It's quite possible that you haven't heard of Adyen (ADYE.Y +0.26%) -- the Netherlands-based provider of a payment processing platform for merchants -- as it is not a customer-facing brand. But it's very likely that Adyen has processed one of your credit card or other digital payment transactions when you shopped online or at a store.
Adyen has emerged as a powerhouse in the payments processing industry, with a star-studded client list that includes the likes of Nike, Uber, and McDonald's. Its business has been flourishing, and yet its stock price is down by over 50% since its highs about a year ago.
OTC: ADYE.Y
Key Data Points
The stock market has been a scary place in 2022, but the drawdown in stocks is also creating some great bargains. As smart investors look to take advantage of those bargains, here are three reasons why Adyen should be one of the top stocks they should consider.
1. Its platform is resonating with customers
Merchants use Adyen's platform to automate their digital payment processing, and they pay Adyen based on the numbers and amounts of transactions processed. In a crowded industry of payment processing providers, what separates Adyen from its competition is its modern platform, which is easy to onboard and simplifies the ongoing operations for merchants relative to traditional legacy players.
Image source: Getty Images.
Adyen's unified commerce platform is the only one among its peers to support payments via multiple sales channels (in-store, online, buy online-pick up in the store, or other variations) in a single integration. The platform also accepts various forms of digital payments, supports different currencies, and offers Adyen's clients valuable data insights to improve customer experience, increase revenue, and prevent fraud.
Adyen's differentiated offering is appealing to its clients, and they're excited to adopt the platform. In the recently reported first half of 2022, Adyen processed 346 billion euros' worth of transactions, a jump of 60% year over year. Over the past three years, Adyen has more than tripled its processed volume. Revenue for the first half of 2022 also grew an impressive 37%, reaching 609 million euros.
Revenue growth was slower than the payment volume growth, as Adyen offers merchants discounted pricing on higher volumes, which rewards growing businesses for sticking with Adyen and attracts larger customers like McDonald's and Nike as they get competitive pricing relative to Adyen's rivals.
2. "The Adyen Formula" is the secret sauce
Lower operational and maintenance costs of its reliable tech platform, plus the natural scalability of its business -- where incremental transactions generate revenue, but cost next to nothing -- make it a highly profitable model for Adyen. In the first half of 2022, EBITDA was 356.3 million euros with a 59% EBITDA margin. Free cash flow clocked at 309 million euros and a 51% margin. As of June 30, Adyen had 5.6 billion euros on its balance sheet.
Adyen's profitable growth seems to be rooted in its culture guided by "The Adyen Formula" that focuses on customer-centricity, teamwork, diversity of thoughts, direct communication, and speed of innovation and execution. The company protects this cultural foundation very dearly. It's the reason why Adyen's leadership doesn't believe in growth by acquisition, as it may dilute the core of the company that has fueled its continuous innovation and efficient execution.
It's also the reason why Adyen is very selective about whom it hires. The company has a very methodical and rigorous candidate selection process. The majority of its prospective employees are even interviewed by its board of directors.
Bringing on, retaining, and growing the right people on the team boosts Adyen's productivity and allows it to operate in a decentralized manner where employees are entrusted and empowered to make quick decisions without going through a bureaucratic process, ultimately driving higher organizational efficiency.
Overall, Adyen's corporate culture looks like a truly sustainable competitive advantage for the company.
3. A big opportunity lies ahead
The transition from cash to digital payments is well-documented at this point. According to a McKinsey study, the global payments revenue was estimated at $1.9 trillion in 2020 and is projected to reach $2.6 trillion in 2025. Adyen, with its annual revenue run rate of just over 1 billion euros, is barely scratching the surface of that market opportunity.
To capture a piece of that pie, Adyen ramped up its pace of hiring in the first half of 2022. The company added 395 employees in the first six months, taking the employee count to 2,575 full-time employees. In an environment where the macro conditions are putting a lot of pressure on its rivals, Adyen -- with its prolific free cash flows and all the financial flexibility needed -- is capitalizing on its opportunity and getting stronger.
The company continues to innovate and advance its financial products to meet more and more needs of merchants. With newer products such as its banking-as-a-service offering -- built to provide businesses with the ability to offer bank accounts, business financing, and card issuing -- Adyen is expanding its addressable market.
In its first-half 2022 results, the company reaffirmed its objectives of growing revenue at a CAGR (compound annual growth rate) between the mid-twenties and low-thirties in the medium term, while improving its already impressive EBITDA margin to 65% in the long term.
A potential multi-bagger at a great value
With the current pullback in the broader market, Adyen has seen the price-to-free-cash-flow ratio of its shares fall below 20, which is a compelling valuation for a business of its caliber:
ADYEY Price to Free Cash Flow data by YCharts
With its powerful culture, superior platform, scalable business model, and large opportunity, Adyen seems to be in an excellent position to produce outstanding returns in the long run. Now could be a great time for investors to find a spot for Adyen in their portfolios.
