2024-01-02 19:44:40 ET
Summary
- Most enterprises use many payment processors to provide backups and redundancy to their operations, making the Adyen "plug-and-play" narrative somewhat deceptive.
- While Adyen is a market share gainer in payment processing, it is also clear the industry is subject to immense long term pricing pressure.
- At maturity, Adyen will likely trade at multiples in line with other processors. The key driver of stock performance will be the future growth curve, and there's reason for skepticism.
Adyen ( ADYEY ) is a merchant acquirer. Merchant acquirers are essential for businesses to process payments, but the space is very competitive. Adyen has many direct competitors, some of the most notable include Stripe, PayPal's Braintree ( PYPL ), Chase Paymentech ( JPM ), Fiserv ( FI ), Fidelity National Information Services ( FIS ), and Global Payments ( GPN ).
The chart below details the typical players in the payments ecosystem, with Adyen falling under the merchant account / gateway graphic.
The biggest challenge with Adyen or any merchant acquirer, is that they must compete on price. This is obvious in Adyen's financials, their take rate has slipped to 17.3 basis points for the first half of 2023, compared with 20.1 basis points 5 years ago. All signs indicate this trend will continue, with management repeatedly stating that they are willing to sacrifice take rates at the expense of more volume. This seems like a sensible strategy to grow the business, but is more evidence of a structurally challenged industry.
Adyen's differentiation has been framed by the ease created by the modernity and connectedness of the platform:
One of Adyen’s biggest advantages is that it acts as a global platform with direct connections to international cards, enabling ‘plug and play’ expansion to new regions. Moreover, Adyen is equipped with local payment methods and expertise as preferred payment methods are different around the world, such as Alipay in China, which accounts for 65% of online payments.
Oftentimes, the most important part of analyzing an investment opportunity is putting on your customer hat. Massive enterprises seldom use a "plug and play" platform for all of their payment volume, most are using many providers to provide backups and redundancy, and making strategic decisions to divvy up volume. Payment processing decisions are complex.
And given payment processing is an integral part of every single business, talking to customers will result in an extremely wide variation of opinions. Even though price is an important element in choosing payment processors, Adyen is offering enough incremental value that it is gaining market share on its competitors. Thus the truth of the Adyen story lies somewhere in between being a unique, connected payments platform versus just another processor. Over time, as Adyen reaches maturity it should begin to look a whole lot like the fray of merchant acquirers.
What Needs To Go Right
There's never certainty when investing, but understanding what needs to happen for an investment to work is quantifiable. Adyen has many unknowns, and a number of outcomes that need to go its way at the current valuation.
Adyen's stock cratered 40% in one day following missing its 1H earnings over the summer. During Adyen's November 8th Investor Day, they narrowed their medium term guidance to revenue growth in the mid-20's and lowered EBITDA margin guidance from 65% to 50%. The stock has rocketed 80% from the lows following this announcement:
Here were some base case assumptions for Adyen before Investor Day: 20% TPV CAGR, 65% EBITDA margins, $1.8B at FCF at 20x equates to a $36B market cap. After the current rally, the market sits right at that $36B. It's always important to look back and assess how changing expectations can cause such a dramatic change in valuation.
We can adjust our models based on Adyen's updated guidance to get an idea for what the market is anticipating will happen. Adyen's management expressed a bit more confidence in the growth, we'll assume 25% growth, 50% EBITDA margins, and 5% of revenue spent on CapEx, we arrive to about $2.2B of Adyen free cash flow in 2028. Expectations have improved a little bit, but not enough to cause such a huge swing in price.
That's been caused by multiple expansion. 20x may be a bit too conservative if Adyen hits its forecast. But, this is still the likely multiple a mature Adyen trades at, in-line with other processing peers trade at:
The key question becomes what Adyen's future growth curve looks like. Fiserv is a mature business growing at around 8% this year, which obviously pales in comparison to Adyen's 25% expected growth rate. However, if 5 years from now, Adyen's growth rate slips closer to Fiserv, the multiple likely will to. This was the fear before Adyen reaffirmed its guidance at Investor Day.
Adyen's likely builds its guidance by assuming the amount of volume it can siphon off from competitors on its existing client base, which the company has reported accounts for 80% of growth. In order to generate at least a double digit return owning Adyen moving forward, the applied exit multiple would need to be 30x or higher five years from now. The one big advantage Adyen has on its side is the persistent tailwind of overall volume growth, which is mostly dependent on economic growth.
The primary conclusion is that Adyen's variation of outcomes is quite wide. Adyen will very much be a battleground stock for quite some time. On one hand, if Adyen is still growing at 25% a decade from now, investors will have done quite well. On the other hand, we've gotten a preview of what might happen to the stock should growth permanently slow. But because of the competitiveness of the merchant acquiring business, and the reality that enterprises are able to drive down processing costs by increasing volume, the more cautious line for Adyen seems more likely.
For further details see:
Adyen: Taking The Skeptical Line