I have prepared a summary presentation of Adyen so that those people who are not familiar with it have a starting point for their due diligence.
I have also added some comments on the slides I have prepared to facilitate their understanding. Are you ready? This is a longer-than-usual read!
Starting with some basic info...
The company was founded in 2006 under the name “Adyen” which means “A new beginning” in Surinamese.
Adyen currently processes around €400 billion annually and has a market cap of $73 billion, being traded in Amsterdam and OTC in the US
To understand Adyen’s value proposition it’s important to understand the pain points of the traditional pmts system.
Merchants had to partner with many companies to accept payments and this generated disperse data that drove little actionable insights
Adyen aimed to solve these pain points by capturing as much of the value chain as possible, both in the acquiring and issuing side.
This allowed large merchants to partner just with one company (Adyen) and to manage payment processing in a platform where data was unified
This value proposition helped Adyen excel in enterprise as it solved many of large merchants’ pain points
The enterprise segment continues to drive growth despite coming from a larger base due to the advantages for large enterprises described in the slide below
The company follows a land and expand model where it typically starts working with a customer in one geography and then expands across other geographies and channels
Most of the volume growth is currently being driven by merchants already on the platform
Adyen is dominant in Europe although it’s quickly growing in the US due to its existing customer base giving more domestic volume to the company
In emerging economies Adyen is still in the process of acquiring all relevant licenses to compete favourably against incumbents
The company has 4 sources of revenue
Settlement fees make up most of gross revenue although the majority is paid to financial institutions who act as intermediaries
The rest of the sources flow directly to net revenue as there are no intermediaries involved
Net revenue is a function of processed volume and take rate.
Adyen’s strategy to grow net revenue has clearly been laid out by mgmt., focusing on incremental processed volume at the expense of take rate
The more volume you bring as a merchant, the cheaper Adyen becomes
Adyen is growing its top line fast while being profitable (61% EBITDA margin calculated over net revenue)
The platform is CapEx lights which allows the company to enjoy such great margins without sacrificing growth
Adyen is profitable on an accounting basis and has very low cash needs, combination which converts the company into a cash machine.
The company converts 90% of EBITDA into cash and this has allowed the company to enjoy a hefty cash position with no debt.
Management, who has historically been conservative, is guiding for strong growth over the medium term.
This growth will not come at the expense of margins as 65% EBITDA margins (over net revenue) are expected over the long term.
For me Adyen is a durability of growth story
Adyen is managed by a small team of 6 managers.
These managers put a lot of focus on company culture to create an environment where every employee has the Adyen formula ingrained in them.
Having 2,000 employees, every candidate must meet a manager before joining!
From these managers there is clearly an outsider: Pieter van der Does.
Pieter leads the company that he co-founded 15 years ago and in many ways thinks as just another Adyen shareholder. This might be due to his +€2 billion stake in the company
Since day 1, Adyen followed quite an unusual strategy for a disruptor as it directly targeted the high-end of the market
Due to this unusual strategy the company traditionally faced incumbents and still lays far away from traditional disruptors such as Square
In the slide below you can find some of Adyen’s competitors with some of my comments related to how the company competes against them
Adyen is richly valued, there is no doubt about this.
Looking at the P/S ratio can be misleading as gross revenue is used for this ratio & most of it goes directly to financial institutions
As the company is profitable, we can use EBITDA ratios to see that it’s expensive
However, doing a quick example and being conservative in the growth estimates that the company can achieve we see that from these levels Adyen might be a good long term investment
12% CAGR considering conservative growth and the P/Net revenue compressing more than 4x
There are many points that make Adyen a high quality company but I decided to go in depth into one of them: high quality customers
No doubt that the company’s customer list is one of the most important aspects of the business
These customers can allow Adyen to comfortably achieve its growth targets without needing to add one single customer
How? Through 3 different sources:
Of course, as with any investment, there is also a bear case.
In the case of Adyen I’d say that the bear case is quite limited which would explain why it trades at such a hefty valuation
My final thoughts on Adyen! I think that the company is a durability of growth story and we know that historically the market has not done a good job at pricing these types of companies
I am scaling in very slowly into my position because I am aware that valuation is rich
Hope you enjoyed the read!
You can access the full presentation
here!
Stay well!