Adyen: Cheaper Than Ever, Yet Growth Stalls

seekingalpha05-14

Adyen's top-line growth has decayed post-pandemic, and bottom-line growth even turned negative when excluding net interest income for the first time since 2017.The valuation of Adyen looks cheaper ...

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Therefore, I am rating Adyen stock with a hold.   Images By Tang Ming Tung/DigitalVision via Getty Images Adyen (OTCPK:ADYEY) is a Dutch company in the payments acceptance industry. It has a market cap of $41.68 billion and in 2023 generated €1.626 billion in revenue and €698.3 million in net income. The company has main offices in 13 countries and employs more than 4,196 people. Some of their major clients are merchants such as Microsoft, eBay, McDonald's, Etsy, Spotify, and so on. In this analysis, I would go through their business model, and discuss their financial growth, together with its price action, valuation, and inherent risks to finally come up with a hold rating. Adyen Business Model Adyen H2 2023 Presentation The business model of Adyen consists of offering merchants full-stack solutions of global payments by integrating gateway, risk management, and processing & acquiring solutions all together into a single platform. The majority of their revenues come from EMEA (56%), followed by North America (26%), which is the region that is exhibiting the highest growth. The rest of the revenues are split between APAC (11%) and LATAM (6.5%). Adyen operates through three different business units. Digital, Unified Commerce and Platforms.   Digital is nothing more than solutions for merchants to accept online payments.   Unified Commerce refers to the solutions offered to companies with omnichannel payment systems to connect their data. There, they consolidate the company's information regarding inventory, customers, and payment options to provide insightful data visualizations of the business.   Platforms is the unit that offers solutions to marketplaces for example, they allow the sellers of marketplaces to get paid through their ecosystem. Think of this like the process of eBay utilizing Adyen's technology to pay directly to their website sellers.    Financial Performance of Adyen Different from other public companies, at least in the US, Adyen reports its earnings semiannually instead of annually. Yet, every quarter they released a so-called Business Updated where they share relevant metrics such as net revenue, EBITDA margin, and capital expenditures with their respective guidances. Therefore, for this analysis, I will be looking at year-end figures for Adyen.   FactSet The table above illustrates the financial evolution (in euros) of Adyen. As you can see, revenue growth has been elevated over the past five years. However, post-pandemic growth acceleration has faded away and Adyen passed from growing at 46% in 2021 to 22% in 2023. The same applies to the bottom line, where Adyen grew net income in 2021 at 80% and in 2023 it grew at a rate of 24%. Yet, when having a look at pre-pandemic figures such as 2019 and 2018, it is clear that the growth of Adyen has been decelerating. However, growth remains elevated and there was never a reason to believe that revenue growth was going to be of triple digits in perpetuity. What's positive here is that the net income margin has remained constant since pre-pandemic levels, which is pretty solid despite the revenue deceleration. Something important to note is that in 2023, net income was of €698.3 million. Nonetheless, €285.0 million of that, or 40.8%, arose from net interest income that is not a core component of the revenue. Contrary to a classical bank, Adyen reports this figure after operating income, but just in 2023 and 2022 it was meaningful. In other years it was either negative or minimal compared to the net revenues. The primary reason for net interest income to be high in the past years is due to cash balances held in bank accounts that are receiving elevated interest rates in different currencies such as EUR, USD, and GBP. Again, this is not their primary business, but they gain from float income between the time payments are initiated and the time where they are fully processed. To give you some perspective about the impact of this, without net interest income, the net income margin for 2023 would've been just 30% (vs. 43%), and the growth would've been negative at -14% (vs. 24%), based on my napkin math and using the same tax rate of 26%. Taking this into account changes the equation completely, and the aforementioned statement of \"net income margin has remained constant since pre-pandemic levels\" becomes completely invalid. In my opinion, this starts to bring doubts about the profitability profile of Adyen going forward. ADYEY Price Action Data by YCharts Over the past five years, the stock performance of Adyen could be divided into two parts. The first one arose from the pandemic that brought triple-baggers to stockholders, and the second one arose from the stock collapse where US investors got to lose up to ~80% of their investment, amplified with the dollar strengthening. Even though the stock price was sort of consolidating since mid-2022, on the 17th of August 2023, the company reported weak earnings in the first half of 2023, making the stock to drop -36.47% after reporting its slowest sales growth on record, which was far away from analysts' estimates of 40% vs. 21%.  Yet, the stock has been able to recover significantly, going from a $6.60 low to a $16.97 high, which represented a spectacular 157.1% gain. Nonetheless, recently, the company had its Q1 2024 Business Update where few financial metrics were shared. Even though net revenue expectations were met, the shares slid -15.43% that day. Overall, from the graphs the stock doesn't look either under or over-extended, and it can be seen how volatility in the stock price has been reduced over the years as the company consolidates.  Adyen Valuation Data by YCharts Basing the valuation on its multiple history, we can see that Adyen trades significantly cheaper now. In late 2020, their multiples were at exorbitant levels, but over time, valuations stabilized, which made the stock trade at cheaper multiples. For example, in terms of price to free cash flow, Adyen is roughly at its historic low at 21.70x, which represents a difference of -49.4% from its historical five-year average. Data by YCharts With other multiples such as the PE ratio, the valuation opportunity is even more notorious. Currently, they trade at a 55.54x PE ratio, with their average of the past five years being -57.0% away at 129.06x. Of course, a mid-fifties PE sounds ruinously expensive. Still, from there, we need to incorporate the premium that this stock has historically exhibited due to its growth prospects. For example, net income (euros) in 2023, 2022, and 2021 grew at accelerated annual rates of 24%, 20%, and 80%, respectively. Meanwhile, it is expected for the company to grow its 2024 net income within still elevated rates at 26% All these helping to justify the elevated absolute multiples.           Broker Analyst Rating Date Rating Target Price Implied Return (%)   Mean   13-May Overweight 17.14 27.2   Restricted Restricted 26-Apr Buy 20.35 51.1   Jefferies Hannes Leitner 7-May Buy 19.63 45.7   Restricted Restricted 25-Apr Buy 19.39 44.0   Evercore ISI David Togut 26-Apr Buy 19.22 42.7   New Street Research Soomit Datta 25-Apr Buy 19.15 42.1   Stifel Nicolaus David Vignon 9-May Buy 18.86 40.0   Keefe Bruyette & Woods Sanjay Sakhrani 25-Apr Buy 18.43 36.8   Oddo BHF Corporates & Markets Cor Kluis 25-Apr Buy 18.21 35.2   Wells Fargo Securities Andrew Bauch 26-Apr Buy 18.16 34.8   TD Cowen Bryan C. Bergin 10-May Buy 17.42 29.3   BMO Capital Markets Rufus Hone 25-Apr Buy 17.14 27.3   Restricted Restricted 25-Apr Overweight 16.98 26.1   Restricted Restricted 6-May Buy 16.39 21.7   KBC Securities Thomas Couvreur 25-Apr Overweight 16.07 19.3   Susquehanna Financial Group James E. Friedman 25-Apr Hold 14.14 5.0   Autonomous Research Josh Levin 29-Apr Hold 13.82 2.6   Bryan Garnier & Co Paul Charpentier 25-Apr Hold 12.86 -4.6   Monness, Crespi, Hardt Gus Gala 3-May Hold 12.28 -8.8   KeyBanc Capital Markets Alex Markgraff 25-Apr Hold - -   Click to enlarge FactSet From the Wall Street analyst side, almost all price targets posted after the Q1 Business Update have a consensus view for either a buy or an overweight, with the rest of the analysts opting for a hold, but none of them selecting a sell rating, based on the information I have available. On average, the price target of the stock stands at $17.14, which means an opportunity of a 27.2% upside from the current price of $13.47. Adyen Vs. Stripe Stripe is probably the most similar global competitor that Adyen has. Although Stripe is not public and the company has \"no rush\" to go on an IPO, they disclosed a few KPIs that can be compared to the ones of Adyen.  For example, in 2023, Stripe achieved $1 trillion in total payment volume, which is comparable to the $1.073 trillion (dollar adjusted) that Adyen achieved that same year. Both growing revenues at almost the same rates from the year prior, with Stripe at 25% and Adyen at 26%. At this point, they seem like twin companies. Nonetheless, a big difference is that Stripe remains unprofitable, although it became cashflow positive in 2023, and Adyen has been profitable since 2014 based on its statements.  On their last funding last month, Stripe was valued at $65 billion, which is considerably higher than the $42 billion market valuation of Adyen. Risks Although this is a company stock that has been limiting its downside risk due to more fair valuations after the pandemic surge, some risks in the competitive landscape could put this company in a tight spot. With the current high competition of payment acceptance in both online gateways and POS systems, margin contraction is something that could come naturally as the service of offering acceptances for payments gets commoditized and all these companies would be competing exclusively for offering the lower fees.  Nonetheless, this commoditization might not be absolute. For example, I see differentiation and market segmentation as key factors that could be playing out within payment-acceptant companies. Especially when cross-selling other products. For example, Toast is a payment acceptance that goes above and beyond accepting payments. In addition, they cross-sell clients with other software solutions that are relevant to the restaurant industry. If you want to learn more about Toast, I recently made an analysis about them where I rated them with a Strong Buy and the analysis got ample engagement in the comment section. Furthermore, in a Bloomberg interview, the commoditization question of all companies doing the same was asked to Adyen's founder and CEO Pieter van der Does, and he responded in the following matter.  We build everything ourselves on a single platform that we control very well. We have more than 40 engineers and they’re all working on making it better for our customers, which is the merchant. Every week with a new release, every week more functionality, we make a system that works better. If you look at the others in the industry, there’s a lot of consolidation and they run many different platforms. While they are chasing problems on each platform, we are spending that time just to help our merchants. We don’t believe in all those mergers. That’s if you believe that it is a commodity. We believe it’s about functionality, about truly helping those merchants. And then we feel that building it yourself on a single platform is the way to position ourselves. Following that comment, Adyen is a company that has attributed all of its growth organically without the need to run expensive acquisitions to grow its client base. In addition, the company was founded 18 years ago, and the founder with a net worth of $1.8 billion remains its CEO. His net worth would probably be a lot higher if the Vermogensrendementsheffing (wealth tax) in the Netherlands didn't exist. Yet, capital gain taxes do not exist in that country for private individuals, so it compensates.   McKinsey Even though this is a highly competitive business, the total addressable market is insane, and McKinsey estimates ongoing higher revenue growth in the following years than in the period from 2017 to 2021. Based on these estimates, I believe Adyen is a company that is well-positioned to grasp part of that market growth. The growth in this industry is far from over, and as rates remain primarily based on spending percentage, payments acceptance business would most likely adjust well to inflation.  Still, if Adyen's growth (removing net interest income) continues with another year of negative net income growth, the story will completely change, and that 55.54x PE would quickly halve.  Conclusion Adyen is definitely in an industry that has more opportunities than treads. Their customer base encompasses some of the largest global enterprises in the world, and their global presence is a unique characteristic that allows them to offer unified commerce solutions. Top-line growth has been decelerating considerably since the pandemic, and net income (excluding net interest income) even decreased together with its margin. On the bright side, the valuation looks cheaper than ever with price to cash flow running -49.4% below the 5-year historical average, and the stock is accompanied by optimistic targets from Wall Street analysts. In my personal opinion, I would rather wait and see signs of improvement, especially in the net income margin (excluding net interest income) to go and buy as cheap could get cheaper. I could be missing an opportunity due to the cheap valuation, but I am willing to take that potential opportunity cost while being more patient.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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