2023-03-06 00:23:47 ET
Summary
- Adyen is now trading nearly 50% below its all-time high in 2021.
- The fintech market is massive and continues to expand rapidly thanks to the emergence of industries like e-commerce.
- The latest earnings result showed impressive revenue growth, while the bottom line was a bit underwhelming.
- The current valuation still seems quite stretched which limits the upside.
- I rate the company as a hold.
Investment Thesis
Adyen ( ADYEY ) is a fintech company that not many people know about. However, it has been growing rapidly and has the potential to become a vital player in the industry. The company is benefiting from the massive fintech market that continues to expand rapidly thanks to digital transformation. Despite facing a challenging macro backdrop, its latest earnings results continue to show strong growth with superb margins, though the bottom line stalled due to higher spending. The share price has pulled back significantly due to rising rates and other macro concerns, but the current valuation is priced to perfection. I like the company but I think the upside is limited at the current levels, therefore I rate it as a hold.
Why Adyen?
Adyen is a Netherland-based financial technology company founded back in 2006. The company helps customers process payments through different channels and methods such as mobile, POS (point of sale), credit card, wire transfer, and others. Its integrated platform also provides other services such as card issuing, risk management, reporting, and fraud protection, which allow customers to do everything in one place. Unlike other high-profile fintech companies like Mastercard ( MA ) and PayPal ( PYPL ), it mostly operates behind the scenes. A majority of your transactions are probably processed by the company without you even knowing it. For instance, all payments on Spotify ( SPOT ) or McDonald's ( MCD ) are actually done through Adyen. Its customer list also includes other blue-chip companies such as Microsoft ( MSFT ), Booking Holdings ( BKNG ), and Uber ( UBER ).
Fintech is one of the most important segments in digital transformation with massive growth opportunities. Emerging industries like e-commerce, ride-hailing, food delivery, etc are only made possible because of digital payments. These industries are continuing to expand rapidly which presents strong tailwinds for the fintech market. According to Allied Market Research , the TAM (total addressable market) of fintech is forecasted to grow from $110.57 billion in 2020 to $698.48 billion in 2030, representing a superb CAGR (compounded annual growth rate) of 20.3%.
The fintech market is pretty crowded but the company's growth continues to outpace its peers. A huge advantage of Adyen is its simplicity and scalability. The company's single-platform approach allows customers to simplify their payment processing steps and improve efficiency. It also provides an extremely convenient integration process through drop-in or API, which reduces the friction of onboarding new customers and allows the company to expand its global presence easily without having to increase its spending on CAPEX substantially. This alongside the large and expanding TAM should continue to drive growth moving forward.
Financials
Adyen reported its financial earnings for H2 2022 in early Feb and the top-line growth continues to be very strong while the bottom line was quite underwhelming due to higher spending. The company reported revenue of €721.7 million, up 30% YoY (year over year) compared to €556.5 million. The growth is driven by strong processing volume, which grew 49% YoY from €300 billion to €421.7 billion. This was led by POS volume which was up 62% YoY from €41.8 billion to €67.6 billion, as more customers are adopting the newly released POS terminals for unified commerce.
Ingo Uytdehaage, CFO, on POS growth :
Our point-of-sale volumes were €67.6 billion, up 62% year-on-year and comprising 16% of total processed volume. This figure underlines the continued appetite for advanced multi-channel experiences and to the unique ability of our single platform to meet this need. In order to remain at the cutting edge of consumer journeys, in H2, we relentlessly sought new avenues for innovation. This resulted in the launch of several product iterations, with an online checkout, the rolling out of our new terminals and piloting our embedded financial services suite.
The bottom line was a bit soft due to increased spending for expansion. Total expenses grew 77.9% YoY from €218 million to €387.8 million. Due to the ramp-up in hiring, wages and salaries expenses were up 91.7% YoY from €100.9 million to €193.4 million. The hiring is likely pulled forward as management indicates a slowdown in hiring moving forward. This resulted in operating income being flat YoY at €333.8 million compared to €333.7 million. The operating margin declined from 60% to 46.7%. Net income was €26.5 million compared to a net loss of €(13.8) million in the prior year.
Investors Takeaway
Despite the drop in share price, Adyen's valuation is still very stretched. The company is currently trading at an fwd PE ratio of 65x and an fwd EV/EBITDA ratio of 42.9x which are meaningfully above payment processing peers such as Mastercard, Visa, and Shit4 Payments ( FOUR ). The three companies have an average fwd PE ratio of 35.9 which represents a significant discount of 44.8%. The company's fundamentals are strong and the expanding market should continue to provide solid tailwinds. It is generating best-in-class growth and margins despite facing a weakening economy. However, the current valuation does look like it is priced to perfection which limits its potential upside. Therefore I rate the company as a hold and will wait for a better price point.
For further details see:
Adyen: An Emerging Fintech Giant