Stripe and Paypal rival Adyen (ADYEN.AS) saw its shares in free fall yesterday on Euronext Amsterdam. The around 40% share price drop after disappointing growth and earnings reporting, is the largest on the AEX since the accounting scandal of Ahold in 2003. The trading was temporarily halted during the day. It erased more than €18 billion of Adyen’s market capitalization in a single day. In case of Adyen there is no accounting scandal, but investor disappointment. The annual revenues growth during H1-2023 is with 21% lower than expected, especially given the transaction volume growth of around 40%. A year ago the revenues growth was still 37%. Also Icecat observed that the e-commerce market was slowing down post-COVID.
Adyen’s premium margins are dropping in a toughening fight for market share with its rivals. As a consequence, the EBITDA (earnings before interest, tax, depreciation and amortization) is dropping with 10% to 320 million euro. Counter to what the market is expecting, Adyen is on a hiring spree in stead of streamlining its operations to maintain its EBITDA margin, which fell to 43% from 59%. A similar margin decline led to a sell-off in Adyen shares when the company reported full-year earnings in February after which the stock gradually recovered.
Adyen added about 1,150 employees last year. The payment provider expects to add a similar number in 2023 as it “prepares for its next growth phase”. This hiring sets it apart from its larger competitors that cut jobs to lower costs amid rising interest rates and economic uncertainty. Even worse, the compensation costs for employees surged by 80%, including related to the 15% increase in workforce, which is almost four times its revenues growth. This trend is clearly not sustainable. The same for operating expenses which is up 66% year-on-year. It is clear that Mr Market has signaled Adyen management again, but now even louder, that the party is over. Adyen lost its fintech halo.
So, is the Adyen stock a buy or is it a so-called falling knife? Personally, and this is not an investment advice, I see Adyen as still a great company: a fast-growth global payment provider for online and retail payments. I think it is good that they invest in improving and innovating their services to become a category leader in the future. However, CEO Pieter van der Does should take the message from Mr Market very serious this time around. Adyen should focus on rapidly improving its EBITDA margins. And therefore its employee compensations should definitely expand far slower than its revenues growth rate to get there.
As the P/E ratio of ADYEN.AS dropped from around 65 to a more healthy 49 given it’s 20-ish annual growth percentage, I decided to cautiously buy the dip from yesterday on. The stock might still correct further, for example to a P/E ratio of around 20-30, or might bounce back again like in last February. Only Mr Market knows.
Disclosure/disclaimer: neither the author nor Icecat has business relations with Adyen. The author is active as a retail investor with his own private investment strategies and owns (now) a few Adyen shares. In this post, the author shares his private opinion and is not giving investment advice.
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Founder and CEO of Icecat NV. Investor. Ph.D.
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