2023-06-02 04:31:22 ET
Summary
- Adyen, a European payment processing company, has strong growth potential and could become a major player in the payment industry.
- The company faces competition from Stripe, PayPal, Fiserv, and Worldpay but has a competitive advantage due to its lower wage costs and high return on invested capital.
- Adyen's long-term goal of becoming a platform for all payment-related services could further enhance its competitive edge and shareholder returns.
Thesis
Adyen (ADYEY) is one of Europe's most exciting companies, with the potential to become a very important player in everything to do with payments. They could also build a strong moat to protect their earnings if their long-term goals are achieved. But at the moment they need to improve a little bit because they have some advantages, but the really big competitive advantage against a competitor like Stripe (STRIP) is not in place at this point.
However, the market is large enough for more than one player and even two or three leading players would have the potential to deliver strong shareholder returns.
Analysis
Adyen posted really strong numbers in 2022 despite a difficult economic environment. They achieved a 49% YoY increase in processed volume and net revenues increased to €1.3bn, up 33% YoY. Revenue consists of settlement fees and processing fees. Settlement fees vary by payment method and processing fees are €0.11.
The main customers are large or medium-sized companies; small companies are rare, as Adyen requires a minimum turnover of a few million. So growth comes mainly from merchants who are already on the platform and increasing their volume, or from new larger merchants. The churn rate is very low at <1%.
Annual Report 2022
If we look at the net revenues, we see that EMEA is their most profitable region and that Asia Pacific and Latin America are relatively small but growing fast, but the interesting thing is that North America is bigger than EMEA in terms of payments processed but has lower net revenues, which tells us that the margins are better in EMEA.
Competition
Stripe, which recently deepened its partnership with Amazon (AMZN), is one of their competitors. And this has been a huge success for them, as Amazon is responsible for a huge amount of payment volume. But the biggest competitor in terms of volume is still PayPal (PYPL) with 1.36 trillion . But Adyen is growing much faster than PayPal and I could see Adyen overtaking them in the next 3 to 5 years. Other competitors include Fiserv (FISV) and Worldpay (FIS), and there is a really interesting section in the FIS presentation at the J.P. Morgan conference a few days ago where they say:
In global e-comm, and just definitionally, I view our competitor in global e-comm to be Adyen. I think they do a fabulous job by the way.
And when one of your competitors praises your business as much as they do, it really shows that you have a strong and successful business model.
This diagram shows Adyen's value chain and how they have changed the business landscape by cutting out some of the players, making the process faster and with lower transaction costs. But there is a problem with that, because Adyen is sandwiched between two players that have a lot of pricing power. On the one hand, they have their large customers, who push down their fees, and on the other hand, they have Mastercard (MA) and Visa (V), who know that Adyen is dependent on them and can therefore also dictate prices. For example, Stripe, with its smaller customers, only has this problem on one site because its small customers do not have enough power to dictate rates. And this dependency could cause problems for Adyen in the future, so it is worth keeping an eye on.
Competitive Advantage
One competitive advantage that Adyen has over Stripe, PayPal or others is that the majority of its full-time employees are based in Amsterdam, where the wage level is much lower than in cities such as San Francisco or New York. And because wages are a big part of the costs, they have better net profit margins. However, Adyen is hiring more outside the EU and plans to add 1200 new employees, so there will be some margin pressure this year .
Economies of scale and effective use of the received data also help Adyen to achieve better approval rates, leading to higher volumes. For now, the range of payment methods and currencies is a differentiator, but only a small one, as I am sure that in the future the major players will all have a similar number and all the key players.
I think the whole package of technology, broader offerings and insights/analytics will be a big factor going forward and Adyen is working on that because they have a long-term plan that goes beyond payments and they plan to have one platform for all the things that merchants need.
And the high ROIC also tells us that Adyen is an efficient allocator of capital, which most likely has a competitive advantage that results in this above-average ROIC. PayPal, for example, currently has a much lower ROIC, only in the high single digits, and even in the last 10 years it has been in the low double digits most of the time.
Barriers To Entry
I think there are some regulatory barriers to entry in the form of licensing. Adyen has a banking license in the EU and a branch license in the US. And both of those protect them a little bit from new entrants. But any serious competitor should be able to get them, even if it takes a while.
And in terms of switching costs, I could see that changing POS terminals could be a hassle, but most of the other payment processors would give them new terminals for free, so there would be no switching costs. So the market is very competitive and we could see big players switching, like eBay (EBAY) switching from PayPal to Adyen . But the move by eBay shows us that Adyen does have a competitive advantage over PayPal, most likely in the form of a better authorization rate.
In terms of valuation, Adyen is as cheap as it has ever been. A 57x EV / EBIT is very high, but Adyen is also growing very fast while being FCF positive, which you don't see very often. And Adyen is FCF positive without big SBCs, which is also something you do not see much these days.
SBC is very, very small compared to US companies and the change in shares outstanding is tiny, even though the chart makes it look like a lot.
However, the CAGR of shares outstanding is only about 1% and this dilutes shareholders relatively little.
Conclusion
Adyen is a strong, relatively expensive company with a high ROIC and interesting future growth opportunities. They have sort of disrupted the market and are growing strongly, whereas in the US they are relatively unknown because Stripe has got more attention there. But a lot of that is because Stripe is an American company and Adyen is from the Netherlands.
One risk for Adyen is that they have a few customers that are responsible for a large proportion of their processed payments and the loss of one of them would really impact the business. But overall, I think Adyen has a good risk/reward profile as it has the potential to be a long-term compounder that could beat the index, while the downside is protected by its strong balance sheet and FCF generation.
The competitive edge could be further enhanced by their long-term goal of becoming the platform for everything related to payments and beyond.
For further details see:
Adyen: A Risk I Would Be Willing To Take