Pocket Change is a newsletter where Tony + Karine keep track of and analyze stocks we think are noteworthy (and whether we should invest pocket change into). We’ve been friends since 2013, and have been sending each other stock suggestions and portfolio screenshots over the years. Pocket Change is our way of opening up the conversation and sharing these ideas more publicly. This newsletter goes out every weekend with our analysis and decision for a new stock.
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Summary
If you’re interested in payments or in tech, you’ve likely heard of Paypal or Stripe. One payment company that isn’t as well known in the US is Adyen, sometimes called “Stripe for the enterprise.” Like Stripe and Paypal, Adyen is a payment company that allows businesses to accept e-commerce, mobile, and point-of-sale payments.
Based in Amsterdam, Adyen is a global platform that enables easy integrations across multiple acquirers and gateways across North America, Latin America, Australia, and Europe. One of its major benefits is their direct connections to international cards, enabling ‘plug and play’ expansion to new regions. They are laser focused on payment processing - top retail brands to tech giants like Tiffany & Co., Uber, Netflix, and eBay use Adyen to manage an easy, unified payments experience.
Adyen first went public on the Euronext in June 2018 with an implied market capitalization of $8.3B, and since then, has doubled its stock price and grown quickly to $56.8B, particularly as it powers the payments behind the recent surge in e-commerce demand. Today, we look at Adyen, how it fits in the payments landscape and where we think the business could fit in the long term.
Did you know?
CEO Pieter van der Does and CTO Arnout Schuijff previously worked together at Bibit, which was acquired by Worldpay to expand their online e-commerce presence in Europe. After selling their company, the duo started Adyen based on a similar thesis and focused on building an architecture that allows adding new payment methods frictionlessly.
In 2018, eBay decided to partner with Ayden to process payments on its marketplace, replacing former partner PayPal. The rationale was that Ayden can lower costs and help eBay accept more payment options and grow their business.
Fundamentals (H1’FY20)
Volume Processed: €129.1B, +23% YoY
Net Revenue: €279.9M, +27% YoY
EBITDA: €140.9M
EV: €46.5B
EV/EVITDA: 55x
How Adyen Makes Money
When a customer uses their credit card to purchase goods or services from a merchant, the actual backend of a payment is quite complicated. Adyen’s platform provides the infrastructure and APIs to easily manage payment processing across the full payments stack - gateway, risk management, processing, acquiring, and settlement. Adyen earns processing and settlement fees (for gateway and acquiring services respectively.
Settlement Fees: (~89% revenue) - Adyen makes a majority of its revenue as a % of transaction value, meaning it makes more money when merchant payment volume increases. Merchants pay these fees for Adyen’s acquiring services, which is specifically when Adyen captures the credit card and transaction information from the merchant and routes it to the card issuer (Visa/Mastercard) for approval. This includes interchange + payment network fees and other costs incurred from financial institutions, which varies depending on the payment method.
Processing Fees (6% revenue): Fixed fee per transaction paid by merchants for the use of Adyen’s platform and recognized as revenue when a transaction is initiated via the Adyen payment platform.
Sales of Goods (0.5% revenue): Sale of POS terminals and related accessories. Currently point-of-Sale volume is just ~9% volume.
Other Services (3.5% revenue): Foreign exchange service fees, third-party commission, etc.
Growth opportunities
Increasing Volume within Existing Merchants: Because Adyen serves many high growth technology companies, its transaction volume follows their growth trajectory. These companies often have multiple payment processors to cover various regions around the product, so Adyen has the opportunity to take share from competing processors when they launch in those regions.
New Verticals: Adyen has a vertical-focused sales process, and they recently launched and are aggressively pursuing quick-serve restaurants (e.g. Chipotle) in their Enterprise Retail, Food & Beverage and Hospitality segment. This is an area where combining online with POS capability is critical. They also launched their Unified Commerce offering, which includes features like loyalty program and self-service ordering.
Revenue Growth in North America + Asia-Pacific: Europe is still the largest contributor to net revenue with 63%, followed by North America (18%), Asia-Pacific (10%), and Latin America (9%). However, revenue growth in North America (58%) and Asia-Pacific (28%) outpaced Europe (21%) and Latin America (15%).
Take-Rate Expansion: Adyen processed €129.1B in the first half of this year and earned 21 basis points, representing 1 basis point of expansion from last year. As Adyen moves down-market to smaller merchants, they could expand the take-rate.
Competitors / Risks
Stripe: Stripe has primarily been very developer-forward and focused on SMBs. Stripe’s mission is to “increase GDP of the internet", which means investing in products that also enable more entrepreneurs to start businesses like Stripe Atlas (helping entrepreneurs with incorporation) and Radar. Stripe recently announced their Salesforce partnership, which underscores their efforts to double down into enterprise and plan for their IPO and be a larger competitor to Adyen.
Concentration Risk: Adyen serves many large customers, which often have multiple payment service providers and have more leverage over negotiating fees. The management team has actively tried to reduce the total net revenue from the top 10 years, going from 33% in 2017 to 27% in 2019.
Management Team: The management team recently sold 15% of their total holdings for €692.9 million on August 24, and despite releasing that “all four individuals remain committed to Adyen in their current roles working on the long-term strategy,” the CTO announced one month later that he was stepping down.
Key Questions to Ask Yourself (before we think you should buy...)
Can Adyen maintain its growth rate 3-5 years from today given the competitors (e.g. Stripe, PayPal)?
Do you think Adyen is well-positioned to continue growing among its current merchants or will its growth rely on new merchants?
Our Take
We think Adyen is overvalued at 55x EV/EBIDTA while growing net revenue at +27% YoY and would recommend investors to wait for a more attractive entry-point.
Note this is not investment advice. Please consider doing your own research before making any investments!
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