Dutch payment provider Adyen (ADYE.Y) was a relatively unknown payment provider until it got on some investors' radar after replacing PayPal (PYPL -0.03%) on eBay (EBAY 9.86%) in 2018. But compared to PayPal, Adyen still fails to get name recognition from investors. However, that might soon be changing.
Here are two reasons why Adyen is on the way to the top of the payments industry.
Image source: Getty Images.
1. Adyen has a data advantage over competitors
Adyen started in 2006 with the idea of developing a modern payment platform. However, Adyen management realized early on that payment processing was already becoming commoditized. And to survive, the company needed to differentiate itself.
Management eventually decided to squeeze more value from the avalanche of transactional data that the company was collecting -- especially after gaining large customers like Uber (UBER -1.88%), Spotify (SPOT 3.41%), Meta Platforms (META -1.16%), and Netflix (NFLX -0.48%). Soon after that decision, it began using insights from the analysis of its data stockpile to build new features and products that became extremely popular with merchants.
For example, among the first products to come out of Adyen's data-driven approach was RevenueAccelerate in 2016, which helped increase the payment approval rate for merchants on Adyen's platform. When Adyen introduced the product, few payment companies stressed increasing approval rates to increase merchant revenues. Instead, other payment companies tried to win over merchants by offering lower prices. Consequently, Adyen became increasingly popular, as merchants with a large volume of transactions could gain far more revenue by increasing approval rates than the merchants could save through competitors lowering costs.
Adyen continues to innovate beyond RevenueAccelerate. Last year, the company was first to market with a product called Score that uses artificial intelligence to identify malicious activity on a merchant's platform. The global online fundraising platform GoFundMe became one of the first users of Score.
2. Adyen disrupts the old value chain in the payments process
Historically, credit and debit card payments flow through a patchwork of many intermediaries, increasing the complexity and cost of money traveling across the payment network from shopper to merchant. However, today that old value chain is being threatened by Adyen.
Source: Adyen Capital Markets Day presentation September 2020.
Adyen might have started as a payment gateway and processor, but today it is much more. Adyen has put together the building blocks to become an end-to-end payment platform by replacing the functions of all middlemen between the customer and the merchant, except for card networks like Visa (V 0.30%) and Mastercard (MA 0.98%).
What is the benefit of using Adyen over the legacy system of multiple intermediaries?
First, merchants benefit from Adyen's integrated platform, which is far more efficient and less costly than the solutions offered by traditional payment providers, which often use complex, inefficient technology.
Second, it is very challenging for merchants to integrate the international operations of different intermediaries. Adyen is possibly the only company that can offer a globally integrated payment infrastructure platform to merchants -- which becomes even more important as the trend of retailers wanting to make more global sales increases.
Most of Adyen's competitors are ill-equipped to serve the needs of merchants in a global marketplace -- a possible reason Adyen is outperforming its peers.
The bottom line
While Adyen's second-half 2021 net revenue growth of 47% year on year with an earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 64% sounds fantastic in this challenging market, investors worry about merchant sales growth slowing in 2022 due to the halt of stimulus checks in the U.S., the Russian-Ukrainian war, and a possible recession.
After investors saw that April's Mastercard SpendingPulse report confirmed fears of slowing e-commerce growth, many e-commerce and payment stocks dropped. And Adyen was not immune to the above concerns, with its stock slumping almost 48% year to date. Additionally, even with the drop, Adyen still sells at a price/earnings-to-growth (PEG) ratio of 1.73. PEG ratios over 1.0 are considered a high valuation, especially in a bear market. Should a recession occur and merchants' sales growth shrink, Adyen's stock price could fall further.
However, in Adyen's last earnings report at the end of 2021, management said it has yet to see a sales slowdown on its platform. So while it is risky in the short term to invest in a high-growth company like Adyen before a potential worldwide recession, long-term investors should consider squirreling away a few shares of this dominant payment company, especially if shares fall further.
