Adyen (ADYE.Y 0.51%) (ADYY.F 0.29%) is a fast-growing fintech that experienced explosive growth during the pandemic. From 2019 to 2021, the stock climbed from about $7 to nearly $35. Like other innovative payment companies, Adyen benefited from shifting trends during the pandemic, including contactless payments and in-app purchases.
Adyen continues to grow rapidly, but not nearly as quickly as it once did. Since peaking in August 2021, the stock has fallen 79%. The significant decline looks like a tempting opportunity to buy. The stock is cheaper, but does that make it worth buying today? Here's what investors should know before buying the payments company.
Adyen's payment platform simplifies life for merchants
Headquartered in the Netherlands, Adyen provides a platform for businesses to accept in-store, online, or in-app payments. Its point-of-sale system is a newer solution businesses use to process payments as they move away from legacy payment systems.
The company handles the entire payment lifecycle, including gateway, processing, issuing, acquiring, settlement, and risk management. Its payment platform allows merchants to accept various payment methods across numerous currencies within a single integrated platform.
Adyen charges merchants for processing payments through its platform, earning processing and settlement fees. Settlement fees are based on a percentage of transaction volume, while processing fees are fixed per transaction.
Its rapid growth led to a high stock price and an unsustainable valuation
The global push toward digital payments has been an ongoing process that accelerated during the pandemic. During the early days of the outbreak, businesses shifted toward digital, cashless payments. This created a need for a unified commerce approach, where merchants could offer in-app and online ordering, along with curbside pickup, all on the same platform.
The companies ushering in this new payments economy saw a surge in their businesses during the pandemic. With the rise in contactless payments and online retail sales, Adyen's business got a big boost. From 2019 to 2021, Adyen's processed volume grew more than 115%, propelling its earnings before interest, taxes, depreciation, and amortization (EBITDA) 126% higher in the same period.
Adyen's growth trajectory was unlikely to continue at that rate. The stock traded at a rich valuation on the back of lofty growth expectations. At its peak valuation, Adyen was priced at 21.7 times sales.
Data source: YCharts.
It continues to grow, albeit at a slowing rate
Adyen continues to grow. Last year, its processed volume grew another 49%. However, its EBITDA margin has been slowly on the decline. After peaking at about 64% in the second half of 2021, this margin gradually fell to 43% in the first half of this year.
One reason for the falling EBITDA margin is Adyen's pickup in spending. Last year, its full-time employee count grew by 53% and another 17% in the first half of this year. Management says the costs are driven by increasing its global team as it scales the business. Employee benefits and sales and marketing expenses were up 80% and 13%, respectively, in the year's first half.
Management says Adyen will not slow its spending until 2024, which may pressure its margins further in the near term.
Data source: Adyen. Chart by author. H1 = first half of the year. H2 = second half of the year. EBITDA = earnings before interest, taxes, depreciation, and amortization.
Investors can be patient on Adyen stock
Adyen is a rapidly growing company in the ever-evolving payments industry. The company continues to grow, but concerns about its growth rate and margins have made investors rethink the high price tag.
Today, Adyen stock is valued at 3.78 times sales. Even though this is near its lowest valuation in recent history, it's still pricey relative to competitors. PayPal, which has also experienced a significant sell-off following its pandemic boom, trades at 2.24 times sales.
Adyen is an intriguing company that is cheaper today than just a few years ago. However, before buying the stock, I want to wait to see how things play out with its expenses and margins in the next couple of quarters. Management's longer-term target for its EBITDA margin is about 65%, so investors will want to monitor this metric to see how the company is progressing on this goal in future earnings reports.
