Adyen: Unified commerce x enterprise businesses
In the most recent shareholder letter (First half 2021), Adyen stated:
“The trend in our North American footprint mirrors our historical track record — we see increased opportunity when the environment grows more complex.”
This explains Adyen’s moat and business strategy well: it’s the intersection of unified commerce with increasingly complex payment requirements and enterprise businesses.
Processed volume was up 67% on the quarter, with net revenue up 46% — the discrepancy between the two is indicative of Adyen’s moat and business strategy, to focus on large enterprises while Stripe focuses mostly on SMB and mid-market. So the end result is a lower take rate, and that trend should continue going forward.
80% of Adyen’s growth is from existing customers with a very low (<1%) churn. The idea is to sign up customers and have them scale over time; a true land and expand strategy. That churn is so low is indicative of (1) how essential Adyen becomes to the business over time and (2) the switching costs of Adyen’s service.
Adyen called out McDonald’s as a good example of the land and expand strategy:
Enterprise merchants that were onboarded in previous periods continued to drive the majority of volume growth in the first half of the year. By building trusted partnerships with our merchants, we are continuously able to win additional volume. A recent example of the success of this approach is how our partnership with McDonald’s has grown over time. In 2019, we launched mobile transactions in the UK with them and have since expanded to do the same in Canada, the UAE, and additional European markets.
North America is a now 22% of the business, growing at 80% as they are taking advantage of multi-channel shopping journeys aka unified commerce.
“Of the regions, North America continued to stand out. The region’s contributions rose to 22% of net revenue, growing 80% year-on-year. This acceleration comes on the back of almost a decade of investments. Starting out, we mainly helped US merchants expand outside the region. Today, we are consistently able to win US domestic volume as we are well-positioned to help merchants solve for the evolving complexity in the North American payments landscape (e.g. shopper preferences evolving towards multi-channel shopping journeys and payment method proliferation). There is significant opportunity with both new and existing merchants — our merchant base now includes household names such as Airbnb, American Eagle, and Slice.”
“Point-of-sale (POS) volume doubled year-on-year, as it reached €22.8 billion in H1 2021, comprising 11% of total processed volume. The growth of these volumes further emphasizes the increased relevance of our unified commerce proposition. The addition of leading names such as LVMH and The Body Shop underscores this success.”
“An ever-evolving space”
Adyen is investing in the future capabilities of the platform including:
Another interesting growth vector that was called out in the shareholder letter was “Adyen Platforms”. Adyen platforms was created to make handling payments easier peer-to-peer marketplaces and on-demand services. For more info on Adyen Platforms click here.
Adyen called out new use-cases for Adyen Issuing — expense management:
The sophisticated controls (e.g. time-, location-, and category-based) of Adyen Issuing support a plethora of use cases. We saw additional applications go live in the first half of 2021 in the realm of expense management. Our Issuing offering allows these merchants to achieve operational efficiency by instantly streamlining these processes. Illustrative is how accounting software provider Visma implemented the product to enhance its software for a broad range of expenses, and how Just Eat Takeaway.com is leveraging the product to build out a new revenue stream, allowing its corporate clients’ employees to order food and beverages without having to submit an expense report.
Following longer-term investments, we obtained multiple licenses in the first half. Notably, we were granted our US branch license. Our European banking license has helped many of our merchants grow, and we see similar opportunities for our merchants in the US. Other improvements include the expansion of our acquiring capabilities in Japan and the UAE. Both are illustrative to how we build driven by merchant demand — our launching merchants in Japan were Microsoft and Breitling, and we moved into the UAE with HMS Host International and Fabergé.
An Interesting Culture
CEO Pieter van der Does has been on record saying that all new employees are interviewed by at least one board member prior to being hired. Apparently, this is still the case despite having 1,954 employees now, with 207 new employees added in the first half of 2021. Whether this concept can scale as they add even more employees remains to be seen, but nevertheless it is very interesting. I don’t recall seeing this idea being implemented in any other business (at this scale) I’ve followed, and it speaks well of what they are trying to build.
Although I love the business, it’s hard more me to wrap my mind around valuation whichever way I look at it.
I don’t really do complex DCF’s but I do look at revenue growth over 5 years, take the margin at maturity from it, multiply by a fair multiple, and then work it back to the current market cap.
I haven’t updated the revenue/profit figures of the most recent half, but prior to that, I was seeing a 6% IRR with some pretty healthy assumptions going forward. After the recent run up, Adyen is at 7.75% of my portfolio. My cost basis is $42.16. I love the business, but I am not adding at these levels. I am not selling either.
One of the hidden valuation levers for Adyen is the relative dearth of SBC. Net that out if SQ or PYPL, or pretty much any US founded company and that alone supports a much higher “headline” multiple relative to growth. That said agree it isn’t cheap here, but more like 8-9pct irr on my simple dcf math.
Big Adyen bulls have proclaimed it the LT winner. They are asking themselves when it will do $10b EUR of EBITDA? 2030? 2032? 2034? 2036? And then they discount that back after slapping a high multiple (e.g. 30x+) on it. Aggressive for sure, but that IRR range is 9-15% from here depending on your view.