Financial technology (fintech) is one of the most popular sectors for growth-oriented investors. Digitizing the global financial infrastructure has been a momentous task that has taken decades of investment and likely will require decades more of investment in the future. Leaders in the fintech industry can capture a lot of the value from these investments by offering software and payment services to individuals and businesses. 

One little-noticed fintech company has skyrocketed to the top of my watch list in recent years, and if you're interested in fintech stocks, I think it should move onto yours as well. The company is Adyen (ADYE.Y -3.75%), a Dutch payments processor that I believe is one of the highest-quality businesses in the world.

Here's why I like Adyen's business, but why I am not buying shares -- at least, not yet. 

What is Adyen?

Adyen's business started as a merchant acquirer for large companies in Europe. Some of its largest customers include Spotify and Uber

What is a merchant acquirer? This is an entity that sits in between the credit card networks, merchants, consumers, and card-issuing banks. Without getting too bogged down in the details, merchant acquirers like Adyen route all the relevant information to other stakeholders and authorize the approval or rejection of a card transaction at the time of each purchase. Adyen's merchant-acquiring software can be used by companies for in-person, online, and mobile application purchases, and it earns revenue by taking a small cut of every purchase made through its platform.

On top of its core merchant-acquiring business, Adyen has expanded up and down the payments value chain. It now offers online checkout and in-person point-of-sales (POS) services, credit card issuing, revenue optimization, and many other value-added services. It also has slowly moved its products to work in international markets such as the U.S., where it got full approval to operate in late 2021. The company wants to become a one-stop shop for merchants' digital payment needs.

Better authorization rates than competitors

The key value-add that merchant acquirers provide is high authorization rates for their merchant customers. In simpler terms, a good merchant acquirer is one where the majority of credit card transactions that should get approved do get approved. If Spotify can process 95% of credit card transactions around the world with one merchant acquirer, compared to only 90% with another, that is a huge difference in the amount of revenue it can earn.

Adyen is well known as the merchant acquirer with the highest authorization rates. This has helped the company win contracts from large companies such as sandwich chain Subway, where just small changes in authorization rates can mean huge changes in revenue generation.

But why is Adyen better? Simply, it built up its fintech services from scratch with 21st-century technology, while its main competitors are an amalgamation of acquisitions built from separate code bases that have a difficult time working seamlessly together. This allows the company to easily win contracts away from legacy providers, even though Adyen (generally) has higher fees.

Higher authorization rates give Adyen a competitive advantage within the merchant acquirer niche. It continues to widen its moat by expanding internationally (this is a huge value for its multinational clients) and adding on the other services mentioned above like POS solutions, analytics, and card issuing. As the company continues to invest in these new services and expand its geographical footprint, I think this moat can widen over the next five years and further separate Adyen from the competition.  

Valuation is steep, but don't lose track of this one

Because it has gained market share, Adyen's revenue and earnings grew at an impressive rate in the past few years. In 2022, its net revenue rose to $1.41 billion from $581 million in 2019 and $218.3 million in 2017. The company has wide profit margins, generating an EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of 55% last year. Over the long term, management thinks it can hit an EBITDA margin of 65%.

Although growth and profitability have been impressive at Adyen, the stock trades at a nosebleed valuation. With a market cap close to $44 billion, shares trade at about 50 times trailing EBITDA, which is much higher than the market average.

Does Adyen deserve a premium earnings multiple? I think so, but probably not double or triple the market average that it goes for now. From my seat, this makes Adyen stock one you shouldn't buy today, but a great business that should go on the watch list. If its earnings multiple comes down materially at some point within the next few years, that will be the time to strike.