2023-03-24 10:10:56 ET
Summary
- Adyen supports seamless transactions by integrating multiple payment infrastructures and offering tailor-made solutions for top-tier retail and enterprise customers.
- With a "land-and-expand" strategy, Adyen focuses on getting a foot on the door and building from there. Its multiple data points give it the resource to grow.
- The growth has been good, and the cost structure is also sensible. However, the current valuation is not great.
Adyen In A Nutshell
Founded in 2006 and headquartered in Amsterdam, Adyen ( ADYEY ) ( ADYYF ) is a payment company that specializes in providing a payment platform for e-commerce businesses. The platform enables retailers to seamlessly accept payments from a diverse array of sources, including options offered by Apple (AAPL), Google (GOOG) (GOOGL) , and PayPal (PYPL). With a clientele comprising over 4,000 businesses, Adyen caters to prominent names such as Netflix (NFLX), Facebook (META), Uber (UBER), Spotify (SPOT), and popular retailers like River Island and Superdry.
Operating discreetly in the background, Adyen's services often go unnoticed by customers. Despite its unassuming nature, the company has managed to attract and maintain a strong customer base by offering a crucial service.
Adyen identified a potential market in addressing in-store payment solutions. Instead of rushing to enter the market, the company chose to develop its own tailor-made solutions aimed at the top-tier retail and enterprise customers. The goal was to provide additional value for merchants, such as data analysis and fraud prevention, while simultaneously enhancing the consumer experience by simplifying login processes and offering a user-friendly interface.
Adyen's Technology: Integrating Global Payment Infrastructures
The company is working to integrate multiple payment infrastructures, including credit card payments, which operate worldwide. This global reach offers them insights into diverse market realities, resulting in an expertise that is difficult to replicate. By integrating with numerous banks and processors across the globe, they enable credit card companies to offer their services in multiple countries.
This large-scale operation provides data-driven insights, helping credit card companies understand decline reasons and identify market trends. Moreover, the company maintains the flexibility to adapt to changing market conditions. Ultimately, addressing these issues benefits consumers by reducing declined payments and providing a payment experience that aligns with the latest consumer trends.
A prime example of the company's approach is its direct integration with Visa (V) and Mastercard (MA), bypassing banks entirely. This strategic move has been a significant factor in the company's growth. By connecting directly to the Visa and Mastercard networks, Adyen eliminated the role of banks. This bold decision resulted in an influx of valuable data. Leveraging this data, Adyen was able to modify how it submitted transactions to the Visa and Mastercard networks, ultimately leading to increased approval rates.
The significance of this direct integration is truly remarkable. Gaining access to over 100 additional data points, such as industry and country information, enabled Adyen to implement minor adjustments that resulted in two or three percent higher approval rates . For companies processing transactions worth 100 million, this improvement equated to an additional two or three million in revenue.
Adyen's Land-and-Expand Strategy
Adyen's strategy is centered on its "land-and-expand" approach , emphasizing the establishment of long-term partnerships with customers and consistently striving to increase wallet share. The company's structure is divided into three core commercial areas: Digital, Unified Commerce, and Platforms.
Within the Digital pillar, Adyen aims at content tools and platform providers. The Unified Commerce pillar provides businesses with a multi-channel solution, giving them insight into transaction activities across both online and in-store channels. As for the Platforms pillar, Adyen's suite of embedded financial products (EFPs) and embedded payment solutions cater to the growing demand for embedded financial services, offering SMBs access to top-tier technology and financial products that were previously only available to leading global companies.
Scaling Up While Keeping Costs In Check
Adyen's long-term perspective is evident in its hiring strategy for the second half of 2022, where the company expanded its team to facilitate further business growth. The majority of new hires joined the company's tech functions, aligning with Adyen's tech-first approach.
To achieve its technical and commercial goals, Adyen plans to bring on a similar number of new team members in 2023 as it did in 2022, with a focus on strengthening the platform engineering teams. By the beginning of 2024, Adyen anticipates that the team will have reached its next level of maturity, at which point the company will slow its hiring efforts and allow operating leverage to take effect.
Financial Review
The company's primary revenue source comes from the fees it charges for its payment processing and acquiring services. These fees comprise scheme fees, interchange fees, and costs incurred, along with a mark-up. Keep in mind that the figures presented in the company's financial statements are in euros (1 EUR = 1.09 USD).
Adyen has a geographically diverse client base, with a significant portion of its revenue originating from the US, despite the company being based in the EU. It's worth noting that there is a certain degree of customer concentration for Adyen. As of December 31, 2022, the company's top 10 merchants made up 33% of total revenue, an increase from 29% in 2021. However, in both 2022 and 2021, no individual customer contributed more than 10% to the total revenue.
Examining Adyen's income statement, it's evident that the company has been profitable with a reasonable cost structure, as stated by the management team. It's important to recall that 2022 was a year of investments and staff expansion. If 2024 is a year of normalization, then we can anticipate improved operational efficiency in the following years.
While reviewing Adyen's balance sheet, it's clear that the company has minimal debt and maintains sufficient cash on hand to cover its payables. This is a crucial detail, especially in the current environment with looming threats of a banking crisis.
Valuation & Risks
The company has already achieved profitability, which is quite uncommon at that early stage. If we assume a 30% annual growth rate and a net profit margin near 50% by 2025 (revenue around USD 3.27 billion), applying a 30x profit valuation multiple would result in a market capitalization of roughly USD 48 billion, similar to its current valuation.
However, this thesis faces challenges. A major obstacle is the potential for increased competition from both traditional and new payment processors, which could make accessing international credit and debit card networks more difficult, putting Adyen at a disadvantage. Additionally, securing intellectual property rights for the company's processes is vital to prevent competitors from replicating its solutions. Moreover, innovations in digital assets and the traditional arena (e.g., FedNow) could disrupt Adyen's current business model.
Given these factors, I find little value in Adyen's current valuation, considering its business operates in a sector with relatively low barriers to entry and high chances of disruption. However, the company does exhibit some stickiness in its services, and I consider it worth monitoring and reassessing as circumstances change.
For further details see:
Adyen Uncovered: The Payment Startup Powering Industry Giants