The global card payment market is forecast to grow rapidly in the coming years. According to Nilson Report, a credit card news a data service, global card payments volume will reach $52.4 trillion by 2026, and for every single transaction, there needs to be a payment processor. Therefore, with digital payments scaling up quickly, there is an immense opportunity for payment processors to thrive.
Adyen (ADYE.Y 0.53%) is an appealing pick in this market. Although many investors might not know the company, if you ever bought a burger from McDonald's or paid for your Spotify subscription with a debit card or digital form of payment, you have used Adyen, which is based in Amsterdam. With the shares about 60% below their all-time highs, should you add this payments processor to your portfolio?
Image source: Getty Images.
Adyen stands out from the crowd
The primary revenue sources for Adyen are its processing and settlement fees, which the company obtains when merchants either initiate a transaction or complete one on its platform. However, the company also has risk management and digital-card issuing services to ease friction for merchants.
This full-stack offering has attracted lots of attention. As a result, the company processed more than 516 billion euros (about $540 billion) in total payment volume (TPV) in 2021. That said, Adyen faces stiff competition from behemoths like PayPal (PYPL 0.64%) and Block (SQ -1.57%), along with pure plays like Stripe.
However, Adyen has one competitive advantage that has allowed it to catch up to some of its rivals: It is the low-cost leader. Instead of boosting its take rate as consumers push more volume through its platform, Adyen lowers it. This incentivizes its customers to make Adyen their primary processing platform. In 2021, Adyen's take rate was a measly 19.4 basis points, a 14% year-over-year decline as it won additional volume.
Catching up to the competition
This low-cost differentiator has done well for the company in recent years. Remember when eBay dropped PayPal as its primary payments platform in 2018? That was in favor of Adyen. Recently, it has been catching up to the big dogs in the payment processing industry. In 2021, the company's processed volume grew 70% year-over-year -- a much higher rate than PayPal's 33% TPV growth over the same period.
This helped revenue jump to 1 billion euros in 2021, a 48% year-over-year gain. Over the medium term, Adyen hopes to increase revenue at a mid-20s to low-30s percentage compound annual growth rate, far outpacing PayPal's projected 12% revenue increase in 2022.
While Stripe is likely growing much faster than PayPal, it is a private company, so its financials are unknown. However, Stripe's estimated 2020 revenue was $7.4 billion, and grew 70% year-over-year, according to the Wall Street Journal.
What could go wrong
In terms of risks, the biggest is stiff competition. That said, Adyen is rapidly expanding and gushing cash, which could help it invest much faster than its rivals. In 2021, Adyen sported a healthy 63% EBITDA (earnings before interest, taxes, depreciation and amortization) margin and generated almost 567 million euros in free cash flow.
Adyen is a global company with revenue coming from around the world, but almost 60% of its top line comes from Europe, the Middle East, and Africa, and 23% from North America. The U.S. and many economies in Europe are seeing higher inflation and interest rates, which could lead to slower economic activity. Considering Adyen makes money on transaction volume, that could hurt the company in the short term.
The last concern is valuation. Adyen trades at 73 times earnings -- a steep multiple. However, the company might not be focused on profitability but on cash generation to fuel long-term adoption. Therefore, a valuation based on free cash flow is more insightful -- and on that front, Adyen trades at an appealing 20 times free cash flow.
Is Adyen a buy right now?
If the company can continue persuading enterprises to move more of their payments volume onto Adyen, then the company could see success over the long term. With its jaw-dropping cash flow, Adyen has more than enough money to continue building a platform more innovative and appealing to businesses. However, if the company's take rate continues to decline without increases in processed volume, that would be cause for concern.
While Adyen isn't a risk-free investment, there's enough to like about the company to at least put it on your watchlist. There is heavy competition, but the company's has it own competitive advantages. For that reason, I think Adyen is worth buying right now.
