Adyen - One of the biggest Stripe & Paypal competitor in Europe is down 30% today

[ofelixculpa]

Stock is down 30% and I am a bit shocked and at the same time thinking on buying it

**Background:**Adyen is a company that provides payment processing and acquiring services to merchants. They work with third parties like financial institutions and network scheme providers to enable these services.The fees charged to Adyen by these third parties are known as "pass-through settlement fees", which include interchange and payment network fees.

Financial Metric
H1 2022
H1 2023
YoY Change
Revenue
€3,947M
€854M
-78% Net Revenue
€609M
€739M
+21%
Operating Income
€331M
€279M
-16%
Net Income
€282M
€282M
Flat
Diluted EPS
€9.09
€9.07
-0.2%

EBITDA
€356M
€320M
-10%

EBITDA Margin
59%
43%
-16pp

Free Cash Flow
€309M
€248M
-20%

Cash Balance
€5,584M
€6,412M
+15%

The significant decline in revenue was due to the change in revenue recognition methodology for settlement fees in 2023. Net revenue, which excludes settlement fees, increased 21%.

**Previous Policy:**Up to December 31, 2022, Adyen considered itself primarily responsible for providing payment transaction services. This means they had control over the full settlement service before it was transferred to merchants. In accounting terms, Adyen acted as the "Principal" for these fees. When acting as a Principal:Adyen would recognize both the revenue from the fees charged to merchants and the costs from the third parties on a gross basis. This means both the revenue and the costs were shown in full in the financial statements.

**Change in Policy:**In H1 2023, Adyen made changes to its terms and conditions related to merchant agreements. These changes clarified the roles and responsibilities of the services provided by third parties. The key points from this change are:Adyen does not provide a significant service of integrating the services from third parties into one combined output for the merchant.Adyen does not control the inputs from third parties before services are provided to the merchant.Because of these changes, Adyen now acts as an "Agent" for the pass-through settlement fees, effective from January 1, 2023.

**Impact of Acting as an Agent:**When acting as an Agent:Adyen only recognizes the net amount (i.e., the difference between what they charge the merchant and what they pay to third parties) in the revenue. This means the gross revenue and the costs from third parties are no longer shown in full in the financial statements.

**Financial Impact:**Looking at the financial data provided:In H1 2022 (before the change), Settlement fees were €3,641,350 and Costs incurred from financial institutions were €3,313,269.In H1 2023 (after the change), Settlement fees dropped significantly to €485,582, and Costs incurred from financial institutions were only €74,409.This drastic reduction is because, in 2023, Adyen is only recognizing the net amount in the revenue, whereas in 2022, they were recognizing the full gross amount.

This is how the Revenue growth in the last 9 Yrs looks like:https://snipboard.io/1vM0jO.jpg

EDIT: As promised, this is the trend of the real metric that matters for this company:

Period
Net Revenue (MN)
HoH Growth Rate

H1 2018
156.4
-

H2 2018
192.5
23.1%

H1 2019
221.1
14.8%

H2 2019
275.6
24.7%

H1 2020
279.9
1.6%

H2 2020
379.4
35.5%

H1 2021
445.0
17.3%

H2 2021
556.5
25.1%

H1 2022
608.5
9.3%

H2 2022
721.7
18.6%

H1 2023
739.1
2.4%

EDIT 2: Let's also add EBITDA trend as it is relevant:

Period
EBITDA (MN)
HoH Growth Rate

H1 2018
70.3
-

H2 2018
111.7
58.9%

H1 2019
125.8
12.6%

H2 2019
153.5
22.0%

H1 2020
140.9
-8.2%

H2 2020
236.8
68.1%

H1 2021
445.0
87.9%

H2 2021
357.3
-19.7%

H1 2022
356.3
-0.3%

H2 2022
372.0
4.4%

H1 2023
320.0
-14.0%

Or in a chart if you prefer:

https://snipboard.io/RdnMWJ.jpg

 

[bowtiedguy]

@ofelixculpa Interesting stuff. In our industry Adyen is recognised as a top payment provider. The original owners/founders used this name as it means something like 'a second time', as they sold Bibit which is now Worldpay. They process for the top brands like Google, Facebook etc.

Now, they havebeen processing as a gateway provider years ago, and moved into the financial flow as well. There is more money to be made. They however have the same challenge as other providers, they are one of the many. Big retail companies don't go with just 1 provider, they always will and ahould go with 2 and may even 3 (redundancy, price competition, specific services etc.).

After the pandemic we see a shift happening in terms of market and geographies. We have Crypto, Travel and Hospitality, Gaming, Gambling etc. Some became very successful during pandemic and others after. Now with inflation you see things slowing down, so my gut feeling says that we are waiting for some challenging times and transaction volume might go down. I expect Adyen and Stripe come out on top though.

 

[ofelixculpa]

@bowtiedguy What would be the top 2 or 3 alternatives for corporates when diversifying from Adyen?

I know that each provider has something unique that companies might find useful depending on the nature of their operations.

I would defintely say Stripe (based in Ireland so works perfect for EU transactions)

 

[lovefor3va]

@ofelixculpa Fiserv, FIS, Global Payments are competitors with larger market share but lower growth.

 

[hopes746]

@ofelixculpa Adyen and Worldpay are 2 most global acquirers/payment service providers. So big corporations may look to Worldpay, although big corporations will likely already have multi-acquirer strategies as mentioned above.

There are regional solutions (even if the regions are big) but Adyen & Worldpay have the only truly global single-provider offerings.

 

[bowtiedguy]

@hopes746 Exactly how I see it. One side note, I am not sure about the accuracy of global. Many hooks and ifs for merchants to accept globally. Think multiple contracts with different banks still needed, multiple different payouts, not all currencies accepted, repatriation of funds (think India as a big but difficult market).

 

[hopes746]

@bowtiedguy Don’t get me started on India, that’s a whole different beast. I think you and I both seem aware of that I think “global” depends on licenses held and partnerships. “Global” is certainly available for the right merchants and the right partner connections.

 

[pangalaj]

@ofelixculpa Even after -35%, it’s still at a P/E of 50 and the P/S is around 22.

The stocks is still valued super high

 

[ofelixculpa]

@pangalaj Yeah, though as you know the valuation depends very much in the growth rate. If there is a turnaround and company all of a sudden shows double digit growth in the next earnings, then it will be repriced again.

The PE of 50 was well priced bcuz of the high growth (check the first chart I posted above with the Revenue trend in the last 9 YRs, it is crazy)

 

[resjudicata]

@ofelixculpa Which by the provided metrics seems to be rather non existent.

I would also question what prompted the policy change?

 

[ofelixculpa]

Adyen added about 1,150 employees last year and has said it will hire a similar number in 2023 as it prepares for its next growth phase. Hiring at the payments firm sets it apart from larger peers that have announced job cuts to lower costs amid rising interest rates and economic uncertainty.

Adyen, which handles transactions for company’s such as McDonald’s Corp. and Hennes & Mauritz AB, reaffirmed its guidance for Ebitda margin at above 65% in the long term. It continues to expect net revenue growth at a rate between the mid-20s and low-30s in the medium term.

Source: Bloomberg

 

[ofelixculpa]

As promised, this is the trend of the real metric that matters for this company:

Period
Net Revenue (MN)
HoH Growth Rate

H1 2018
156.4
-

H2 2018
192.5
23.1%

H1 2019
221.1
14.8%

H2 2019
275.6
24.7%

H1 2020
279.9
1.6%

H2 2020
379.4
35.5%

H1 2021
445.0
17.3%

H2 2021
556.5
25.1%

H1 2022
608.5
9.3%

H2 2022
721.7
18.6%

H1 2023
739.1
2.4%

Investors might be selling bcuz of the growth rate slowing drastically, while management reaffirms that they will keep hiring as initially planned for future growth (compared to the competitors that have been drastically cutting headcount), which translates into much lower profitability than investors had priced in.

 

[dustie]

@ofelixculpa Trying to catch up with the Paypal drawdown ;-)

 

[ofelixculpa]

@dustie But very different business model, right? I know Paypal Holding has few companies and one is direct competitor of a company like this, but Adyen is very strong in Europe and has clients like H&M, Microsoft, Uber, etc...

But Paypal has higher net margins and it is trading in a value range, where Adyen isn't value investing even after a close to 40% slash today. The issue with Paypal, I still don't get who uses it, and what is the benefit of using their core paypal service layer in eCommerce or other transactions. There are a huge nº of alternatives

 

[farmsandfieldsmusic]

@ofelixculpa As far as i read it Crashed because of the low EBITDA. It was less then expected. it was expected to be lower but Not that much. Some Stuff like Investments into new employees (550 new employees) lowered the Overall earnings.

Greetings Lukas

 

[farmsandfieldsmusic]

But they also said they will Slow down the Rate of new employees being hired in Future. So maybe it recovers

 

[kittym]

@ofelixculpa I don´t know Adyen, but

1. I would avoid any company where the "revenue" definition needs to be discussed (because not crystal clear)
2. Wirecard

 

[ofelixculpa]

@kittym Yeah, I think as you say a lot of investors get scared when you have the most important accounting item of the company re-defined. You think, well, a listed company which was top globally speaking and market cap wise, should have been discussed this a long time ago. Why now? This is not a startup. Adyen is one of the biggest fintech firms in Europe, with a market capitalization of 35.4 billion euros.

But if there is nothing weird or tricky going on in the company, and it is just a gross revenue definition keeping the rest of the metrics untouched... it shouldn't be a big panic.

I am going through what seems to be the most critical metric for an investor: The Net Revenue. I will try to elaborate a trend chart and post it here. Remember that this was up 20% in their earnings.

 

[celtish]

@ofelixculpa gross v net revenue accounting is very judgmental, and especially for payments companies. Also, it looks like they restated their pricing plan to be interchange plus and updated their agreements triggering this change.

 

[resjudicata]

@celtish

gross v net revenue accounting is very judgmental, and especially for payments companies

Are you able to elaborate on what this means please, and if you think it is a problem for Adyen?