Adyen (ADYEN), a leading global payment solution provider, has experienced significant volatility in the past several months. Following a disappointing H1 2023 report that missed Wall Street expectations, its stock price plunged by 38% in a single trading day. This dip is part of a larger trend, with the company's valuation vanishing by 76.3% over the past two years—from a peak of over €2,700 in August 2021 to just €640 by late October 2023. We seized the opportunity to invest in Adyen shares during these pessimistic times.
However, the sentiment has shifted with the announcement of robust earnings growth in the recent third quarter. This positive development prompted a change in Wall Street's outlook, with analysts issuing a double upgrade for Adyen's stock. This led to an impressive 38% surge in its share price, also in a single day, reflecting a renewed optimistic market sentiment. Our confidence in Adyen's long-term potential remains steadfast despite the recent turbulence.
Strong growth in third-quarter key metrics
Adyen handles the full payments process for merchants globally, offering an end-to-end platform for merchants to accept various payment methods. Merchants find it easy to use the Adyen solution, which has a full suite of payment options covering the whole spectrum of the payment ecosystem. The company has many multinational corporations as customers, including Nike (NKE), McDonald's (MCD), and Uber (UBER).
Adyen saw strong growth in the third quarter across key metrics. The company processed €243.1 billion in total payment volume, a 21% increase over the third quarter of last year. Net revenue also jumped 22% year-over-year to €413.6 million. All three of Adyen's business segments, Digital, Unified Commerce, and Platforms - experienced high double-digit growth compared to a year ago. Specifically, Digital volume grew 21%, Unified Commerce volume rose 25%, and Platforms volume increased 15% year-over-year. The consistent growth demonstrates Adyen's ability to drive business in its core segments. What instills confidence among investors is Adyen's dedication to sustainable, long-term financial performance. The company has a target of low-twenties and high-twenties percent in annual net revenue growth through 2026. Adyen also aims to maintain an EBITDA margin over 50% and limit capital expenditures to 5% or less of net revenue. This balanced forecast of strong continued revenue expansion paired with solid profitability and controlled spending shows Adyen's commitment to generating shareholder value for years to come.
Impressive growth with high return on capital
What we like about Adyen is its impressive growth over time. Its revenue has skyrocketed from €153.68 million in 2014 to €8.94 billion in 2022, representing nearly 60x growth over that period. Operating income has also soared, multiplying nearly 49 times from €13.63 million to approximately €665 million. Though the growth rate has decelerated somewhat, this most recent quarter reaffirms Adyen's ability to consistently achieve growth in the high twenties range. Despite its larger size, Adyen has maintained the ability to scale revenues and earnings.
What makes Adyen's growth even more compelling is that it has not come at the expense of profitability. While other high-growth businesses have to burn significant cash and require large investments during their expansion phase, Adyen, on the other hand, managed to have consistently high returns on capital amid its rapid growth. Since 2014, the company's return on capital has steadily improved from 11% to nearly 30.2% in 2021, and maintained a strong return on capital at 25.31% in 2022.
Low leverage and high interest coverage
Moreover, Adyen employed little leverage on its balance sheet. The total debt-to-capital ratio is only 7%, and the EBIT/interest expense is quite high. In the past twelve months, the company's earnings before interest and taxes are 113.1 times higher than its annual interest expense. This shows how easily the company's earnings cover its limited interest payments. With a minimal debt-to-capital ratio and high interest coverage, Adyen has significant financial flexibility and capacity to fund future growth.
Upside potential
Adyen has not only improved its operational performance but has also significantly increased its free cash flow, which impressively surged from €142.43 million in 2014 to nearly €1.93 billion in 2022, reflecting a compounded annual growth rate of 38.5%.
Source: Author's table
Assuming a conservative scenario where Adyen's free cash flow growth rate slows down to 20% over the next five years, with a terminal growth rate of 2% and a discount rate of 10%, the discounted free cash flow model estimates Adyen's valuation at approximately €47 billion. Given the company's total of around 31 million shares outstanding, this valuation translates to a per-share value of about €1,518, representing a 60% increase from its current trading price.
Key takeaway
In conclusion, Adyen's share price volatility depends mainly on Wall Street's expectations. The company itself has robust financial performance with promising growth prospects. Its strong third-quarter results, along with its efficient operational model, low debt, high return on capital, and growing free cash flow, position it well for sustainable long-term growth. According to the discounted free cash flow model, Adyen is a compelling investment opportunity with around 60% potential upside from the current trading price.
