Many companies talk the talk when it comes to their long-term focus, but only a few walk the walk. Dutch payments processing platform operator Adyen (ADYE.Y -2.38%) is among the latter.
Adyen reported second-half and full-year 2022 earnings about a week ago, and its shares fell by 15% the next day, likely in response to the company's strategy in the face of the current macro environment. Although Adyen's decisions may be spooking those with short-term time frames, savvy investors realize that the company is being proactive about fueling its next stage of growth with moves that could produce handsome rewards in the long run.
Adyen wants to disrupt the payments market
Merchants use Adyen to process digital payments. But Adyen doesn't want to be just another payments processor. It's on a mission to disrupt a payments processing market that has been dominated by legacy competitors offering patchwork systems that are difficult for merchants to integrate and scale.
With Adyen's modern, integrated Unified Commerce platform, merchants can accept payments across multiple sales channels (online, in-store, or other variations), in various forms of digital payments, in the currency of their customers' choice, and from any geographic location. That simplicity and, in turn, the lower costs and faster execution for both the initial setup and its ongoing operation, are appealing to businesses. No wonder companies like Microsoft, eBay, Etsy, and McDonald's are trusting Adyen as their payments processing partner.
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But all that success didn't just come overnight. It required years of meticulous planning, hiring the right people, innovation that challenged the status quo, and disciplined execution. That proactive approach and long-term thinking have enabled Adyen to almost quadruple its revenue since the end of 2018 and develop into a business that converted nearly 50% of its 2022 revenue into free cash flow.
Investing now to power the next growth stage
Stories of successful long-term planning can make complete sense in the rear-view mirror, but the investments and sacrifices they require can often feel painful along the way. The 15% drop Adyen's shares took the day after it reported its second-half results is likely an illustration of that.
For the half, despite challenging macro conditions, Adyen's revenue grew at a robust 30% year over year to 721.7 million euros (about $774.8 million). The number that seemed to have attracted analysts' attention, however, was how many employees the company added. Adyen's headcount grew by 757 full-time employees, an increase of 30%. The resulting increase in expenses -- in combination with a slower rate of revenue growth that can be attributed to macro conditions -- brought its earnings before interest, taxes, depreciation, and amortization (EBITDA) margin from 64% in the second half of 2021 and 59% in the first half of 2022 down to 52% in the second half of 2022. The company also continued to increase its capital expenditures. These rose from 6% of revenue in the prior-year period and 6.6% in 2022's first half to 8% of revenue in the second half. That further lowered how much revenue Adyen converted into free cash flow -- from 57.5% in 2021's second half and 51% in 2022's first half to 41% for 2022's second half.
So why is Adyen making these investments when the company seems to be doing just fine? The answer to that question is rooted in its relentless focus on the long term. The company, with its financially conservative approach, had 6.5 billion euros in cash and cash equivalents on its balance sheet as of Dec. 31, which gives it the flexibility to reinvent itself and grow.
As Chief Executive Officer Peter van der Does wrote in his letter to shareholders a few months ago, Adyen is not a reactive organization and is not letting macro conditions dictate its strategy. The company is growing on its own terms. When interest rates were near zero and money was cheap, many companies lost their fiscal discipline. Many of those are now in a bind, and must cut staff and expenses. Adyen wasn't one of those companies. It maintained its approach of disciplined execution. And now, when it feels ready to propel itself into its next stage of growth, it's ramping up its investments.
With its investments in people and infrastructure, Adyen wants to broaden its offerings in payments, financial services, and data analytics, and further its global reach. The company is laying a foundation for its next phase of growth.
An opportunity for patient investors
Adyen aims to be the standard bearer in the payments and related financial services industry, and it's willing to back itself even if that means lower profitability in the near term. The company's leading products, such as the Unified Commerce platform, its sustained sales growth over the past four years, and its cash-rich model vouch for the soundness of its long-term approach.
Adyen's shares have recouped much of the decline they had right after the latest report, and are back above the levels they traded at in January. The shares now trade at a price-to-sales ratio of 5.5 and a price-to-free-cash-flow ratio of about 19. Those valuations may not look cheap by traditional standards, but they are significantly below historical levels. The market recognizes Adyen's potential and is placing a premium on its stock.
What Adyen is doing may not seem conventional, but its vision, long-term approach, and track record should excite patient investors. Investors might want to take a small position in the company now, monitor its performance over time, and build a larger position incrementally, hopefully at even more attractive valuations.
