What happened
Shares of Adyen (ADYE.Y 1.30%) collapsed as much as 44% this week, according to data provided by S&P Global Market Intelligence. The Dutch payments processor posted slowing sales growth and compressing earnings before interest, taxes, depreciation, and amortization (EBITDA) margins for the first half of 2023, which caused investors to reevaluate their positions. As of this writing, Adyen stock is down 28.6% year to date (YTD).
So what
If you just looked at the highlights in a vacuum, you'd think Adyen had a strong first half of 2023. Payments volume grew 23% year over year to 426 billion euros, revenue grew 21% year over year to 739 million euros, and the company generated 323 million euros in EBITDA. What's not to like?
But with some context, you can see why Adyen shares cratered this week. EBITDA was actually down 10% year over year with a margin of just 43%. Margins have compressed in recent quarters and are now significantly below management's long-term guidance of 65%. Yes, the company has a good excuse for this, as it just hired a bunch of engineers to take advantage of all the layoffs, but it looks like investors are skeptical regardless. Revenue growth has slowed considerably during the last few years. For example, in the first half of 2021, Adyen's revenue grew 46% year over year.
Perhaps more important is the fact Adyen previously traded at a nosebleed valuation before this stock drop. Earlier in 2023, shares traded at an enterprise value-to-EBITDA (EV/EBITDA) ratio of close to 60, which is more than double the market average. That was pricing in strong revenue growth and margins that would expand (or at least stay stable) in the coming years. It is no surprise to see the stock tanking, then, with revenue growth decelerating and EBITDA margins compressing to 43%.
OTC: ADYE.Y
Key Data Points
Now what
Adyen still has a long tailwind at its back, with more payment volume going digital around the world. It is now one of the largest payment processors in the world and competes well with U.S. competitors such as Stripe and Global Payments.
But the stock is still not cheap even after this week's plummet. Adyen has a market cap of 28 billion euros and generated 1.46 billion euros of revenue over the last 12 months. Even assuming it hits 65% EBITDA margins (which it isn't right now), that is just 950 million euros of EBITDA for an EV/EBITDA of 30. This is still above the market average. If you are going to buy the dip on Adyen stock, you need to believe it can expand its margins to its long-term guidance and continue growing revenue at 20%+ for the foreseeable future.
