Paying for goods and services today seems relatively easy. You swipe a card or tap your phone, the register (or tablet) rings you up, and voila: You've exchanged money for that $5 cappuccino.
However, within that simple transaction are a number of steps through which your payment must go, all in the span of a few seconds: from the payment terminal, to a payment processor and risk management system (to determine whether the payment is fraudulent), onto the credit card networks, to the customer's bank, and then back again. This patchwork has to function correctly to make sure that you get that cappuccino.
These steps in the payment process have historically evolved from lots of legacy providers and technologies. Today, some companies do basic processing, some do risk management, and others provide merchant services, such as regulatory compliance, business consulting, or even merchant financing. In addition, a single merchant may have to use different systems in different geographies, or between in-store, online, or mobile payments, adding further complication.
However, Adyen (ADYY.F -1.26%), a relatively young European company that just went public last summer, is looking to disrupt this entire space of payment-service providers. Judging from its recent results, it's succeeding.
Image source: Adyen.
1. What Adyen does
Adyen was founded in 2006 by entrepreneurs Pieter van der Does and Arnout Schuijff, who founded e-commerce payment gateway Bibit, which they sold to Royal Bank of Scotland in 2004.
As opposed to legacy payment-service providers, which have mostly cobbled together various older technologies via acquisitions, Adyen -- Surinamese Creole for "start over again" -- started with a blank sheet of paper, and built a completely integrated software platform from the ground up. Adyen's software is built on open-source technology, and designed to integrate all processing steps across global markets under a single platform. Adyen's platform also accepts payments across point-of-sale, e-commerce, and mobile commerce, using leading technologies such as machine learning, big data analytics, and artificial intelligence to approve more transactions with fewer cases of fraud.
The comprehensive nature of Adyen's platform also allows it to provide merchants insight into their sales data across all channels. This not only allows Adyen to earn more revenue from value-add services, but also reduces customer churn.
2. Huge growth and potential
Adyen's operating history is impressive. The company only releases biannual financials (not quarterly, like most U.S. companies), and won't release full-year financials until the end of February. Still, its first-half 2018 metrics give a glimpse of the company's potential:
|
Metric |
H1 2018 |
Growth (YoY) |
|---|---|---|
|
Processed volumes |
70.0 billion euros |
43.1% |
|
Net revenue |
156.4 million euros |
67.3% |
|
EBITDA |
70.3 million euros |
83.1% |
Data source: Adyen H1 2018 shareholder letter. YoY = year over year; EBITDA = earnings before interest, taxes, depreciation, and amortization.
As an investor, this is what you love to see: processed volumes growing at 43.1% -- far higher than the overall electronic-payment market growth rate of 9.6%. Clearly, Adyen's business model is finding success in the marketplace.
Not only that, but Adyen's revenue growth of 67.3% is outpacing even that volume growth, meaning it seems to be able to charge more and more for its various services. Finally, Adyen's EBITDA growth is exceeding even that impressive revenue growth, hinting at massive operating leverage in future.
Add this up, and it's a huge winning combination.
3. Keys to success
Adyen has grown so fast by targeting some of the best global internet companies, all of which need to scale very quickly across geographies. Early customers include Netflix, Facebook, Uber, and Spotify, just to name a few.
As these companies rapidly grow across the globe, Adyen grows with them, allowing it to expand without even adding new customers.
Of course, Adyen is adding customers, expanding to new geographies (it just entered Canada in October), and developing new products, such as its point-of-sale terminal, unveiled in 2015.
4. The catch
It's pretty clear that Adyen is an awesome business. So what might trip up investors? Well, the stock is not cheap -- and that may be the understatement of the year. The company went public last June at 240 euros per share, and nearly doubled to 431 euros on its first day of trading. It now sits at a whopping 663 euros per share -- for a market capitalization of almost 20 billion euros. If we assume that the company made approximately 400 million euros in 2018 (after making 156 million euros in H1 2018), that's a valuation of nearly 50 times revenue --- not earnings. Revenue.
That makes the stock a bit too expensive for me to dive in at the moment. However, in the long run, I expect Adyen to be one of the biggest players in global payments. It's a stock to keep your eye on for any type of pullback.
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