Adyen (ADYEN 1.95%) is one of the most important financial technology (fintech) businesses in the world, but few people know of its existence. The modern payments facilitator is the middleman on millions of digital transactions around the world, helping shoppers seamlessly make purchases online, among other merchant services.
Since going public in 2019, shares of Adyen are up 57%, a respectable return that is barely trailing the S&P 500. But at one point in 2021, the stock had risen a whopping 500% due to the rapid market share gains it was making. Now, Adyen is in its sharpest decline so far as a public company, with shares off 77% from all-time highs.
But if you look at the underlying business, Adyen's operations look just fine. Here's why now could be a good time to bet on an Adyen rebound.
Data source: YCharts.
Modern payments architecture
Adyen was formed in 2006 by two European payments engineers who wanted to disrupt the clunky, legacy payments options we had at many merchants (whether offline or online) at the time. Today, one of those founders -- Pieter van der Does -- is still running the company as co-chief executive officer. Adyen works as a payment processor for merchants, allowing them to accept money from customers using products such as credit cards.
In the beginning, Adyen focused on processing online transactions in the European market. One of its first big customers was music streaming service Spotify. It was able to win over larger enterprises as a small start-up due to its high authorization rates, which is an industry term that measures what percentage of shoppers successfully purchase a product when they want to (stopping fraudulent payments is also important). With a modern software system and a zero-acquisition culture, Adyen is known to have the best authorization rates in the payments industry. Improving authorization rates is a huge boost for large companies, as even a 1% improvement can mean adding millions of dollars in annual sales.
Since its early days, Adyen has expanded its product suite at a breakneck pace, all while shunning acquisitions. Today, it offers merchants a broad set of payment services, from in-store point of sale (POS) systems to online commerce to foreign exchange management. Over the long term, it wants to offer businesses the ability to accept any form of payment from any (legal) customer anywhere in the world.
Competitive worries overblown?
Seeing how impressive Adyen's product suite is, you may be wondering why the stock is down 77% from all-time highs. Some of the fall can be attributed to the broad decline in growth stocks over the last few years, at least outside of a few huge tech companies. However, much of the recent drop is due to pricing pressure from competitors such as PayPal.
PayPal owns Braintree, a direct Adyen competitor that has a large market share in the U.S. Braintree has been dropping its pricing for merchants in North America in recent quarters, which Adyen specifically cited on its recent earnings call. Investors have been concerned about these developments, but Adyen is sitting firm on its pricing because it believes it offers a better product suite (especially for larger merchants) as well as a higher global authorization rate. Time will tell if this is the right move for the business.
There is also the concern around narrowing profit margins, with its earnings before interest, taxes, depreciation, and amortization (EBITDA) margin sinking to 43% in the first half of this year compared to 60% a year prior. While something to keep track of, management has explained that this compression is due to its recent hiring binge, which they expect to level off over the next few years. As long as Adyen's net revenue continues to climb higher once it stops this aggressive hiring push, EBITDA margins should start to expand again.
The stock is cheap if you plan to hold it for many years
The good news for Adyen is that it has a long runway to increase its net revenue globally. At the end of 2022, the company had just 2.1% market share among payment processors, but that is up from 0.2% in 2016. The entire group of modern payment facilitators, such as Stripe and Braintree, only have a 6.8% share, meaning there is still a ton of room to steal customers from clunky legacy solutions.
Even if Adyen doubles its market share over the next five years, it will have just 4.2% of the market. These stats -- along with its best-in-class product suite -- give me confidence that Adyen will continue to increase its net revenue (and eventually profits) this decade. Today, the stock trades at a trailing EBITDA multiple of 28.5, which is a bit expensive versus the average stock. But with depressed margins and a long growth trajectory ahead, I think investors will be happy betting on a rebound in Adyen shares over the next five or 10 years.
