Adyen? Square? Stripe? The Truly Global Payments Company – Adyen Part 4 – Management, Ri
- Rupam Deb
- Jul 24, 2021
- 7 min read
Introduction – Adyen
In our previous post [https://moneywisesmart.com/adyen-square-stripe-the-truly-global-payments-company-adyen-part-3-industry-competitive-advantages/], we discussed the industry that Adyen is in (including the competition) and its competitive advantage to help it fend off competition and earn high returns on capital in this capitalistic world
Today, we will discuss Adyen’s management, risks and financials (including the valuation).
Adyen’s Management
As shown in the screenshot above (extracted from our Multibagger Research Series), the core management team of Adyen have been with the company for many years.
For example, besides Pieter (the CEO) who co-founded the company in 2007, Roelant, the CCO (i.e. the Chief Commercial Officer) has been with the company since 2009. Ingo, the CFO (i.e. the Chief Financial Officer) has joined the company since 2011.
In late 2019 and 2020, 3 people in the management team left the company, and that could be a red flag for investors. We have investigated that and discussed it in our detailed research.
The core management team and many early employees actually joined Pieter from a previous payments company he worked in.
So let’s delve into the story of Pieter and the founding of Adyen a bit.
As a native of Amsterdam, Pieter alternated undergraduate stints at Clark University in Massachusetts, the Sorbonne in Paris and the University of Amsterdam with long breaks in between to climb mountains in the Alps, Scotland and Patagonia.
After graduation, he worked at Dutch bank ING and scientific publisher Elsevier. He said that “My fears that the working world was really dull came true” that time. In 1999, a friend introduced him to Bibit, a startup that helped technology companies and airlines accept money on the Web. He joined the sales team and eventually became the chief commercial officer, focusing on sales, public relations and legal.
In 2004, Royal Bank of Scotland acquired Bibit for $100 million, a good payday. However, Pieter was left frustrated, saying that “It was like building a race car and selling it before you could drive it on the track.”
The day his lockup ended two years later he emailed his Bibit crew about launching something new. “Competitors were getting off too easily,” he said. “So much fintech innovation was simply adding a new layer on top of old technology. No one was attacking the old rails.”
The name “Adyen” is Surinamese for a new beginning, and that mentality became its secret weapon. “It was Bibit without legacy employees, customers and technology.” Arnout Schuijff (another cofounder of Adyen), who built the Bibit platform, began hiring a corps of software developers who spent the next year erecting a fast cloud platform out of the latest open source tools. Hooks were built into it to make adding new currencies and payment methods a painless step.
So, enough of the interesting story of Adyen’s founding.
Are the management actually capable? How are they compensated and are they fair? Do the management own much shares and thus are aligned, and why did they sell off a big chunk of shares in 2019? What’s the company culture and are the management good capital allocators?
These are important questions we think investors should be asking in deciding whether to buy into a company. We cover all these in detail in our Multibagger Research Series if you are keen to find out.
Adyen’s Risks
Every investment and business comes with risk. (If someone tells you it’s riskless, I would suggest to run.)
The key for investors would be to identify them, have a sense of the likelihood that those risks would materialise and the board impact we are looking if they materialise, and position size their investment in the company accordingly.
With Adyen, we have identified 10 potential risks, with one being Adyen’s need to constantly keep up with technological changes.
The payments industry, including the industry-wide standards, payment networks, and associated laws and regulations, are fast evolving.
For example, in recent years there have been developments in tokenization technology, which replaces sensitive data (e.g. payment card information) with symbols (tokens) to keep the data safe in the event that it ends up in the wrong hands. In addition, there has also been rapid innovation in the provision of financial services, such as peer-to-peer (P2P) payments.
Depending on how those technologies and issues evolve, Adyen might have to adapt or revamp its technology or services to deal with the changes well.
Due to the fast pace of technological changes, better solutions could be offered in the future by existing, new or even unknown competitors, at a cheaper price. Adyen would have to continue spending capital expenditure and time to develop its technologies and solutions, which may or may not bear fruit.
For the other nine risks that we have identified, we cover them in our Multibagger Research Series.
Adyen’s Financials & Valuation
Now that we have covered enough qualitative points on Adyen, let’s look at the quantitative side. How does Adyen’s financials look?
First of all, Adyen has easy to understand financial statements (at least on the income statement side – there is something more tricky to think about on the cash flows side).
As we have explained in our previous article (Part 2 here [https://moneywisesmart.com/adyen-square-stripe-the-truly-global-payments-company-adyen-part-2-target-market-business-model/]), Adyen earns revenue mainly from processing fees and settlement fees. Then it is charged the associated costs by the financial institutions (i.e. the interchange fees and card scheme fees), which it records as costs. Then, it incurs operating expenses, mainly personnel costs, sales & marketing costs, and other operating expenses.
As sheen in the chart above, the transaction volume processed by Adyen has grown significantly from EUR 32 billion in 2015 to EUR 240 billion in 2019. Most of those transactions are online, and the offline portion (i.e. the volumes processed at say brick-and-mortar stores through POS) has gradually increased as Adyen increasingly targets that area.
This has led to Adyen growing its revenue fast, with a compounded annual growth rate (CAGR) of 77% from 2014 to 2019. Profits grew even faster at a CAGR of 80% during the same period.
During that period, the profitability of Adyen has also improved greatly, as shown in the chart above. For example, the net profit margin increased from 23% in 2014 to 41% in 2019.
Having high growth and profitability are not sufficient for a company to compound wealth well for shareholders for the long term.
Ultimately, the value to the shareholders is the net present value of the future free cash flows (not profits) available to the shareholders, taking into consideration the level of certainty or uncertainty of those cash flows. This, in turn, depends on how well the capital is allocated by the management, what type of returns are generated on those capital deployed or reinvested, and how much the “accounting” profits are converted into free cash flows.
So some of the important questions to ask here include:
What’s the breakdown of revenue and gross profit into different segments, and what are the economics of those?
What is exactly driving the improvement in profitability, and how much impact does operating leverage have on the company’s growth if any?
What are the returns on capital (e.g. ROA and ROE) the company is earning, and what are the factors driving the changes based on a Du-Pont analysis?
How capital intensive is the business? What type of capital is needed?
How does the net working capital situation of the company look?
Has the company been issuing more shares to fund growth or reward the employees, and if so are they dilutive?
How are the “accounting” profits converting into operating and free cash flows? What can we expect based on our understanding of the company’s business model and operating situation?
Does the company have any medium to long term guidance, and how does that picture fit with our analysis of the company?
Even if a company fares well on most or all of the items on financials above, there is one more important point to consider.
The best company in the world can be a bad investment when bought at the wrong price, and the worst company in the world can be a good investment when bought at the right price. It’s all price versus value, hence value investing.
In February 2021, Adyen was trading at around EUR 58 billion market capitalisation (and similar enterprise value (EV) if we ignore the minor excess net cash), or around EUR 1,900 per share.
When compared with a net operating profit after tax (NOPAT) of around EUR 204 million in 2019 (2020 result was not out yet at the point of writing), that is an EV/ NOPAT multiple of around 280 times based on 2019 NOPAT (or lower if based on 2020 NOPAT)!!
Does this mean Adyen is overvalued? Maybe. Maybe not. We think that just looking at a simple trading multiple is not enough to answer this question, and more thinking and calculations need to be done.
And that’s what we have done, where we have done the hard lifting of all the work to analyse the financials and make an informed opinion on the valuation range of the company.
If you are interested to find out all these, you can check them out in our Multibagger Research Series, where we cover Adyen in detail together with other great potential multibagger businesses.
Summary – Adyen’s Management, Risks, Financials & Valuation
That’s all for today on Adyen’s management, risks, financials and valuation.
To recap:
The core management team of Adyen have been with the company for many years, and many joined Pieter (the CEO) from his previous company Bibit.
Pieter and Arnout, the cofounders, started Adyen after Bibit was acquired to innovate and “attack the old rails”. Hence the Surinamese name Adyen which stands for a new beginning.
One of the risks faced by Adyen is the need to constantly keep up with technological changes.
The transaction volume processed by Adyen has grown significantly, with an increasing portion of offline volume.
Adyen’s revenue and profits have grown fast, at a CAGR of 77% and 80% respectively from 2014 to 2019. Its net profit margin in 2019 had risen to 41%. However, these metrics are not sufficient and we should investigate the other aspects of the financials too.
Adyen was trading at more than 200 times EV/ NOPAT (280 times based on 2019 NOPAT) in February 2021! However, just looking at a simple trading multiple won’t tell us whether a company is overvalued or undervalued, and we have to investigate it further.
We hope that you have enjoyed these summary research articles on Adyen! If you want to learn more about Adyen, check out the detailed analysis in our Multibagger Research Series.
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