While investors might be very familiar with payments businesses like Visa, Mastercard, PayPal, or Block, a company like Adyen probably flies under the radar. That's likely because it is based in Europe and not the U.S.
But Adyen should be on your watch list.
The company provides merchants in various industries with a single integrated platform that allows them to accept payments via mobile, online, or in-person transactions, with other services offered. It's worth mentioning that Adyen's customer list includes some of the most well-known enterprises out there, like McDonald's, Spotify, and Microsoft.
Is this fintech stock a smart buy right now? Here's what investors need to know.
Since Adyen's founding in 2016, the company's story can be characterized as achieving rapid growth. To be more specific, in the last five full fiscal years, the slowest pace that revenue increased by was 37%, which was in 2020. In three of these years, growth surpassed 60%. That is very impressive, especially given the economic disruptions that have occurred.
The management team highlights some broad trends that have and will continue to benefit the business in the years ahead. Perhaps the most powerful is the relentless shift away from cash and toward cashless transactions. The convenience of digital payments is why consumers choose them.
Additionally, executives point to the globalization of commerce. Indeed, by looking at a company like Uber, which is an Adyen customer, it's obvious that these complex organizations need seamless payment solutions regardless of what country the end user is located in. The proliferation of tech businesses and their almost borderless operations necessitates what Adyen sells, particularly as regulatory frameworks vary nation by nation.
During the three-month period ended Sept. 30, Adyen's revenue increased by 22% to $414 million. To be clear, this rate of growth is still impressive in its own right. However, the gains have slowed.
Nonetheless, payment volume was up 21%, totaling $243 billion. Investors cheered the latest financial update, and the shares are up 24% since the announcement on Nov. 8.
Once the economic situation improves, investors can get excited by the fact that Adyen's growth could accelerate once again as it keeps taking market share.
Adyen's success thus far is impressive, but investors can't ignore the competitive landscape. The business is tiny in the grand scheme of things. From the perspective of merchants, Adyen goes up against heavyweights like JPMorgan Chase Payment Services, Bank of America Merchant Services, Fiserv, and Fidelity National Information Services. There are also PayPal's Braintree and Stripe.
At the end of the day, payments solutions are becoming more and more commoditized. Consequently, Adyen will have to keep finding ways to attract new customers, while at the same time satisfying its existing ones. That Adyen's NPS (net promoter score) rating has steadily risen in recent years is indicative of its standing among customers.
To its credit, Adyen benefits from switching costs, the key source of its economic moat. Imagine if an Adyen customer like Microsoft, which is mission-critical for its clients and has tremendous scale, decided to change its payment provider. This would likely cause business disruptions and the chance of lost revenue. As a result, it looks like Adyen's competitive position is protected in what is otherwise an extremely competitive industry.
Consider the valuation
As of this writing, Adyen's shares are about 64% below their peak price. The price-to-sales multiple of 5.8 is well below the historical average valuation of 10.6. The chance to buy the stock on the dip is there.
While I view Visa and Mastercard as safer stocks to own for investors to gain exposure to the broader payments industry, Adyen's growth prospects, impressive customer roster, and attractive valuation are all valid reasons to buy the stock right now.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adyen, Bank of America, Block, JPMorgan Chase, Mastercard, Microsoft, PayPal, Spotify Technology, Uber Technologies, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard, short December 2023 $67.50 puts on PayPal, and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.