The global card payment space is anticipated to grow massively over the coming years. According to Nilson, global card payments volume should reach $52.4 trillion by 2026, and for every single transaction, there needs to be a payment processor for it. Therefore, with digital payments scaling up quickly, there is an immense opportunity for payment processors to thrive.
Adyen (ADYE.Y) is an appealing pick in this market. While many investors might not know the company, if you have bought a burger from McDonald's or paid for your Spotify subscription with a debit card or digital form of payment, you have experienced Adyen. With shares 60% off their all-time highs, should you add this payments processor to your portfolio?
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Adyen stands out from the crowd
The primary revenue sources for Adyen are its processing and settlement fees, which the company obtains when merchants either initiate a transaction or complete one on its platform. However, the company also has risk management and digital card issuing services to ease friction for merchants.
This full-stack offering has attracted lots of attention. As a result, the company processed more than €516 billion in total payment volume (TPV) in 2021. However, Adyen faces stiff competition from big behemoths like PayPal (PYPL -0.03%) and Block (SQ -1.06%), along with pure plays like Stripe.
However, Adyen has one competitive advantage that has allowed it to catch up to some of its rivals: It is the low-cost leader. Instead of boosting its take rate as consumers push more volume through its platform, Adyen lowers it. This incentivizes its customers to make Adyen their primary processing platform. In 2021, Adyen’s take rate was a measly 19.4 basis points, which decreased 14% year over year as it won additional volume.
Catching up to the competition
This low-cost differentiator has done well for the company in recent years. Remember when eBay abandoned PayPal as its primary payments platform in 2018? That was in favor of Adyen. Recently, it has been catching up to the big dogs in the payment processing industry. In 2021, the company’s processed volume grew 70% year over year -- a much higher rate than PayPal's 33% TPV growth over the same period.
This helped revenue jump to €1 billion in 2021, which soared 48% year over year. Over the medium term, Adyen hopes to expand revenue at a mid-20s to low-30s compound annual growth rate, far outpacing PayPal's projected 12% revenue increase in 2022.
While Stripe is likely growing much faster than PayPal, it is a private company, so its financials are unknown. However, Stripe’s estimated 2020 revenue was $7.4 billion and grew 70% year over year according to the Wall Street Journal.
What could go wrong
In terms of risks, the elephant in the room is the stiff competition in the space. That said, Adyen seems to be rapidly expanding. Additionally, the company is gushing cash, which could help it invest much faster than its rivals. In 2021, Adyen sported a healthy 63% EBITDA margin and generated almost €567 million in free cash flow.
Adyen is a global company with revenue coming from around the world, but almost 60% of its top line comes from Europe, the Middle East, and Africa, and 23% from North America. The U.S. and many economies in Europe are seeing higher inflation and interest rates, which could lead to slower economic activity. Considering Adyen makes money on transaction volume, that could hurt the company in the short term.
The last concern is its valuation. Adyen trades at 73 times earnings -- a steep multiple. However, the company might not currently be focused on profitability but on cash generation to fuel adoption over the long term. Therefore, a valuation based on free cash flow is more insightful, and on that front, Adyen trades at an appealing 20 times free cash flow.
Is Adyen a buy right now?
If the company can continue to convince enterprises to move more of their payment volume onto Adyen, then the company could see success over the long term. With its jaw-dropping cash flow, Adyen has more than enough money to continue building a platform more innovative and appealing to businesses. However, if the company’s take rate continues to decline without increases in processed volume, that would be cause for concern.
While Adyen isn’t a risk-free investment, there’s enough here to like about the company to at least put it on your watchlist. While there is heavy competition, the company's competitive edge has allowed it to see success, and this could continue going forward. For that reason, I think Adyen is worth buying right now.
