The fintech industry is filled with a plethora of companies and solutions, ranging from small but fast-growing upstarts such as SoFi Technologies and Nu to more mature companies such as PayPal and Block.
Among these popular fintech names is a European company called Adyen(OTC: ADYY.F). After reporting results for the first half of the year, Adyen stock endured an eye-popping sell-off. The company's financial results through the first six months of the year were less than stellar. With that said, I still think the stock could be worth a position in your portfolio.
It's worth taking a deeper look at the company's performance and tie it into some trends in the broader fintech market. I'll also take a look at Adyen stock and benchmark it against a cohort of other fintechs to help assess if the valuation looks attractive.
The financial results reflect a deeper picture
Through June 30, Adyen generated 739 million euros ($802 million) in net revenue, up 21% year over year. Given the tough competitive landscape and broader macroeconomic trends such as higher interest rates and the impact they have on consumer spending, this level of top-line growth could be considered quite strong.
Unfortunately, when analyzing the financial statements, it would behoove investors to look beyond revenue data -- and this is where it gets a little cloudy for Adyen.
For the first half of the year, Adyen reported earnings before interest, taxes, depreciation, and amortization (EBITDA) of 320 million euros, representing an EBITDA margin of 43%. To put this into context, the company's EBITDA margin was 59% during the first half of 2022. Unsurprisingly, with its profit margin down so far in 2023, Adyen's free cash flow of 248 million euros fell 20% year over year.
When assessing Adyen's financials, it's not difficult to identify the culprits of shrinking profits. Salaries and wages increased 83% during the first half of the year while capital expenditures increased 41% year over year.
Given all of the information above, it would not be surprising for investors to look elsewhere. However, management's commentary around the North American market in particular painted a somewhat problematic picture.
Not a winner-take-all market
Europe, the Middle East, Africa (EMEA) and North America remain Adyen's largest revenue drivers by geography. But when it comes to North America specifically, the company only increased revenue by 23% year over year, less than half of the company growth in the region during the first six months of 2022.
Management spent a good portion of the earnings call diving into North America, as the region remains a top priority for Adyen's long-term growth. The company's chief executive officer, Pieter van der Does, attributed slowing growth in North America to rising interest rates as well as lingering inflation, which has led businesses to seek "cheaper alternatives."
Overall, the challenges that Adyen faces seem pretty clear. The company is contending with intensifying competition in several markets, and undercutting on price alone likely won't be a fruitful strategy. Adyen's management tried to curtail investor concerns by explaining that its increased investment in tech infrastructure should reap benefits down the road.
However, given such a dramatic slowdown in growth, it can be hard to buy into the notion that these investments will ever pay off. Adyen's chief financial officer, Ethan Tandowsky, acknowledged the company's hiring pace in relation to revenue growth is "disconnected."
Is the valuation compelling?
The chart below takes a look at the price-to-sales (P/S) ratio of a number of different fintechs. This includes companies that specialize in various areas of financial services including banking, e-commerce, crypto, and buy now, pay later, among others. Moreover, the cohort include some smaller niche players as well as larger, mature names.
The takeaway from the chart above is that Adyen's P/S of 4.3 sits right in the middle of its competitors. Interestingly, of the three companies trading at higher P/S multiples than Adyen, two of them are focused on Latin America: Nu and MercadoLibre.
It is interesting to see this disparity given the scope of Adyen's international presence beyond Europe, and the gap in trading multiples shown above could signal that the sell-off in Adyen is overdone, possibly creating an attractive entry point for buying the stock.
To add a little more context to the story, consider that Ark Invest CEO Cathie Wood recently added to her Adyen position. Wood is a longtime investor of innovative technology companies through her exchange-traded funds (ETFs).
After the earnings report, Wood nearly doubled her position in Adyen by purchasing more than 730,000 shares. While investors should not flock toward a company simply because of high-profile institutional support, Wood's conviction seems to align with the point I made above about Adyen's price multiple.
Before taking a position, it's worth considering the investments Adyen is making in its products and how that might translate into meaningful gain in market share over time. Should investors be intrigued by the company's potential, a prudent approach could be to dollar-cost average into Adyen stock over a long-term time horizon.
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Adam Spatacco has positions in Block and SoFi Technologies. The Motley Fool has positions in and recommends Adyen, Block, MercadoLibre, PayPal, and StoneCo. The Motley Fool recommends the following options: short December 2023 $67.50 puts on PayPal. The Motley Fool has a disclosure policy.