Payments processing is a lucrative industry, with lots of competition from the public and private spheres. Public companies like PayPal and Block provide payment processing capabilities to businesses, alongside private companies like Stripe.
However, Netherlands-based payments platform Adyen (ADYE.Y 2.84%) has taken the industry by storm and seen rapid adoption. The company takes a unique and effective approach to gaining market share. Adyen has also achieved jaw-dropping profitability and cash generation, allowing it to invest heavily -- even during a challenging macroeconomic time.
The company reported its first-half earnings results on Aug. 18, which didn't disappoint. Adyen improved its dominance in the space, which means you should consider adding this disruptive fintech platform to your portfolio.
Image source: Getty Images.
Adyen is becoming a giant
One of the most vital metrics of Adyen's success is the company's payment volume -- the volume that the company processes. Considering the company takes a piece of this volume, if Adyen can increase this, that would mean good things for the company. In Adyen's first half of 2022, it did just that: Payment volume soared 60% year over year to €346 billion, which helped revenue jump 37% over the same period to €608.5 million.
An astute investor would see that Adyen's revenue grew slower than its processed volume. This might be bad for most businesses, but this is part of Adyen's success story. The company has a unique business model where it decreases its take rate as large customers rely more heavily on Adyen. This incentivizes its large customers -- like Microsoft or McDonald's -- to use Adyen instead of its rivals.
This strategy continued in the first half of 2022, with Adyen's take rate dropping from 20.6 basis points in the first half of 2021 to 17.6 basis points in the first half of this year. This business strategy could be risky, but it provides robust counter positioning because it is cheaper to use Adyen's product suite once a company reaches a certain scale. For opponents to match those costs, their profitability would crumble, making it difficult to replicate.
Considering the vast majority of the company's volume growth comes from its existing merchants, this seems like a much more efficient growth strategy than spending marketing dollars to attract new customers to expand volume that way. In fact, the company spends very little on marketing: In the first half of 2022, the company spent just €24 million -- only 4% of revenue.
Making investments in the future, yet profitability is still sky-high
One of Adyen's highlights is its profitability. In the first half of 2022, it generated €282 million in net income and €309 million in free cash flow, representing a 46% and 51% margin, respectively.
With so much cash, Adyen boosted its hiring pace. The company now has over 2,500 full-time employees, representing an increase of 395 employees in the first half of the year.
Why is Adyen hiring so aggressively right now? While its rivals and other companies in the tech space are starting to become forced to lay off employees, Adyen has barely seen a blip in activity. Therefore, it can attract the best talent during this time, resulting in the best innovation and product offering in the space.
These investments into its people could help Adyen reach its financial goals: The company wants to achieve a compound annual growth rate in the 20s to low 30s over the medium term, while attaining an EBITDA margin above 65% over the long term.
Why I'm buying soon
Adyen showed continued strength this quarter, with barely any impact from the challenging economic environment in the U.S. and Europe seen in its adoption. The company continued to progress on gaining a larger share of volumes from its enterprise clients, as seen through its take rate, which will likely continue for the long haul.
With shares trading at just 20.6 times free cash flow, the stock isn't too expensive either. Block trades far above this price, and PayPal is valued at 21 times free cash flow, despite only increasing revenue in the low single digits in its most recent quarter. Conversely, Adyen just expanded revenue by 37% year over year in the first half of 2022.
The stars seem to be aligning for Adyen for those who don't own the company yet, myself included. Because of the company's stellar business progress and attractive valuation, I plan to buy shares very soon, and you may want to consider doing the same.
