Shares of Square (SQ -1.40%) recently slipped after Morgan Stanley analyst James Faucette noted that it had lost one of its customers, the Danish juice bar and coffee chain Joe & the Juice, to its European rival Adyen. Joe & the Juice operates over 300 stores across North America, Europe, Asia, and Australia.
Faucette noted that while Joe & the Juice's revenue contribution was "relatively immaterial" to Square, the company had previously cited it as a "key customer case" showing how it was gaining larger customers. That loss, Faucette claims, indicates that Square could struggle to expand overseas and lock in bigger customers.
Amsterdam-based Adyen went public last year and only trades on the Euronext exchange, but it's quickly becoming a familiar name for U.S. investors in fintech stocks. Last year Adyen caused big headaches for PayPal (PYPL 0.41%) when it lured away the latter's longtime partner eBay (EBAY -1.54%). eBay plans to process most of its payments with Adyen by 2021, and completely phase out PayPal's services by 2023.
This means that Square and PayPal, which are rivals in the U.S. market, now share a common enemy. Let's see why investors should keep a close eye on Adyen's growth.
What does Adyen do?
Adyen was founded in 2006 by a team of payment industry professionals. Its platform lets merchants accept electronic payments linked to credit cards, bank accounts, cash-based systems, and other services.
It became one of Europe's hottest start-ups over the following years, and was granted a European banking license in 2017. Square doesn't have a banking license yet, but PayPal was granted a European banking license in 2008. Those licenses allow Adyen and PayPal to process payments instantly instead of waiting for the payments to clear through traditional banks, a process that can take several days.
Adyen currently serves over 3,500 customers worldwide. In the first half of 2019, it generated 65% of its revenue from Europe, 15% from North America, 10% from Latin America, and 9% from Asia.
Adyen's revenue rose 41% year-over-year to €221.1 million ($243.3 million) during that period, with 46% growth in North America, 43% growth in Asia, 41% growth in Europe, and 36% growth in Latin America. Adyen's growth rate in North America should worry Square and PayPal, since one of its long-term goals is to reduce its dependence on the European market.
Adyen's EBITDA rose 79% annually to €125.8 million ($138.4 million) during the first half of the year, while its free cash flow surged 88% to €117.6 million ($129.4 million). Those numbers indicate that Adyen is growing just as quickly as Square.
Why Adyen is a threat to Square
In the first half of 2019, Square's total revenue rose 44% to $2.13 billion. Its adjusted revenue, which excludes transaction and bitcoin costs, rose 52% to $1.05 billion. Its adjusted EBITDA increased 60% to $167 million.
Square has expanded overseas with merchants in Canada, the U.K., Australia, and Japan, but 95% of its total revenue still came from the United States during the first half of the year. Adyen's worldwide growth represents a big obstacle for Square's overseas expansion.
Furthermore, Adyen's global reach makes it an appealing choice for larger U.S. companies with overseas operations, as well as overseas companies (like Joe & the Juice) that operate across multiple countries. As a result, Square could struggle to lock in bigger enterprise customers to reduce its dependence on smaller to medium-sized businesses.
Adyen is arguably less of a threat to PayPal, which has a first mover's advantage in the market, holds a banking license in Europe, operates in over 200 countries and regions, and generates nearly half of its revenue overseas. Adyen scored a brutal blow against PayPal by winning over eBay, but the divorce wasn't surprising -- especially since eBay already spun off PayPal in 2015.
Should Square worry about Adyen?
Square's investors shouldn't head for the exits based on its loss of Joe & the Juice to Adyen. However, the loss indicates that Square's expanding ecosystem might not be as sticky as it claims, and that its international expansion plans -- which it's highlighted in recent conference calls -- could hit a brick wall.
Editor's note: We have corrected the spelling of Adyen.