Adyen, my favorite little payments company out of Netherlands, reported its H2 2020 results today. Those results blew way past sell-side consensus expectations, and Adyen’s stock price is at all-time highs. I’ve spent a bunch of time following this company and also looked through a few new sell-side reports on it today, so I thought I’d share some valuation thoughts here while those thoughts are still fresh in my head. Before you continue reading, please check out the replay of Adyen’s earnings webcast. If you haven’t already seen it, it’s well worth it. Instead of standard webcast slides, Adyen made a delightfully whimsical little animation comic, with some pleasant bebop music in the background.
Similarly, I was playing around with some Adyen figures prior to the earnings release and also feel that Adyen - although a seemingly a great company - is overvalued.
For me, they'd need to accelerate revenue growth to 40-50% and maintain over the next 4-5 years to justify this valuation, and I'm struggling to see that - partly for the reasons you mention above.
Interestingly, Visa is on a 31x EV/EBITDA currently vs. a January 2020 S&P 500 overall EV/EBITDA of 14-15x....
Bull Case:
- Worldwide trend of cash sales moving to electronic increases pace
- Sideways expansion into other areas of processing, as you mention
- Continuation of smaller merchants / businesses losing market share to the bigger players (i.e. payments move from small merchants to big ones which helps Adyen)
- Expansion into new/emerging markets
- Movement of card holders from big (legacy?) banks to Fintech accounts
Bear Case:
- Competition from other processors
- Reduction in pricing power due to competition as merchants play processors off against each other
- Interest rates increase, reducing company value in adjusted DCF calculations
Thanks for the interesting information and opinions. I agree with you that Adyen is on the high side of valuation.
Two questions:
1. What do you think of Adyen Issuing, and how do you think that would affect your thoughts on the future achievable revenues for Adyen considering it allows Adyen to profit from the interchange fees and the backend processing and functions too?
2. On your statement "Chase Paymentech still will deliver superior authorization rates for Chase Manhattan cards. Similarly, BofA’s payments business will deliver higher authorization rates for BofA-issued cards than the authorization rates that Adyen can get on those cards. Reasonably sophisticated merchants realize this." This is interesting. Do you have any data on that, or sources to support that? Would be interesting to see how different are the authorisation rates.
Similarly, I was playing around with some Adyen figures prior to the earnings release and also feel that Adyen - although a seemingly a great company - is overvalued.
For me, they'd need to accelerate revenue growth to 40-50% and maintain over the next 4-5 years to justify this valuation, and I'm struggling to see that - partly for the reasons you mention above.
Interestingly, Visa is on a 31x EV/EBITDA currently vs. a January 2020 S&P 500 overall EV/EBITDA of 14-15x....
Bull Case:
- Worldwide trend of cash sales moving to electronic increases pace
- Sideways expansion into other areas of processing, as you mention
- Continuation of smaller merchants / businesses losing market share to the bigger players (i.e. payments move from small merchants to big ones which helps Adyen)
- Expansion into new/emerging markets
- Movement of card holders from big (legacy?) banks to Fintech accounts
Bear Case:
- Competition from other processors
- Reduction in pricing power due to competition as merchants play processors off against each other
- Interest rates increase, reducing company value in adjusted DCF calculations
Thanks for the interesting information and opinions. I agree with you that Adyen is on the high side of valuation.
Two questions:
1. What do you think of Adyen Issuing, and how do you think that would affect your thoughts on the future achievable revenues for Adyen considering it allows Adyen to profit from the interchange fees and the backend processing and functions too?
2. On your statement "Chase Paymentech still will deliver superior authorization rates for Chase Manhattan cards. Similarly, BofA’s payments business will deliver higher authorization rates for BofA-issued cards than the authorization rates that Adyen can get on those cards. Reasonably sophisticated merchants realize this." This is interesting. Do you have any data on that, or sources to support that? Would be interesting to see how different are the authorisation rates.
Thanks!
Fun Liang
funliang@moneywisesmart.com
P.S. You might enjoy this short analysis video of mine on Adyen too.
https://youtu.be/01mfYxbhLu0