Consumers often associate price with quality. Generally speaking, more expensive items tend to be better, or so the story goes. While there is some truth to that, the relationship between price and quality is not perfect by any means, be it in the market for used cars or the one for equities. It is, in fact, possible to find excellent stocks for less than $20.
Fintech specialist Adyen (ADYE.Y -0.70%) is one example. Read on to find out why this Netherlands-based company is a good pick for long-term investors, especially as it is changing hands for just under $13 apiece.
What does Adyen do?
Adyen's payment processing and financial management services have proved incredibly valuable to its clientele, which largely consists of multinational corporations. Companies operating in different regions of the world often rely on a fragmented and clunky set of country-specific platforms to accept payments. Adyen allows them to do so on a single platform that transcends national barriers and integrates online and brick-and-mortar stores, risk management, and more.
That's why it has attracted well-known corporations like Uber Technologies, Gap, McDonald's, and many more. However, Adyen's network of notable customers hasn't been enough to keep its shares performing well over the past year.
Besides mounting competition from the likes of PayPal, the company has been dealing with slow revenue growth, or at least slower than what investors would have wanted. Margins haven't been up to the market's expectations either. Last year, Adyen's revenue was 1.6 billion euros ($1.74 billion), an increase of 22% year over year. The company's processed volume jumped by 26% year over year to 970.1 billion euros ($1.1 trillion).
Adyen's earnings before interest, taxes, depreciation, and amortization (EBITDA) margin was 46%, a 2% increase compared to the previous fiscal year. These are not terrible results by any means, but it's important to understand the context. Adyen was performing much better in the earlier days of the pandemic. Even as many of its peers resorted to cost-saving measures when things got tight, Adyen decided to double down and invest in the future.
The company went on a hiring spree -- the exact opposite of what many of the largest corporations on Wall Street did. This move slowed Adyen's margin growth. These factors explain why the stock has lagged the market over the past three years. What's next for Adyen?
Plenty of growth left
There are at least two key aspects of Adyen's business that should allow it to perform well over the long run. First, the company has a strong moat in the form of switching costs. Payment processing is an important facet of the day-to-day activities of businesses. For those that use Adyen's platform, deciding to opt for another payment processor could result in business disruptions. Nobody wants that.
Adyen consistently has a low volume churn (or the percentage of customers who decide to jump ship) of less than 1%. Though the fintech industry is competitive, having a robust competitive advantage is typically one of the best solutions for that problem for any company in any sector. So, investors shouldn't worry too much about competition from PayPal, especially since fintech has a bright future.
And that brings me to my second point. Adyen is based in the Netherlands and still generates most of its revenue in Europe. However, the company's fastest-growing region has been North America. It generates even less revenue in other regions such as Latin America and Asia-Pacific. Here's the good news, though: The fintech industry has a vast runway for growth, according to various estimates.
Digital payments are better equipped to handle the changing nature of commerce, which is moving online. That's why various fintech solutions are increasingly in higher demand. Adyen, a leader in the field with a strong competitive advantage, is well-positioned to profit from this long-term trend. Investors should consider snapping up the company's shares, especially since they currently trade for the price of a couple of cups of coffee.
