Home Payment processors Is Adyen a buy? | The Motley Fool

Is Adyen a buy? | The Motley Fool


The global card payment market is expected to grow rapidly in the coming years. According to Nilson Report, a credit card data service, the global volume of card payments will reach $52.4 trillion by 2026, and for every transaction there must be a payment processor. Therefore, with the rapid evolution of digital payments, payment processors have a huge opportunity to thrive.

Adyen (ADYE.Y 1.91%) is an attractive choice in this market. Although many investors may not be familiar with the company, if you’ve ever bought a burger from McDonald’s or paid for your Spotify subscription with a debit card or digital payment method, you used Adyen, which is based in Amsterdam. With stocks around 60% below their all-time highs, should you add this payment processor to your portfolio?

Image source: Getty Images.

Adyen stands out

Adyen’s main sources of revenue are its processing and settlement fees, which the company gets when traders initiate a transaction or complete one on its platform. However, the company also has risk management and digital card issuance services to ease friction for merchants.

This complete offer attracted a lot of attention. As a result, the company processed more than €516 billion (about $540 billion) in total payment volume (TPV) in 2021. That said, Adyen faces fierce competition from behemoths like PayPal (PYPL -0.73%) and To block (SQ 3.44%)as well as pure games like Stripe.

However, Adyen has a competitive advantage that has enabled it to catch up with some of its rivals: it is the leader in low-cost. Instead of increasing its acceptance rate as consumers push more volume through its platform, Adyen lowers this. This incentivizes its customers to make Adyen their primary processing platform. In 2021, Adyen’s take rate was just 19.4 basis points, down 14% year-over-year, as it gained additional volume.

Catch up with the competition

This low-cost differentiator has worked well for the company in recent years. Remember when eBay abandoned PayPal as the main payment platform in 2018? It was in favor of Adyen. Recently, it has caught up with the big dogs in the payment processing industry. In 2021, the volume processed by the company grew by 70% year-over-year, a rate well above PayPal’s POS growth of 33% over the same period.

This helped boost revenue to €1 billion in 2021, a 48% year-on-year gain. In the medium term, Adyen hopes to grow revenue at a compound annual growth rate of 20-30%, far exceeding PayPal’s projected 12% revenue increase in 2022.

Although Stripe is likely growing much faster than PayPal, it is a private company, so its finances are unknown. However, Stripe’s estimated revenue in 2020 was $7.4 billion and grew 70% year over year, according to the the wall street journal.

What could go wrong

In terms of risks, the most important is fierce competition. That said, Adyen is growing fast and springing cash, which could help it invest much faster than its rivals. In 2021, Adyen posted a strong EBITDA (earnings before interest, tax, depreciation and amortization) margin of 63% and generated nearly €567 million of free cash flow.

Adyen is a global company with revenues from around the world, but nearly 60% of its revenue comes from Europe, the Middle East and Africa, and 23% from North America. The United States and many economies in Europe are experiencing higher inflation and higher interest rates, which could lead to slower economic activity. Since Adyen makes money on trading volume, this could hurt the business in the short term.

The final concern is valuation. Adyen is trading at 73 times earnings, a high multiple. However, the company might not focus on profitability but on generating cash to fuel long-term adoption. Therefore, a valuation based on free cash flow is more insightful – and on this front, Adyen is trading at an attractive 20x free cash flow.

Is Adyen a buy right now?

If the company can continue to persuade companies to move more of their payment volume to Adyen, then the company could see long-term success. With its breathtaking cash flow, Adyen has more than enough cash to continue building a more innovative and attractive platform for businesses. However, if the company’s pick rate continues to decline without an increase in processed volume, this would be of concern.

While Adyen isn’t a risk-free investment, there’s enough to like about the company to at least put it on your watch list. There is strong competition, but the company has its own competitive advantages. For this reason, I think Adyen is worth buying right now.