Adyen Stock: A FinTech Stalwart Priced To Perfection (ADYEY)

TechCrunch Disrupt London 2015 - Day 2

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Investment Thesis

Here’s Beating The Market’s overarching investment thesis for Adyen laid in our introductory Adyen note for Beating The Market:

  • Adyen (OTCPK:ADYEY) has built a disruptive global payments platform for merchants by integrating payment gateway, risk management, payment processing, and acquiring processes. Adyen did this organically, meaning that it has made no “bolt-on” acquisitions. This has allowed the company to scale globally with exceptional efficiency and simplicity for the end-user.
  • Adyen’s transparent fee structure is lower than competitors such as PayPal, Stripe, and WorldPay. Hence, there is room for future revenue expansion among the existing customer base.
  • A single global platform allows Adyen’s customers (read: enterprises) to get a comprehensive view of their end consumers. For now, this centralized data is not monetized by Adyen. Furthermore, Adyen will be able to create new products and services for its customers based on its data library with the growing use of machine learning and AI.
  • Adyen continues to win customers, and it is expanding into the mid-market. Additionally, it has room to monetize its existing customer base further. Thus, Adyen will continue to grow at a brisk pace over the coming years. Management has stated that they are building for the multi-decade long term. To that end, they are managing growth such that they expand at 25-35% annually for many years to come. Despite only targeting this level and building methodically and sustainably, the company grew at 42% in 2019 and very likely would have maintained that growth had the pandemic not struck.
  • Adyen is led by its visionary founder, and the company has a great culture with a focus on long-term outperformance. Hiring is very deliberate at Adyen. Each new hire goes through an extensive vetting process and is ultimately interviewed (after being vetted) by one of the six board members of Adyen. This intimacy ensures Adyen’s culture remains in line with the company’s espoused values. – Original Beating The Market Adyen Deep Dive

Even after it’s seen its market nearly cut in half over since the highs last September, I don’t love the stock at its current valuation, but I do like the company quite a lot and believe it justifies a higher valuation. Today, we will take a look at Adyen’s business, the trends supporting its explosive growth, and lastly, we will ascertain Adyen’s fair value and expected returns to determine whether or not it’s a good investment today.

Introducing Adyen: The Power Of One Acquiring Platform

When it comes to buying things, consumers are more likely to buy something when it is convenient. Amazon is a prime example. Amazon makes it easy for consumers to easily buy something with one click, and better, it uses data and analytics to learn the consumers’ behaviors and provide them with “recommendations for you”. Amazon leverages data and AI to optimize its cost structure and offer lower prices to its customers, similar to how Adyen optimizes the acquiring infrastructure to enable its merchants to process and authorize more transactions, which leads to more sales.

Adyen is the Amazon for payments and fosters payments through its eCommerce, mobile, and point-of-sale platform. Adyen is a unified transaction platform for businesses and consumers, as it removes the need to manually enter your credit card information every time you purchase something from a different online retailer. Adyen’s platform was developed in-house and one of Adyen’s key advantages is that its founders designed Adyen to connect directly to each payment method so merchants can simply access a wide variety of networks, while Adyen is in control of the end-to-end platform.

Popular Adyen Payment methods

Adyen’s Website

Adyen creates synergies across its platforms as it removes the need for banks in the payment process since it has banking licenses in both Europe and the U.S., while it also provides its merchants a secure, reliable platform that gives them the ability to process more payments. Adyen leverages the vast amounts of data it processes and touches since it leverages machine learning when it comes to understanding customer insights and customer behaviors. Adyen helps merchants connect data points across many channels and leverage it to enable more transactions to be sent to issuers to be approved for purchase.

Adyen: A FinTech Stalwart

Adyen’s website

As can be seen above, Adyen recreated the full stack for merchants to acquire and process payments. Just as Square originally started as a point-of-sales payment company, Adyen started the other way around with a focus on eCommerce and then transitioned offline with a physical point-of-sales solution. Adyen connects merchants to card networks like Visa or Mastercard and other alternative payment methods to enable online transactions, while offline is a recent area of focus. Offline now makes up ~14% of Adyen’s TPV and this segment is growing by over 100%.

Adyen

Adyen’s Website

Since Adyen custom builds each integration, it enables merchants to access transactional data across the full acquiring stack as Adyen has custom integrations with networks like Affirm, Klarna, Alipay, and many other fintechs as well as the traditional card networks. Adyen’s ability to enable the flow of data as well as the flow of funds for merchants, makes Adyen uniquely positioned to serve merchants, especially large enterprises, in the Open Banking paradigm, which we’ve recently highlighted and are investing in at Beating The Market.

Bull Case

  • By 2025, McKinsey & Company expects that 50% to 70% of digital commerce will take place on platforms. The future of merchants accepting payments is on cloud-based platforms. Adyen is uniquely positioned to help its customers because it can embed payments into its merchants’ cloud-based platforms and leverage new technologies so that merchants can accept more payments and be in a better position to succeed with insights into their transactions. Global e-commerce sales were $4.9 trillion, giving Adyen an 11% share of this market, looking at Adyen’s online volume. This market is expected to increase by 50% to reach over $7.4 trillion by 2025, which gives Adyen strong tailwinds in a growing market where it’s already absorbing market share.

On the aforementioned indicators of sustainable growth – in line with previous periods, more than 80% of our growth came from existing merchants, volume churn was minimal at <1%, and net revenue concentration during the period decreased. – H2 2021 Shareholder Letter

  • Given the trend in digital payments and the transition of payment processing shifting to platforms, Adyen will generate a good portion of its growth from its current customer base, as more than 80% of its growth comes from existing merchants each year. Adyen benefits when its customers succeed as it generates fees each time it processes a transaction, while Adyen incentivizes higher volumes with lower fees for merchants through tier-volume discounts. This is a beneficial model for Adyen as it grows alongside its customers while its customers also benefit from lower fees. This results in strong network effects for Adyen.

As more merchants join Adyen’s platform, its consumer data insights improve. This will let Adyen create better data-driven value-added products and services, which will attract more merchants to Adyen.” – BTM’s Adyen Deep Dive

  • Adyen’s less than 1% volume churn is also a positive indication that Adyen’s services are sticky as merchants aren’t moving away from the platform. This is a key factor to watch and has always been an area of strength for Adyen. This also illustrates the strength of Adyen’s platform when it comes to processing and understanding data to improve its platform for its customers, creating a “data-lock-in” effect as customers are less likely to leave the platform over time.

Management & DNA

  • As I previously mentioned, Adyen’s founding team has strong ties to the payment industry as some of them, including Adyen’s current CEO, and CTO up until the end of 2020, while Adyen’s founding team worked at Bibit together for nearly 12 years. Bibit was a first-gen payments provider for enabling merchants to accept credit cards and other payment methods for the first generation of eCommerce payments. Bibit would go on to be acquired by Royal Bank of Scotland Group in 2004, while the team stayed on for two more years. Bibit’s technology stack wasn’t anything groundbreaking in terms of new infrastructure layers, but as they joined RBS, the founders of Bibit realized the challenges of innovating at a large bank compared to an agile start-up.

Below is a notable back and forth between Roelant Prins, current Adyen Chief Operating Officer, and an Adyen co-founder who has been with the company prior to its existence, going back to Bibit.

Mike Robertson: Back in the day when I was at RBS when they acquired Bibit and I can’t recall exactly whether Bibit came first or Worldpay came first in terms of acquisitions. But it ended up being, of course, this combination. And I do recall at the time being very excited because Bibit for me was a company which was very agile and was able to, as you said, innovate quickly and deliver quickly. It felt almost like you would do a sales call, head back to the office, and then, you know, many weeks later, the actual production of that sales call would arrive with a customer, which I thought was astonishing. Is that really then what you saw as the key differentiator, did quote unquote, Big Bank effectively kill that agility? Is that what you think happened?

Roelant Prins: Yeah, that’s what happened. And, you know, it’s all to do with the fact like Big Bank is not used to run technology the way smaller tech company does it. So, in our way of working, which we still run today, you are able to try, test, push something through life quickly, see whether it works, and then you optimize. And we call that within Adyen, we launched fast and iterate. That’s of course completely opposite on how they think about development of functionality within a bank. It’s, you know, risk management first, you figure out like, hey, what’s the potential impact here. We gotta make sure we understand all different angles, and then typically projects take six months, you know, through business cases and all sorts of studies. And by doing it that way, you basically limit all the different functionalities for which you are not hundred percent sure what the impact is. And for us, a lot of things we build, we don’t know exactly on day one, how big it will be. You know, you have to try a lot of things and solve them, become really impactful, and then you improve them. Some of them you launch and you feel like, hey, in the end, doesn’t really do what we were expecting it to do, and then let’s pause. And that ability to constantly try things and see what works and sticks and improve it that just doesn’t fit with a risk management approach the Big Bank has. And that’s the limiting factor.” – Adyen from RBS Worldpay to today and beyond.

Bibit’s underlying infrastructure would go on to become a crucial layer for Worldpay. Adyen’s mission was to develop a new acquiring stack for merchants that is agile and allows them to innovate with new technologies, payment solutions, or new networks that arise.

Pieter van der Does and the other founders are engineers and come from a banking background. While the company was founded in 2006, its CEO is committed for the foreseeable future. For more on Pieter van der Does, I recommend this recent interview.

    • Ultimately, this is what makes Adyen unique, as it doesn’t need to spend on acquisitions since it has a strong developer culture that enables them to build new products internally. Adyen’s 2200 employee count is significantly lower than that of Stripe, which has more than 7,000 employees on similar volume figures ($640B was Stripe’s GPV growing at 60% compared to Adyen’s of ~$560B growing at 70%). Adyen’s employee base is far more efficient compared to its industry peers.

    • Given Adyen’s strong culture and its unique approach to building new integrations, Adyen’s proven it can expand its offerings through new payment solutions to capture more volume, thereby increasing revenues.

Adyen

Adyen’s Website

  • One of Adyen’s new revenue streams is Adyen’s in-person offerings, which benefits Adyen given the strong trends towards digital payments and away from cash.

Adyen

Adyen’s Website

Adyen leverages the data that its customers generate to optimize payments whether it’s for digital wallets or e-commerce. This is what attracts so many large merchants, some of which include Nike, Tesla, Facebook, and Spotify.

Market Share Analysis

According to Nilson, the total volume of payment cards is expected to reach $79T, up from $42T in 2020, a 6.5% CAGR. Adyen had a 1.2% market share of this TAM in 2021, while its processing volume was ~$560B, up 70% year-over-year. Given the strong tailwinds in digital payments even prior to Covid, Adyen is well-positioned to grow GMV by 50% or more through 2025. By 2030, it’s foreseeable that Adyen could capture north of 8% market share as it continues to grow and benefit from increased network effects. Adyen could generate north of $6T by 2030, 30% growth in GMV per year, which is well within reason over the next 10 years. This would amount to greater than $10B in net revenue for Adyen in 2030, using a conservative 1.75% take rate, which accounts for slightly below 28% annualized net revenue growth over this period.

Valuation

Adyen generated $616.7M in free cash flow on ~$1.09B in net revenue, which were up by 53% and 46% respectively in 2021. Adyen’s current market cap is $55.9B at $18 per share, trading at ~36x Adyen’s expected 2022 net revenue or 51x PS on TTM net revenue, Adyen is by no means cheap on a valuation basis, but it is a highly free cash flow generating business model, which is generating mid 40% net revenue growth in an industry experiencing strong secular growth trends. Adyen is deserving of trading at a higher valuation given its free cash flow growth as well as the strong cash position it’s building, now with $5.02B in net cash. Trading at 82.5x EV to free cash flow, ~65x EV to forward 12-month free cash flows. Adyen’s valuation is priced to perfection, but Adyen has a long runway for growth over the next 10 years, hence it’s deserving of these types of multiples as its competitive differentiations make the company a clear winner in digital payments.

Determining Adyen’s Fair Value And Expected Return

To determine Adyen’s (ADYEY) fair value, we will employ our proprietary valuation model and project Adyen’s expected returns over the next 10 years to determine if it’s a buy. Here’s what it entails:

  • In step 1, we use a traditional DCF model with free cash flow discounted by our (shareholders) cost of capital.

  • In step 2, the model accounts for the effects of the change in shares outstanding (buybacks/dilutions).

  • In step 3, we normalize valuation for future growth prospects at the end of the 10 years. Then, using today’s share price and the projected share price at the end of 10 years, we arrive at a CAGR. If this beats the market by enough of a margin, we invest. If not, we wait for a better entry point.

Assumptions:

TTM revenue

€1.0B

Forward 12-month revenue [A]

~$1.558 B (USD)

Potential Free Cash Flow Margin [B]

50%

Average diluted shares outstanding [C]

~3.1B

Free cash flow per share [ D = (A * B) / C ] (in USD)

$0.251

Free cash flow per share growth rate

28%

Terminal growth rate

4%

Years of elevated growth

10

Total years to stimulate

100

Discount Rate (Our “Next Best Alternative”)

9.8%

ADYEY: Current Stock Price

$18.06

Results:

L.A. Stevens Valuation Model

L.A. Stevens Valuation Model

Adyen is undervalued today trading at ~$18 as its intrinsic value is closer to $29, accounting for potential buybacks. Given Adyen is already free cash flow positive while generating hypergrowth, Adyen could easily use its cash flows to buy back shares creating value for shareholders. Now, we’ll deploy the third part of our model to determine an expected annual return for Adyen over the next 10 years trading at $18.06.

Adyen DCF

L.A. Stevens Valuation Model

Adyen is expected to generate ~20% annualized returns through 2032, which is better than our 15% hurdle rate at Beating The Market, hence I label Adyen as a buy at $18 per share.

Risks

Payment gateways are widely used technologies today and Adyen faces competition from other payment gateways like Stripe. Adyen faces competition from PayPal, Square (now Block), Shift4, Worldpay, and even some of the current payment types that Adyen supports like Shopify, Klarna, and Affirm. They all represent competition, but the acquiring side of moving money is complex and Adyen has competitive a differentiation that makes its product more suitable for large merchants compared to Stripe while not relying on a massive employee base. I expect that competition in this space will be constant, but Adyen has an ideal product road map and technology stack to continue to innovate from within and play a large role as an acquirer that can connect with each payment network since its platform was built internally from the ground up. I don’t expect that Adyen’s TAM (essentially money movement processed by a card) will consist of one winner capturing more than 40% to 50% market share. I expect that there will be a couple of players that can get to 10% to 20% market share over time, hence it is a large enough market where there will be multiple winners.

Conclusion

Adyen is a great company that has profound product-market fit, a visionary CEO with an inspiration to disrupt a legacy player in Worldpay, where he previously worked and helped engineer their tech stack. Pieter has a long-term mindset and Adyen fulfills all of BTM’s crucial characteristics, except that its valuation is fairly high compared to some of the other companies in today’s markets.

At this time at Beating The Market, we have several high-growth stocks offering returns well above 25%; however, now is an ideal time to invest in Adyen because the stock is trading below its intrinsic value and it’s a rarity to find such a strong business already generating free cash flows which are poised for elevated growth through 2030. Adyen will not be a Weekly Top Idea because its valuation is steep compared to some of the generational opportunities presented by Mr. Market. I still believe Adyen is fairly priced and an attractive buy at $18.

Thanks for reading and happy investing!

As always, we strongly encourage freedom of thought and ideas within Beating The Market. To that end, please feel free to express your questions, comments, or concerns in the comments.

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