Is Adyen Stock a Buy Now?

Adyen's (ADYE.Y 0.53%) stock dropped 15% on Feb. 8 in response to its latest earnings report. In the second half of 2022, the Dutch digital payments provider's revenue rose 30% year over year to 722 million euros ($775 million) but missed the consensus forecast by 14 million euros. It mainly blamed that slowdown on its sluggish e-commerce sales in Europe, which offset its stronger post-pandemic growth across travel-oriented sectors. 

On the bottom line, Adyen's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose just 4% to 372 million euros ($399 million), which broadly missed analysts' expectations for 25% growth. It mainly blamed that big miss on its big hiring spree throughout the year.

Adyen ended the year with 3,332 full-time employees, representing 53% growth from the end of 2021. But instead of pruning that workforce, Adyen told investors it would grow its head count at a similar rate in 2023 as it prioritized its long-term expansion over its near-term profits.

Investors clearly weren't pleased by Adyen's cooling growth and rising expenses, but does its post-earnings sell-off represent a good buying opportunity?

Image source: Getty Images.

What does Adyen do?

Adyen doesn't offer a consumer-facing digital payments app like PayPal. It also doesn't provide any peer-to-peer payment services like PayPal's Venmo, Zelle, or Block's Cash App.

Instead, Adyen works behind the scenes as an end-to-end platform for payments, data, and financial management services. By integrating Adyen's backend software into their own online, mobile, and in-store payment platforms, merchants can quickly accept over 250 payment methods -- including credit cards, debit cards, mobile wallets, and other payment apps.

That flexible approach makes Adyen a well-diversified play on the secular growth of the digital payments market. It's also an attractive option for merchants that don't want to tether themselves to a single digital payments platform. That's why eBay switched from its former subsidiary PayPal to Adyen as its main payments processor five years ago.

Adyen also promotes that flexibility and independence by helping merchants issue their own virtual payment cards, which serve as branded mobile wallets, and maintain their own payment and data systems. It doesn't issue any credit or debit cards on its own, and it doesn't plan to dabble in any crypto or stock trading services like many of its fintech peers.

Can Adyen keep growing?

Adyen has grown rapidly over the past five years. Its growth decelerated in 2020 as the pandemic caused many brick-and-mortar stores to close down, but accelerated again in 2021 as those businesses reopened. That momentum continued throughout 2022, even as inflation curbed consumer spending and the war in Ukraine affected its European business.

Data source: Adyen. YOY = Year-over-year.

In 2022, Adyen generated 57% of its revenue from its EMEA (Europe, Middle East, and Africa) region, which grew much slower (25%) than all of its other regions. Most of its growth was driven by its North America and Asia-Pacific (APAC) regions, which both grew their revenues by 48% during the year and together accounted for 37% of its top line.

Adyen wants to strike while the iron's hot and expand aggressively into North America and Asia, but that expansion will squeeze its margins. It will also expose it to more direct competition from similar backend services like PayPal's Braintree and Stripe.

To the bulls, Adyen's ability to expand as its industry peers cut costs indicates it has plenty of staying power. But to the bears, its expansion represents a desperate bid to gain more international merchants as its core EMEA market cools off.

For now, the analysts seem to be siding with the bulls. In 2023, they expect Adyen's revenue and adjusted EBITDA to increase 33% and 40%, respectively. But based on those estimates, which we should take with a grain of salt, Adyen's stock still looks pretty expensive at 23 times this year's sales and 39 times its adjusted EBITDA. PayPal, which is growing at lot slower than Adyen, trades at just 3 times its 2023 sales and 12 times its adjusted EBITDA.

Is it the right time to buy Adyen?

Adyen is still growing a lot faster than many of its fintech peers, but a lot of that growth has already been baked into its stock price. That's why its stock was punished so harshly after its recent earnings miss.

I personally own some shares of Adyen, but I wouldn't aggressively increase my position right now -- especially since its costly expansion plans could cause it to generate weaker-than-expected EBITDA growth over the next few quarters.