Share prices of Adyen (ADYE.Y -0.70%) sank 36% on Aug. 17 after the Dutch fintech posted its results for the first half of 2023. Its revenue rose 21% year over year to 739.1 million euros ($804.4 million), which missed analysts' estimates by $40.7 million and represented its slowest half-year growth rate since its public debut in 2018.
Its earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 10% to $348.3 million and missed the consensus forecast by $71.8 million. That decline reduced its EBITDA margin year over year from 59% to 43%, which raises troubling questions regarding its long-term EBITDA margin target of 65%.
Image source: Getty Images.
That was an ugly top- and bottom-line miss, but did investors overreact and prematurely dump this high-growth fintech stock? Let's see if it's too late to take the bullish view.
A behind-the-scenes payments powerhouse
Adyen operates an end-to-end platform for processing payments, data, and other financial services. Once merchants integrate Adyen's software into their online, mobile, and in-store payment platforms, they can instantly accept more than 250 payment options, including credit cards, debit cards, mobile wallets, and other payment apps.
Adyen doesn't provide a consumer-facing digital payments app like PayPal, and it doesn't offer any peer-to-peer payment services like PayPal's Venmo, Block's Cash App, or Zelle.
Instead, it works behind the scenes and helps merchants create their own branded mobile wallets and control their own customer data. That flexibility makes Adyen an appealing option for merchants that don't want to get locked into a walled garden. That's why eBay ditched its longtime partner (and former subsidiary) PayPal and fully transitioned to Adyen's platform over the past five years.
Why is Adyen's growth cooling off?
Adyen's early-mover advantage in its niche market enabled it to grow like a weed over the past five years. Between 2018 and 2022, its processed volume had a compound annual growth rate (CAGR) of 48%, its revenue had a CAGR of 39%, and its EBITDA registered a CAGR of 41%.
Its growth decelerated in 2020 as the pandemic disrupted brick-and-mortar businesses, but accelerated again in 2021 as those headwinds waned. However, its growth cooled off again in 2022 and slowed down significantly in the first half of 2023:
|
Metric |
2018 |
2019 |
2020 |
2021 |
2022 |
1H 2023 |
|---|---|---|---|---|---|---|
|
Processed volume growth (YOY) |
47% |
51% |
27% |
70% |
49% |
23% |
|
Revenue growth (YOY) |
60% |
42% |
28% |
46% |
33% |
21% |
|
EBITDA growth (YOY) |
83% |
54% |
27% |
57% |
16% |
(10%) |
|
EBITDA margin |
52% |
56% |
59% |
63% |
55% |
43% |
Data source: Adyen. YOY = year over year.
That slowdown has been caused by inflation, which curbed consumer spending, as well as competition from similar back-end services like Stripe and PayPal's Braintree. That mix of inflation and competition limited Adyen's pricing power by driving businesses to scrutinize their payment-processing fees more closely.
Those headwinds were the most severe in North America (which accounted for a quarter of its revenue), where revenue only rose 23% year over year in the first half of 2023 compared to its 52% growth in the first half of 2022. All of its other regions (Europe, Middle East, and Africa; Asia-Pacific, and Latin America) experienced similar slowdowns.
Why are Adyen's margins declining?
Unlike many other tech companies, which aggressively cut costs as their revenue growth cooled off, Adyen ramped up its spending throughout its slowdown.
The number of full-time employees grew 53% year over year to 3,332 in 2022, then grew another 17% to 3,883 in the first half of 2023. Management insists this rapid expansion of its workforce, primarily in tech roles, is essential for the expansion of its ecosystem. And it says it doesn't plan to rein in those investments until the start of 2024.
What the bulls and bears will say
The bulls likely believe Adyen's investments will pay off over the long term as it rolls out new services and widens its moat. Over the long term, the macro environment should improve, economies of scale should kick in, and its revenue growth should accelerate again as it marches back toward its EBITDA margin target of 65%.
The bears probably see its hiring spree as a sign of desperation, which could cause Adyen to "deworsify" its business with unnecessary new features to boost its take rate (how much money it makes from each transaction). Its take rate rose 20 basis points year over year to 17.3% in the first half of 2023, but that slight improvement couldn't offset its slower payment processing volumes. If that trend continues, its sales growth could stall out and its EBITDA margins could keep shrinking.
The bears will also claim Adyen isn't a bargain yet. Analysts expect its revenue and EBITDA to rise 26% and 12%, respectively, in 2023. Based on those estimates (which could be reduced after its recent miss) and its enterprise value of $22.2 billion, Adyen still trades at 17 times this year's sales and 25 times this year's EBITDA.
For now, it seems like the bears are right. Adyen's business isn't headed off a cliff, but its slowing growth, rising costs, and elevated valuation suggest it's too late to turn bullish.
