Description

Business Description

·        Adyen is a payment service provider (gateway, risk manager, processor and merchant acquiror) that focuses primarily on multinational eCommerce enterprises, the fastest growing segment of the payments industry

·        Adyen (which means to “start over again” in Surinamese) was founded in 2006 by entrepreneurs Pieter van der Does (CEO) and Arnout Schuijff (CTO) who in 2004 sold Bibit Global Payment Services to Royal Bank of Scotland for $100M (now the main technology platform underlying WorldPay’s eCommerce business)

·        The company has as simple business model, earning a transaction fee (equal to 22 bps on average, which includes a fixed and variable component) that has little to no incremental cost associated with it

·        Adyen’s customer base includes some of the largest tech customers in the world including Uber, Netflix, Facebook, Spotify, Etsy, Booking.com, Expedia, TripAdvisor, Grab, AirBNB, Dropbox, Twitter, Ofo, Microsoft, Sony LinkedIn, Groupon, Dollar Shave Club, Evernote, eBay, Bonobos, Casper, Salesforce, Cisco, Oracle and SurveyMonkey, and traditional enterprise customers like L’OReal, Tory Burch, Vodafone, Sephora, H&M, Cotton On, Asics, Theory, Lush, Dunkin Donuts and various airlines for in-flight processing

·        Historically, the company has had sticky relationships with <1% volumetric churn each year

·        56% Europe, 28% North America, 8% Asia, 7% Latin America, 1% RoW

·        97% of processed volume from large enterprises with 3% from mid-market

Framework/Thesis/Variant Perception

·        Early stage compounder

o   $23 trillion global payments processing industry, growing 10% per year driven by the secular shift from cash as well as the shift towards eCommerce

§  The company currently processes <1% of global card payments volumes and is even less penetrated when including non-card alternatives like Alipay/WeChat Pay in China, IDEAL in the Netherlands, bank transfers in Germany)

o   Adyen is a secular share gainer in the industry

§  Superior technology

·        Single platform across channels (online, mobile, POS), geographies and payment methods vs. competitors that have rolled up many platforms over time

o   Easier to use, more consistent, better reporting and analytics

§  Reduces overhead in customer payments departments

§  Competitors with multiple platforms across geographies tend to run in to issues on reconciling settlement reports and using multiple local processors also creates complexity

·        Architecture built entirely in-house on open source software and latest hardware vs. competitors built on / locked in to innovation cycle of commercial database vendors

o   Allows for Adyen to constantly make changes and additions to its platform, with software updates on a weekly or monthly basis vs. competitors who update quarterly or biannually

o   Single set of code across the world requires a much lower cost to maintain and to develop new products for

·        Easy to use software development tools/application programming interface (API) that allows merchant customers to easily customize for their own payment needs

·        AI/Machine learning combined with local acquiring licenses and banking relationships results in higher authorization and conversion rates and lower fraud and chargebacks and better insight in to shopper behavior

o   Use of local acquiring generally increases authorization rates, reduces FX rates and fees, lowers interchange and card network fees and reduces payout time per payout currency

o   Companies like Stripe that don’t do their own acquiring, don’t have as good of an understanding of why transactions are rejected

o   Adyen also has its own banking license in Europe and has applied for one in the U.S., which allows it to add more value to merchants via same-day settlement

§  Transparent / simplified pricing

·        One contract across channels/geographies and clear interchange ++ pricing model where customer sees exactly what they are paying for and includes value added services like fraud protection vs. competitors that nickel and dime for things like FX/cross-border payments, additional payment methods, fraud protection, charge back processing

·        Clear volume-based discount tables

·        Pricing tends to be at low end of cost curve (22 bps on average vs. 30 bps on average for legacy WorldPay’s eCom business)

§  Adyen’s top customers (Uber, Netflix, Facebook, Spotify, etc.) are some of the fastest growing companies in the world

·        Top customers own sales grew ~35% on average in 2018 and will likely grow ~25% on average for next 2 years

·        Adyen’s own sales from its top 10 customers grew ~50% in 2018 as it gained wallet share

§  Expanding SAM to margin accretive markets

·        Newest growth vector is in the midmarket, which has take rates that are ~2x its largest customers

o   Not planning a massive expansion of the sales force to acquire and support these customers; partnering with Magento, salesforce.com, NetSuite to source merchants, which lowers customer acquisition

·        Higher mix of “full stack” processing where Adyen is both the processor and merchant acquiror as opposed to just being the gateway

o   In 2018 added acquiring licenses in Canada, Singapore and Australia

§  Expanding SAM to Unified Commerce

·        Today brick and mortar POS still accounts for 90% of card transactions

·        Adyen launched its own POS product in 2015 and these volumes now account for ~10% of overall volumes

o   Far superior product that is easily updateable vs. traditional POS terminals from competition that use pre-built libraries and on-premise software that take months to change

·        Adyen tends to get 100% wallet share for its POS business 

·        Variant Perception

o   Duration of compounding

§  The street is modelling growth to decelerate from 60% in 2018 to 10% by 2021 (vs. management long-term guidance of mid 20s to low 30s)

§  We believe that through a combination of organic growth at its customers, wallet share gains and new customer wins, the company should be able to grow at least 500 bps faster than the street projects

·        eBay (recently won from PayPal) alone could add ~15% to growth in 2020 and 2021)

o   Scalability of business model

§  Consensus is modeling long-term EBITDA margins of ~59% (somewhat in line with management’s guidance of >55%/58% before/after IFRS 16 changes)

§  Last year Adyen increased EBITDA margins by >650 bps because its costs and revenues aren’t linked; if revenues with existing customers continues to grow that will drop directly to the bottom line

§  We think long-term EBITDA margins could be >63% (post IFRS 16)

Pre-Mortem/Risks/Counter Framework

·        Pre-Mortem/Risks

o   PSD2 Regulation

§  PSD2 may negatively impact industry conversion rates / transaction volumes due to the need for an additional layer of authentication (face ID, touch ID, online banking password)

·        Adyen may benefit from PSD2 through monetizing its 3D Secure 2 product offering

·        Several countries in mainland Europe already do this and this has been proven to reduce fraud and chargebacks

o   Customer concentration

§  Top 10 customers account for 30% of sales so a loss of any individual customer could be painful

·        Facebook's Libra cryptocurrency could disintermediate processors

o   Mitigation: Intent seems to be focused on commerce and not processing of transactions between FB and advertisers and Libra has received significant push back from regulators

·        Uber and Grab have applied for banking licenses

o   This has created confusion about potential competition from its own customers, but the intent is for these companies to speed up payments to their drivers

·        Counter framework

o   Fad

§  Adyen does not have a differentiated technology platform or sustainable competitive advantage, which will eventually cause growth to slow faster than expected and the multiple to compress

Key Investment Factors

·        Organic growth

o   Existing customer organic growth

o   Wallet share gains at existing customers

o   New customer acquisition

o   Pricing / take rate

·        Margins

o   Headcount additions

·        Capital allocation

Valuation/Price Implied Expectations

·        Since the IPO the company has traded at between 50x and 100x NTM EBITDA with a current multiple of 51x (consensus) and a NTM P/E ratio of between 75x and 140x with a current multiple of 75x (consensus)

·        Assuming the company grows @ a 40% CAGR over the next 3 years and reaches a 60% EBITDA margin (pre IFRS 16), the stock is worth €1181 (up 85%), assuming an 8% discount rate and 3% terminal growth rate; equates to 66x 2021 P/E

Catalyst

Earnings beats with greater than expected operating leverage (similar to what just happened in 1H 2019 earnings results)