Although many growth stocks have recovered since last year, some continue to lag the broader market. That's the case with Adyen (ADYE.Y -0.70%), a leading Netherlands-based fintech company whose shares have plunged by 50% over the trailing 12 months. Adyen's stock recently dived fell the release of its financial results for the first six months of the year.
However, although the market isn't appreciating Adyen right now, there are excellent reasons to buy the company's shares, especially while they remain down. Let's find out why Adyen is a top fintech stock to buy and hold.
Adyen's latest financial results
Let's first review Adyen's business. The company helps its clients process payments by combining several intermediaries necessary for card transactions to run smoothly into a single integrated platform. While few customers think about what happens when they swipe their cards, the system is complex and involves an acquiring bank, a payment processor, the issuing bank, and the credit card network.
In addition to providing point-of-sales systems and online payment gateways, Adyen plays the role of an acquirer and processor, and also provides risk management services.
In the first half of the year, Adyen recorded 426 billion euros in processed volume, an increase of 23% year over year, while its net revenue of 739.1 million euros came in 21% higher than the comparable period of the previous fiscal year.
The company's net income remained flat at 282.2 million euros. While these results look good on the surface, the problem for Adyen is twofold. First, the company's growth has slowed considerably compared to the results it delivered in recent years. Second, Adyen's shares looked incredibly pricey before the decline.
ADYEY PE Ratio data by YCharts
Richly valued growth stocks tend to see their shares drop off a cliff if they fail to meet the market's expectations -- and that's what happened to Adyen.
The company's expenses increased and negatively impacted its bottom line partly because while other tech giants are cutting their workforce, Adyen has been hiring to invest in its future. That shows management's confidence in its prospects, but many investors don't share that assurance, clearly.
During the first half of 2023, Adyen's earnings before interest, taxes, depreciation, and amortization (EBITDA) of 320 million euros dropped by 10% year over year, while its EBITDA margin of 43% was much lower than the 59% reported in the year-ago period.
Here's what management had to say about the company's EBITDA margin: "We could have actively optimized this metric, but prefer building the team that can realize the long-term potential of our single platform." The bottom line, though, is that Adyen isn't performing the way investors had hoped right now, and that's what caused the stock's massive decline following its half-year update.
It's best to think long-term
It's essential to put Adyen's results in perspective. First, during the early pandemic years, many fintech companies benefited from the increased use of digital payments in response to the outbreak. Adyen was one of those fintech players that enjoyed a pandemic-induced boom, and like many of its peers, the company's growth has slowed now that things have cooled down on that front. Second, we are still facing some economic issues likely affecting Adyen's results.
Still, some of Adyen's headwinds are of the company's own making, including its decision to double down on hiring, which squeezed the bottom line. Even so, long-term investors should stay the course with Adyen, although the near term could be rocky and volatile.
Let's consider why Adyen's stock is still worth buying. The future of fintech is bright. The shift to digital payment forms is driven by a series of factors, including the rise of e-commerce.
Both of these industries are on a seemingly unstoppable growth path. The leaders of the pack, like Adyen, could benefit provided they can stay at the top of their fields.
Another reason supporting Adyen stock is the company's economic moat. The fintech arguably benefits from high switching costs. The many corporations -- including some major ones like Uber Technologies, Spotify, eBay, and Microsoft -- that utilize Adyen's platform risk severe disruptions if they switch to one of the company's competitors.
Adyen's goal was to grow its top line at a compound annual growth rate in the mid-20s to low 30s and to get its EBITDA margin to 65%. These goals seem out of reach right now, but as the economy rebounds and as the fintech giant makes headway into new territories where it isn't as well established as it is in Europe (including North America and the Asia Pacific region), the company's overall results should improve.
That's why it's worth it for investors with a time horizon of more than five years to add shares of Adyen to their portfolios, especially following the stock's recent drop.
