Most investors are probably familiar with some of the major payments businesses out there. Perhaps Visa and Mastercard are on your radar. But a smaller company like Netherlands-based Adyen (ADYE.Y -1.57%) is also worth getting to know better. The fact that its share price has been hit so hard recently might encourage you to take a closer look.
Here are five things the smartest investors know about this popular fintech stock.
1. A convenient platform for merchants
The payments landscape can be difficult for investors to understand, so I think it's worthwhile to first set the stage and explain what Adyen does.
At a high level, this business offers a single platform that allows merchants in a range of various industries -- including retailers, restaurants, online marketplaces, transportation services, and digital media -- to accept payments. And it's worth mentioning that Adyen provides these services in an in-person and physical setting, as well as through mobile apps and online.
Adyen's customer list contains some well-known enterprises, like Uber, McDonald's, Pinterest, and Etsy. Clearly, Adyen has a strong standing with larger businesses that have a presence in multiple markets across the world.
2. Slower growth
It shouldn't be a surprise that Adyen's business was growing like wildfire during the depths of the pandemic. Revenue and processed payment volume in 2021 were up 46% and 70%, respectively, year over year. The surge in digital transactions certainly helped propel Adyen, as well as other businesses in the space.
However, it's been a different story in the past several quarters. Growth slowed in 2022. And through the first six months of 2023, revenue increased by 21%, with volume up 23%. To be fair, Adyen's rate of growth is still impressive, but it's a far cry from what the company was experiencing just a couple of years ago. It's not a shocker that the management team puts the blame on the economic backdrop, primarily the inflationary and higher-rate environment.
Margins have also come under pressure recently. Despite slower growth, Adyen is focused on increasing its headcount to continue scaling the business. This is in stark contrast to other tech companies that have laid off employees.
3. Benefiting from a secular trend
Investing behind broad secular themes happening across the economy is a smart strategy that long-term investors can take advantage of in their stock selection. Without a doubt, one of the most powerful trends in the past decade has been the proliferation of digital payments.
This trend has been bolstered by the rise in popularity of smartphones, as well as the ongoing growth of online shopping. Consequently, as more commerce and transactions are done where the buyer and seller are in different locations, a company like Adyen stands to benefit.
The pandemic also accelerated the growth of electronic payments. People quickly became drawn to the convenience and ease of use they offered. But because cash is still an important form of payment in most parts of the world, there's a long runway for digital payments to penetrate further.
4. Competitive landscape
As I mentioned earlier, the payments industry can be complex. But the fact that it's a lucrative industry means that there is a ton of competition that a business like Adyen faces. PayPal's Braintree segment, privately held Stripe, Fidelity National Information Services' Worldpay, and Shift4 Payments are all key rivals.
But while the competitive landscape is certainly intense, Adyen appears to be doing something right, as its growth trajectory and customer list show.
Plus, what's really impressive is that in 2022, 80% of the company's payments volume growth was derived from businesses that were already Adyen customers before the year started. That's a great sign of its ability to keep its customers not only engaged on the platform, but using its payments services more over time.
5. Cheap valuation
In 2020, Adyen shares were up a whopping 182%. During that same time, the Nasdaq Composite rose 44%. Like many fintechs, Adyen was a darling among investors.
But after hitting its peak price in the second half of 2021, the stock has cratered 80%. It now trades at a price-to-sales ratio of under 3.5. This valuation is about as cheap as shares have ever been.
It's safe to say that the excitement with Adyen has fully faded. So investors who are eyeing the company as a potential buying opportunity might not find a better time than now.
