You can't fault Adyen (ADYE.Y -1.57%) (ADYY.F 0.41%) investors who just want some peace and calm. The last few months for the financial technology (fintech) behemoth have seen the stock go on a wild ride. After it reported slowing growth and after it shared anecdotal news about pressure on pricing from competitors in its first-half update this summer, share prices of Adyen crashed hard. At one point, its market cap had fallen a little more than $20 billion after rising to roughly $100 billion in the fall of 2021.
Today, the downward trend appears to have at least partially reversed. Shares of Adyen are up 63% over the past month, mostly due to positive investor sentiment coming out of its recent investor day in San Francisco. With the stock headed higher, is it time to hop back on the Adyen stock train?
Worries about pricing pressure in the U.S. were overblown
In its first-half update back in August, Adyen reported another period of strong growth. The payment processor that focuses on enterprises and e-commerce grew its revenue by 21% year over year to 739 million euros through the first six months of 2023. Over the last 12 months, the company generated 1.46 billion euros in revenue.
While growth continues to look strong, investors were concerned about two things in August: declining margins and pricing pressure in the U.S. On its conference call, Adyen said it was facing pricing pressure from a competitor -- likely PayPal's Braintree subsidiary -- that was causing growth to slow in North America. Through the first half of 2023, Adyen's earnings before interest, taxes, depreciation, and amortization (EBITDA) margin sank to 43% compared to a 61% margin in the same period two years ago.
These concerns caused Adyen's stock price to fall by 50% in just a few short weeks. Today, it looks like this sell-off was overdone. Lower margins can be explained by a one-time acceleration in employee hiring, which management says is mostly over. The competitive pricing pressure is something to watch, but Adyen is a global business and has faced numerous forms of competition in the past decade as its business scaled. Despite this, the company continues to gain market share in global payment processing year after year.
After management reiterated its long-term revenue growth guidance at the investor day, shares of Adyen shot up much higher, leading to outsized stock returns over the past month. However, the stock is still off around 65% from all-time highs.
What will Adyen's long-term growth look like?
Adyen has an ambitious goal to enable companies to accept any (legal) payment method in any geography around the world. It started out in Europe but has since expanded to have a major presence in the U.S. Over the next few years, it is aiming to expand its presence in Asia, Latin America, and in-person processing. This is a big reason why the company accelerated employee growth this year.
Versatility of payment acceptance is why large companies and platforms go to Adyen for payment processing. It has the highest acceptance rates and the widest breadth of products, allowing many companies to simplify their payment services even with all the methods consumers can use to buy things in the 21st century. There's a reason that Spotify, Uber Technologies, and platforms like Wix.com flock to Adyen over the competition. Adyen provides them with tremendous value for their global operations.
As the end market for payment processing keeps growing and the company continues its market share and geography gains, management believes it can grow its revenue by roughly 25% annually through 2026. In 2026, it expects EBITDA margins to be above 50% again.
The stock isn't cheap, but this is a great business
Assuming three years of 25% revenue growth, Adyen will hit 2.85 billion euros in trailing revenue at some point in 2026. On a 50% profit margin that equates to 1.4 billion euros in EBITDA, or close to Adyen's trailing 12-month revenue. This would be an impressive result for a business that has already reached a significant scale.
Today, Adyen trades at a market cap of 33.5 billion euros ($36.66 billion), or around 24 times this three-year forward EBITDA projection. It is hard for me to argue this is a cheap price. There is a risk Adyen fails to reach these revenue growth or margin targets, but even if it does, the stock would only be trading at a price-to-earnings ratio (P/E) close to the market average.
Adyen is a great business that should make its way into your portfolio at the right price. But after this aggressive price recovery, the stock looks a bit too expensive. Keep this one on the watchlist for now.
