Adyen (ADYE.Y -1.57%) (ADYY.F 0.41%) vis one of the most important companies in fintech, but few people know about it. Adyen's products facilitate global payment processing and compete with products offered by Stripe and PayPal (PYPL 2.90%). Among its client list are heavyweights like Uber, Microsoft, and Etsy, but a key declining metric spooked investors after it reported the first half of 2023 results (Dutch companies are only required to report twice a year).
As a result, the stock tumbled nearly 40% the next day. But is this a knee-jerk reaction, or is there something to this fall? Let's find out.
Customers may not be willing to pay a premium for Adyen's products
The primary concern with Adyen's report was its declining payment volume growth. In the first half of 2023, it was up 23% year over year. This marks a significant slowdown compared to the 49% rise in the second half of 2022.
Capturing customers and growing payment volume is a key part of the Adyen investment thesis, and if it's no longer doing this at the pace investors expect, then there's a reason to be concerned. Furthermore, Adyen's competitive advantage (or lack thereof) isn't pricing power; it's its international footprint. Adyen alternatives like Stripe and PayPal are cheaper and have a lower take rate than Adyen. If customers don't care about Adyen's advantages over straight pricing, then its competitive advantage doesn't exist.
With PayPal's Braintree product growing its volume by around 30%, it's evident that customers are more focused on outright cost, at least right now. So, with one major red flag appearing for Adyen, it concerned investors.
The problem was that there was a second red flag as well.
Adyen's margins are slipping
Adyen's margins were also significantly under pressure during the first half of this year. Adyen uses earnings before interest, taxes, depreciation, and amortization (EBITDA) as its preferred profitability metric, and its EBITDA margin in the first half was 43%. While the margin is respectable in a vacuum, the problem is that it has steadily declined.
| Term | EBITDA Margin |
|---|---|
| H1 2023 | 43% |
| H2 2022 | 52% |
| H1 2022 | 59% |
| H2 2021 | 63% |
| H1 2021 | 61% |
Data source: Adyen. H1/H2 = First half/second half.
Adyen has been growing revenue at a respectable rate. The problem is that its expenses have risen even faster. Total employee compensation rose 83% year over year despite only increasing its headcount by 52%. That means it's giving out some hefty raises or hiring some expensive workers; either way, it's not good news for Adyen's margins.
With slowing growth and declining profits delivering a one-two punch against investors, it's not surprising the stock took a dive. But is this a buying opportunity, or should you follow suit and dump the stock?
The stock is still expensive
Despite its drop, Adyen's stock isn't that cheap. Adyen trades at 4.3 times sales, while PayPal trades at nearly half that valuation at 2.4 times. On the earnings side of the valuation, Adyen's stock demands a significant premium of 43 times earnings compared to PayPal's 17.
While I don't think these two should be valued at the same level, it gives investors an idea of how expensive Adyen's stock is. With plenty of questions surrounding Adyen's ability to charge a premium for its services and rising operating expenses, I don't think now is the time to rush in to purchase the stock.
