical point, the crash was extraordinary to watch. I doubt it will ever occur again. As of today, the stock sits at a 73% drawdown from its historical highs.
Adyen's maximum drawdown since IPO (Own work)
The business
As mentioned above, Adyen is a global payments technology company that provides a wide range of payment processing solutions to businesses. Founded in 2006 in the Netherlands, Adyen has grown to become one of the prominent players in the payment processing industry. The company's name, "Adyen," means "beginning" in Surinamese, reflecting its mission to provide a fresh start for businesses seeking efficient and innovative payment solutions. Unlike some of its competitors, Adyen is 100% B2B and payment processing focused. In my opinion, its closest rival is Stripe (STRIP), but they are of course different. Adyen is often favored by large and multinational businesses (i.e. enterprise segment) due to its global reach and ability to handle complex payment setups. Conversely, Stripe is more popular among startups, SMBs, and online marketplaces, due to its user-friendly development tools and ease of integration. Hence, we can imply that Adyen should have longer sales cycles, but higher retention rates (change causes more disruption among large enterprises).
In previous articles, I've read many comments stating that the company has no moat, that payment volume is very easy to switch between providers or that payment processing is becoming a commodity solution. If that's true, why does Adyen exhibit gross retention rates around 99%? Why are its clients reluctant to change? With that, here I present five reasons why I think Adyen is a good investment.
1. Revenue growth
Adyen's revenue growth trajectory is outstanding. The company reported net revenue of 212.3€ million for FY 2017. Five years later, FY 2022 net revenue had grown all the way up to 1188,4€. That's 5.6x or >40% CAGR. Of course, revenue growth is slowing amid higher inflation and interest rates (consumers of Adyen's clients are consuming less). As a matter of fact, Adyen's latest press release highlighted that their clients have shifted focus from growth to cost reduction. This makes perfect sense, given the difficult macroeconomic environment, however, I expect revenue growth to re-accelerate in the coming years.
2. ROIC & ROIIC
Lately, I've been paying much more attention to Returns on Invested Capital ((ROIC)), but more importantly, Return on Incremental Invested Capital (ROIIC).
Adyen has been earning very high returns on invested capital for many years.
Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns - Charlie Munger
Adyen's ROIC & ROIIC (Own work)
If you want access to the model, just drop me a line in the comments and I will send it to you ))
Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. - Warren Buffett, 1992 Shareholder Letter
3. Owner-operator
It's great to see that the company is still founder-led and that management holds shares. Altogether, they currently own around 7.6% of outstanding shares. This is a comfort sign, although I would personally prefer that they had greater ownership, perhaps above 10%.
Skin in the game is usually accompanied by shareholder-friendly decisions. Adyen had 30.6 million diluted shares outstanding in 2018. Last month they reported 31.1 million diluted shares outstanding for H1 2023. That's a 1.66% increase in shares outstanding (in 5 years). It's also great to see that they do not distribute dividends, implying that there is still significant room for growth. Notwithstanding the above, given the latest market overreaction, it would be great to see the announcement of a share repurchase program. However, management has been very open about hiring being a priority, so I guess this is not currently on the table.
It's also nice to see that there are no multiple common stock classes. Management not only keeps it simple, it ensures that interests with public shareholders are all aligned. So they are feeling the pain from the latest drop much more than you and I.
4. Size
Perhaps one of Adyen's weakest points is its market capitalization. In the past year, I've turned my focus into the small and microcap space, therefore a >20€bn market cap is "big" for me. Of course, this is all subjective. My focus in smaller companies is in the hope of finding a multibagger. So, let's ask a provocative question: Could Adyen become a 100x from current prices? That's a 2.4€ trillion company, and we all know how many stocks trade above the $1 trillion mark. Size does matter. If it becomes a monster such as Mastercard, then it's roughly a 15x bagger (excluding buybacks). Of course, they are very different businesses. I'm not saying it will grow all the way to Mastercard's capitalization, but if you buy a great business and you are willing to wait the time and volatility, you will eventually get there.
Warren Buffett quote about time from The Essays of Warren Buffett: "Time is the friend of the wonderful business, the enemy of the mediocre."
Coming back to Adyen's size, if we take into account the cash in the balance sheet, the EV is around 18€bn. On an FCF yield basis, Adyen currently trades around 11% (assuming a normalized FCF of 2€bn).
5. Profitability
Unlike many other high-growth stocks in the technology space, Adyen has been profitable since its IPO in 2018 (and before). Whether you look at Net earnings or Free Cash Flow, Adyen's figures are remarkable. It's a challenge to find profitable businesses with a high revenue growth story.
Rating
With the above in mind and given the drastic price decline, I rate the stock a BUY, (not yet a STRONG BUY), as I expect further selling pressure towards the end of the year. In fact, I was close to rating it a HOLD because it's rarely a matter of a single "bad quarter".
Risks
Of course, nothing comes with the absence of risk:
Customer concentration : I personally dislike the fact that 18% of total net revenue (20% in 2021) is concentrated among Adyen's top 10 clients. It would be great if we could get further details as it's not the same to have 10 clients with evenly distributed percentage of total revenue, to having 2 clients with 16% of revenue and 8 having the remainder 2%. I will assume the latter just in case and flag customer concentration as a risk.
CEO's health : I couldn't find much about Pieter's health apart from this letter from the company's IR website. Health comes first, but it is of course a very subjective risk if a founder has to step aside.
What I'm doing
First and foremost, I'm long the stock, although it is only about 10% of my intended position size. I bought this starter position several days after the post-earnings crash, so I'm currently at a minor unrealized loss.
Now the interesting part of the trade. I've structured a 2 for 1 Bear Put Spread. I managed to get the following prices:
- Long 1x December 21st, 2023, 700 strike PUT for 35.65€ (debit)
- Short 2x December 21st, 2023, 650 strike PUT for 21.78€ each (credit)
The trade yields a net credit of 7.90€ (-35.65 + 2 x 21.78).
Special disclosure:
- I'm long the Amsterdam Adyen shares (including the options trade).
- These option contracts have a multiplier factor of 10 (not 100).
- Option prices move quickly and will differ to the ones indicated above.
- 1x or 2x is simply the trade proportion, not my real position size.
Let's outline the outcomes
A) The stock rallies sharply : I profit from the long stock position and earn the net credit from the options structure. This marginally reduces the cost of my long stock position.
B) The stock does nothing : I'm long the stock and simply earn the 7.90€ net credit.
C) The stock falls sharply (below 650) : I will be down roughly 18% on my long stock position and get assigned 10 shares of the underlying stock. Also, I will have earned 7.90€ in net credit and a 36.13€ profit from the bear put spread.
- Long stock: 790€ x 1
- Assigned stock: 650€ x 10
- Net credit: 7.90€ x 10
- Spread profit: 36.13€ x 10
In total, I will own 11 shares with a "net" cost of 622.7€ (1+2-3-4, divided by 11 shares).
Of course, you can simply DCA, but this structure suits me well and adds value to my portfolio.
I'm showing my trade structure for educational purposes, hoping that it expands your trading knowledge. If you decide to set a similar structure, make sure you are well capitalized to withstand your broker's margin requirements (present and future). And finally, this structure has a purpose, don't set it for the sake of earning the premium.
Conclusion
I really think Adyen is a great company. The market currently thinks the stock's growth story is over, but this is probably far from true. The stock will probably face a difficult period in the short term, but I strongly believe the business will continue to thrive. If you decide to buy the company's stock, do it at your own discretion and be prepared to add more at lower levels if the selling pressure continues. If you enjoyed reading my article, please consider clicking the Like button and drop a comment below. I look forward to reading your thoughts. Good luck to you all!!
For further details see:
Adyen: 5 Reasons To Consider Owning This Stock