Adyen: Simplifying Payments with Top-Notch Quality

In today's report, we cover Adyen. Adyen stood out from our screening in "Fresh Stock Ideas." As we already hold PayPal, we decided to take a deeper look to better understand the industry dynamics.

In this article, we provide an overview of Adyen’s business, assess the recent drop in margins, and analyze the competitive landscape, specifically comparing it with Stripe and PayPal's Braintree. We conclude this report with a DCF valuation and a sensitivity analysis.

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1. Key Facts

Description: Adyen N.V. (“Adyen”, “Company”), is the global financial technology platform of choice for leading businesses. It offers a single in-house developed solution that manages the entire payments lifecycle, including gateway, risk management, processing, issuing, acquiring, and settlement. Adyen supports various payment types across +100 countries.

Key Financials: Over the period FY14 to FY23, the Company depicted a revenue Compound Annual Growth Rate (“CAGR”) of 48.2% and operating income CAGR of 54.5%, reaching an FY23 net revenue of €1.6 billion and operating income of €681.8 million (margin of 42%). Adyen has cash and short term investments of €8.3 billion compared to nil total debt and lease liabilities of €223.1 million.

Price & Market Cap (as of 15th July 2024): Its market cap is €35.4 billion with a 52-week low of €602.8 and a 52-week high of €1,699.2, whereas it currently trades at €1,139.4.

Valuation: Adyen trades at a TTM EV/EBITDA of 35.6x (3 Year average of 61.4x) and a TTM EV/Sales of 16.8x (3 Year average of 34.7x).

2. Business Overview

a. Brief History

Adyen, meaning “start again,” was founded in 2006 by Pieter van der Does and Arnout Schuijff, marking their second startup project after Bibit (now part of Worldpay Inc.). Arnout stepped down in January 2021, while Pieter continues to serve as Co-CEO, focusing on an oversight role within the Management Board. Ingo Uytdehaage, appointed as Co-CEO in mid-2023, oversees Product Solutions and Operations, effectively succeeding Pieter. Pieter holds approximately 3% of the Company's ownership, valued at about €1.1 billion (as of July 11, 2024), while Ingo holds about 0.6%.

Since its inception as a payments platform in 2006, Adyen has transformed into a global financial technology platform. With 27 offices worldwide, it processed over €970 billion in payments in 2023, providing end-to-end capabilities (acquiring, gateway, processing, settlement, etc.), data enhancements, and financial products (issuing, FX services, PoS terminals) within a single internally built solution. Adyen effectively manages the entire payments lifecycle.

Adyen's significant expansion began in 2012 with the opening of offices in San Francisco, Paris, and London. Recent achievements include obtaining a US branch license in 2021 and acquiring licenses in regions such as Japan and UAE in 2021, and Malaysia and Puerto Rico in 2020. A milestone in its history was the IPO in June 2018, which opened at €240 per share with a €7 billion valuation. Since then, Adyen has achieved a remarkable 16.1% CAGR (until July 11, 2024), despite being lower than the Nasdaq 100. Recent volatility in the payment industry post-pandemic and the shift towards AI stocks like Nvidia explain this “underperformance.”

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers, premium members can benefit from a 3-month free trial)

Due to its Dutch origins, Adyen's presence in EMEA is prominent, accounting for 56% of its net revenues in 2023. Meanwhile, the North America region has expanded rapidly, increasing its share of net revenues from 15% in 2019 to 26% in 2023. Today it has reach in over 100 countries and supports over 200 local currencies.

Source: FinChat.io (affiliate link with a 15% discount for StockOpine readers), StockOpine Analysis

b. Customers

Since its IPO in 2018, Adyen has consistently maintained a low volume churn rate of less than 1% while in 2023, over 80% of Adyen's growth came from existing customers, reflecting the commitment to proving value upfront and expanding collaboration over time.

Customer concentration with the top 10 merchants represents 16% of revenue in 2023. No single customer accounted for more than 10% of total revenue or net revenue in 2023 and 2022. It shall be noted though, that the majority of Adyen's processed volume comes from large enterprises.

c. Segments

Adyen generates revenue through processing and settlement fees for its gateway and acquiring services. In 2023, revenue composition was 57% from settlement fees, 28% from processing fees, and the rest from other services, maintaining similar proportions over the past three years.

Source: Company filings, StockOpine analysis

• Settlement Fees: Adyen earns settlement fees from merchants, typically as a percentage of the transaction value, for providing acquiring services. The fees include interchange and payment network fees, with Adyen charging a mark-up on its incurred costs.*

• Processing Fees: Merchants pay a fixed fee per transaction (€0.11 as per its website) for using Adyen’s platform.

• Sales of Goods: Revenue from selling POS terminals and accessories, distinct from Adyen's payment services. This revenue source is loss-making but crucial for building Adyen's POS business, with POS processed volume accounting for 16.5% of the total volume in 2023.

• Other Services: Additional services include foreign exchange fees, third-party commissions, and issuing physical or virtual payment cards.

* In 2023, Adyen changed its approach to reporting settlement fees. Previously, Adyen was responsible for the entire settlement process and acted as a Principal. With updated terms, Adyen clarified it doesn't control third-party services for merchants. Thus, from January 1, 2023, Adyen acts as an Agent for these fees, no longer recognizing them as revenue.

Let’s now dive deeper into the 3 commercial pillars of Adyen.

Digital

Adyen's Digital segment is dedicated to facilitating effortless online payments in the digital economy. This segment is the largest within Adyen, contributing €605.5 billion in processed volume in 2023, which accounts for 62.4% of the total processed volume.

Adyen aims to be the preferred financial technology platform for enterprises, continuously evolving to meet new payment methods (screenshot below), regulations, and technologies. It addresses significant issues such as the 15% failure rate of online transactions when a card is not present and the increasing complexity of payments due to regulatory changes and shifting consumer preferences. By offering a single, integrated solution, and leveraging machine learning, Adyen helps businesses simplify these complexities (by enhancing approval rates, reduce friction, and minimize fraud) and achieve cost savings at scale.

Source: Website

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