Adyen: Fundamentals and Valuation
Since its IPO in 2018, Adyen has compounded its share price at 15.8%, outperforming the (impressive) 11.8% CAGR of the S&P 500. However, most of this value creation was between 2018 and 2021, fueled by the COVID/tech bubble. As a profiteer of the forced transition to digital payments, Adyen was bid up higher and higher and has since then experienced a brutal bear market, seeing shares fall 75% at the trough last year and 60% currently. Let’s look at the numbers and determine why shares fell so much and if this subdued share price presents an opportunity from now on.
Rise and fall
Adyen went public in 2018 to cash out a few existing shareholders and to raise capital to continue its growth strategy. At the time, Adyen processed around 125 billion euros in volumes and was already highly profitable. In 2023 the company processed 970 billion, eight times as much payment volume. Because of these high expectations (which the company met), Adyen was a hot stock at an incredibly high valuation. We can see that the company peaked around 170 times forward earnings and 125 times forward operating profit (EV/EBIT is a little misleading because of the enterprise value calculation, but we’ll get to this later). The pandemic fueled this increase in multiples and drove prices to unsustainable heights.
Adyen is a prime example of the dangers of high valuations in growth stocks. The company managed to grow revenues and cash flows by roughly 40% a year, but still multiple compression crushed the stock for everybody investing after 2020. This was especially evident after they released H1 2023 results, showing negative EBITDA growth and just 20% revenue growth. Even though the company previously communicated this accelerated investment cycle, the stock got crushed even more. This was around when I got really interested in the company. I used to own a tiny tracking position, but it was always too expensive.
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