2023-08-30 08:30:00 ET
Summary
- Adyen is a global financial technology platform that provides comprehensive payment solutions to businesses across various sectors.
- The company's H1 2023 operating results fell short of expectations, leading to a significant decline in its share price.
- Despite the challenges, Adyen remains focused on long-term growth, has a strong return on capital, and presents an attractive investment opportunity with its current valuation.
In an era where globalization and digitization are more intertwined than ever, Adyen (ADYEY) (ADYYF) stands as a premier global financial technology platform trusted by industry-leading enterprises. Through its unified integration, Adyen efficiently manages the comprehensive payments' lifecycle, encompassing gateway, risk management, processing, issuing, acquiring, and settlement phases. By forging direct connections with both local and international card and banking networks, Adyen positions itself as an invaluable strategic partner to businesses across a myriad of sectors.
Adyen has many multinational corporations as customers, including Nike (NKE), Uber (UBER), and McDonald's (MCD). Since 2015, Adyen emerged not merely as a payment solution but as a comprehensive alchemy of payment gateways, service providers, acquirers, and processors, effectively synthesizing solution relevant for over 150 nations and accommodating more than 200 payment modalities.
A Fiscal Dissection: H1 2023
Recently, Adyen's share price plummeted by 38% after its H1 2023 operating results failed to match Wall Street's lofty growth expectations. At its height in August 2021, the company, once the market's favorite, saw its Amsterdam listing peak at €2,700 per share. As of now, Adyen is trading at a mere €765 per share, equating to only 26% of its August 2021 peak value and mirroring its price back in April 2020.
In H1 2023, Adyen's revenue growth faltered compared to the same period the previous year. This slowdown struck a sour note with investors, especially considering the company's self-positioning as a rapidly growing entity.
In a detailed breakdown, North American net revenue growth decreased to 23% Y/Y from an impressive 52% Y/Y in H1 2022. Similarly, digital volume growth dipped to 23% Y/Y, a sharp decline from the 55% in H1 2022. The company emphasized the growing importance of North America to its revenue streams, making this deceleration more concerning. This downtrend can be attributed to multiple factors. A significant factor was the current economic environment, which was characterized by elevated inflation and rising interest rates. Another factor was the fact that many North American digital businesses prioritized profit over growth in H1 2023, focusing more on cost-effectiveness.
By H1 2023, the company had welcomed 551 new employees, raising the total workforce to 3,883 full-time equivalents. A notable 75% of these recruits took on tech roles to bolster both nascent and established initiatives. The company's H1 EBITDA fell by 10%, amounting to €320.0 million from €356.3 million in H1 2022. The EBITDA margin also contracted to 43% from 59% in the previous year.
At first glance, this EBITDA contraction might raise eyebrows, but a discerning analyst would recognize this as a manifestation of Adyen's strategic foresight. The company's increased investment in hiring activities for future growth was what led to the EBITDA decline. By channelling resources into the augmentation of its global team, Adyen is unmistakably prioritizing a long-term horizon, even if it entails short-term fiscal adjustments. This long-term investment ethos is further corroborated by Adyen's healthy free cash flow conversion ratio of 77% and a capital expenditure accounting for 7.6% of its net revenue. Adyen remains optimistic, setting a long-term target to elevate its EBITDA margin beyond 65% and revenue growth between the mid-20s and 30s.
High Return on Capital
One of Adyen's most commendable financial attributes is its unwaveringly robust return on capital. Since 2015, the company has managed to maintain a performance that sees its return oscillating between an impressive 16.6% and 30.2%. This consistent show of strength not only underscores Adyen's ability to effectively use its capital but also sets it apart from competitors. Take, for instance, PayPal ( PYPL ), a titan in the payments' industry. Despite its prominence, PayPal's return on capital, which ranges from 9.96% to 13.6%, is considerably lower. This comparison accentuates Adyen's financial prowess and positions it as an outlier in terms of capital efficiency in the sector.
Adyen presents a distinct operational profile compared to PayPal. PayPal appears to be diversifying its portfolio, venturing into areas like cryptocurrency trading and other personal financial products. In contrast, Adyen maintains a strategic focus exclusively on the payments' segment. This concentration, particularly in the domain of online payments, is an area that normally experiences substantial organic growth.
Reframing Market Valuations
While some might interpret a significant share price decline as terrifying, seasoned investors would discern this as a compelling acquisition opportunity. The juxtaposition of Adyen's steadfast operational backbone against the backdrop of this ostensibly unfavorable market recalibration offers an intriguing investment prospect.
I view Adyen's current valuation as the most attractive it has ever been. Its EV/EBITDA stands at a mere 26.6x, significantly below its average of 109.25x and the peak valuation of 233.65x since its IPO.
Furthermore, its P/S ratio is at 4x, in contrast to an average of 11.7x since the IPO and a peak of nearly 22x sales.
Key Takeaways
Despite facing headwinds in H1 2023, Adyen remains a formidable player in the global financial technology landscape. While recent revenue challenges have impacted its share price, the company's strategic focus on long-term growth, stellar return on capital, and dedicated concentration in the payments' segment distinguish it from its competitors. The current market valuation, juxtaposed with Adyen's robust operational backbone, suggests a compelling investment opportunity.
For further details see:
Navigating Adyen's H1 2023: Challenges, Triumphs, And Investment Prospects