Summary Of My Writeup On Adyen
High growth company that will continue taking market share from incumbents with its market-leading payment system. Valuation has dropped significantly. Management is focused on the long-term.
I recently did a writeup on Adyen. Adyen is a payment processor/merchant acquirer who counts Facebook, McDonald’s, Netflix, and Shopify as some of its customers. It competes with payment companies like FIS, Fiserv, Global Payments, PayPal, Stripe, Checkout, and others. What follows below is my summary of my writeup.
You can read the whole report by following this link:
https://www.mikegorlon.com/_files/ugd/c561d1_4bb91b190fb64cc39ae116a50137b52d.pdf
Adyen was founded by Pieter van der Does and Arnout Schuijff in 2006 after selling their old payments processing company for €100 million to Worldpay. Following the sale, the founders decided to start another payments company, and adequately name it “Adyen”, which means “Start Over Again” in Surinamese.
They learned from past mistakes and tried to make this payment company even better. They put a lot of emphasis on culture and no acquisitions because acquisitions add more payment systems, which slows down the whole entire payment system altogether, making it less efficient. Instead, the company builds their whole payment system in-house.
The valuation of Adyen was always priced at a really high valuation since its IPO. In Exhibit A, I showed some valuation multiples going back to 2019. The company was growing at a high rate, but the multiples that it was trading at were discounting that these high growth rates were pretty much guaranteed to be achieved.
Exhibit A: Valuation Multiples
Source: Morningstar
This didn’t happen though; growth eventually slowed. Following a quarter with slower growth, higher wage expense, and more competition in the North American market, the stock fell 40% on the day of the earnings call and then it fell another 35% after.
Whereas the Street only focuses on the short-term, the founders of Adyen have a long-term mindset and this is good for shareholders. Digital payment volumes are expected to grow over the next ten years, and Adyen is in a great position to benefit from this transition to digital and non-cash transactions because of the company’s unified payment system, low-cost operations, high operating leverage, and founder-led experience.
This dichotomy between Wall Street’s short-term focus and management’s long-term focus, and a slowing economy with higher interest rates, is what I believe created an opportunity to get Adyen at a much more reasonable valuation than it has traded at in the past. Adyen has double digit returns on invested capital, high free cash flow generation, and high net income margins.
For my valuation, I used a 30% growth rate, a terminal growth rate of 5%, a required return of 10%, and P/E multiple of 25x. This results in a value per share of $13.45 (see Exhibit B). It’s important to keep in mind that the value is very sensitive to the growth rate though.
If growth is 15% with the same parameters of 5% terminal growth rate, 10% required return, and 25x multiple then the value per share drops to $7.50 per share. That’s why I also created a couple of different scenarios (see Exhibit C) with different parameters to get an idea of what the valuation would be if growth or the multiple are lower than expected.
Exhibit B: Valuation
Source: Author Calculations
Exhibit C: Valuation Scenarios
Source: Author Calculations
The stock has slowly been climbing over the past two weeks after hitting a low of $6.55 at the end of September. This $6.55 should serve as an important support level to keep an eye on over the next couple months, but a lot of buyers have stepped in and bought, bringing the share price to $7.84 as of October 6th. There is no guarantee that the stock will continue to increase, but I still believe the company has a lot of upside over the next ten years for the following reasons:
· Transactions all over the world are transitioning away from cash to a heavier percentage of digital.
· Adyen’s unified payment system is better than its competitors and the lowest cost.
· The company has high operating leverage, leading to high returns on capital and high profit margins.
The company is hosting an investor day on November 8th to update investors. This could reassure investors of the company’s long-term plans, how its hiring is doing, and what competition and payments volume have looked like since that last dismal earnings call that sent the stock cratering 40% in a single day.
The investor day and the next earnings call will serve as important drivers of where the stock trades at over the short-term. The good news is that management didn’t give any guidance for the second half of this year so expectations from the Street have already discounted a lot of negative into the price. The bad news is the economy and payment volumes are going to continue to be under pressure over the next year.