Please ensure Javascript is enabled for purposes of website accessibility

4 Things to Know About Adyen, Payments Industry Disruptor

By Billy Duberstein - Updated Apr 24, 2019 at 10:29AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Never heard of Adyen? It's worth getting to know.

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 2.75%), 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.

A graphic showing Adyen's place in the payment-processing chain

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.

Check out the latest earnings call transcripts for companies we cover.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Adyen N.V. Stock Quote
Adyen N.V.
ADYY.F
$1,607.00 (2.75%) $42.99

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
356%
 
S&P 500 Returns
124%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.