Adyen Stock Analysis – An Amazing Business, Fast Growth, ARK Owned

This Adyen stock analysis is part of my full analysis of every stock traded on the Amsterdam Stock Exchange. My goal is to find stocks to invest in that offer 10-bagger potential, so as would Buffett say; I start with the As.

Adyen stock is a great investment story from the Netherlands, it is an amazing business, profitable, growing fast and having a strong business position in the e-commerce payment sector that is expected to keep on growing for long.

Adyen stock has all the great characteristics of a great investment with the usual small catch that comes with all great businesses. Let’s discuss Adyen’s stock price, the business outlook, make a stock valuation and conclude with an investment thesis that should give you to whether Adyen stock fits into your portfolio.

Here is my Adyen stock video for those that prefer watching, Adyen stock analysis article continues below.

Adyen stock analysis

Adyen stock price overview AMS: ADYEN

Adyen is a great business and that is confirmed by just taking a look at its stock price performance since the IPO in 2018.

Adyen stock price historical chart
Adyen stock price historical chart

Since the IPO, the stock is up almost 5-fold and it has been only up and up especially after COVID, given that more and more businesses require online payment systems.

Adyen’s stock market capitalization is 58 billion EUR which is something to keep in mind for when we do the valuation below.

Adyen stock analysis – business overview

Adyen’s business is to offer a global payment platform for online merchants where you can pay as you wish, from using your card to other local payment methods.

Putting solutions for merchants onto one platform, Adyen is scaling extremely fast by offering what merchants need. Adyen operates a global payments platform, integrating the full payments stack — gateway, risk management, processing, issuing, acquiring, and settlement.

Adyen stock analysis – Adyen’s business offer – Source: Adyen
Adyen stock analysis – Adyen’s business offer – Source: Adyen

Adyen allows merchants to have everything under one roof and integrate all the payment systems you might think about which makes things easy for customers.

Adyen stock analysis – Adyen’s business offer – Source: Adyen
Adyen stock analysis – Adyen’s business offer – Source: Adyen

Adyen is the future, and the future is about going cashless and being flexible. The below figure summarizes things.

Adyen stock analysis – Adyen’s business offer – Source: Adyen
Adyen stock analysis – Adyen’s business offer – Source: Adyen

The business is growing extremely fast, especially in North America.

Adyen stock analysis – regional growth – Source: 2020 Annual Report
Adyen stock analysis – regional growth – Source: 2020 Annual Report

The business is growing fast and the company expects to grow between 25% and 30% per year for the medium term. Let’s look at how the above translates into the financials.

Adyen stock analysis – financials

From a financial perspective, they too expect to grow net revenue and achieve a CAGR between the mid-twenties and low-thirties in the medium term. Capital expenditures are expected to remain at 5% of net revenue.

Their projections are in line with what has been delivered. Plus, they expect to increase the EBITDA margin as they scale more customers on the one platform.

Adyen financials – Source: 2020 Annual Report
Adyen financials – Source: 2020 Annual Report

Ayden’s numbers scale in line, there are some derivative liabilities related to Adyen’s stock price that have impacted net income. If Adyen’s stock price goes even higher, the liabilities will increase due to its contract with Ebay, but if stock prices go up, it will not matter much to you.

Adyen financials – Source: 2020 Annual Report
Adyen financials – Source: 2020 Annual Report

If Adyen’s stock price goes even higher, the liabilities will increase due to its contract with Ebay, but if stock prices go up, it will not matter much to you.

Adyen stock analysis - derivative liabilities – Source: 2020 Annual Report
Adyen stock analysis – derivative liabilities – Source: 2020 Annual Report

Back to the real business and what really matters. As a good growth business, this might really be just the start for the company.

Adyen financials – Source: 2020 Annual Report
Adyen financials – Source: 2020 Annual Report

Now, let’s make a valuation but what to take when looking at a company that pays no dividends. Net income is at 8.63 EUR per share from 249 million EUR.

Adyen financials – income statement – Source: 2020 Annual Report
Adyen financials – income statement – Source: 2020 Annual Report

Cash flows are 4 times net income, but that is mostly a working capital thing as due to more business there is more working capital and there is a delay between getting the money from a transaction and distributing to the owner.

Adyen financials – income statement – Source: 2020 Annual Report
Adyen financials – income statement – Source: 2020 Annual Report

All in all, net income is the value to focus on for making a stock valuation.

Adyen stock valuation

If I assume the company to grow earnings by 30% over the coming 5 years, where the growth slows down to 20% in the subsequent 5 years and the market applies a terminal multiple of just 20 compared to the current 225, my fair value of Adyen expecting a 10% long-term investing return is 512 EUR.

Adyen stock valuation
Adyen stock valuation

Adyen stock valuation – Source: Sven Carlin Research Platform – free template download alongside comparative list

If I am more exuberant on the growth rate and increase the terminal PE to 30, then I reach a value of 1092 EUR per share which is still far from the current stock price.

To justify the current stock price from a valuation perspective of one that expects a 10% return from his investments, I need to apply a PE ratio of 50 on 2030 earnings, which is just one quarter of the current so you can say it is conservative but the truth is nobody knows what the market will think in the future.

Adyen stock valuation
Adyen stock valuation

Adyen stock valuation – current price – Source: Sven Carlin Research Platform – free template download alongside comparative list

On top of investing in Adyen as a business, with all the risks that it brings, you also have to think about what the market will think about Adyen in the future.

Adyen stock analysis – key return driver & risk

I think Adyen is a really remarkable business and that it will do extremely well over the coming decade. However, for me, the high valuation puts too much risk on investment returns.

Yes, if the market doesn’t ever care about getting a real business return, but only focuses on the growth potential the company offers, then the stock will keep growing. But if the valuation changes, it might get ugly for investors.

It reminds me of a chapter in Peter Lynch’s book One Up On Wall Street (book summary here) where he discusses EDS stock (Electronic Data Systems) from the bubble of the late 1960s. The business did really well from 1969 to 1974 and there was nothing wrong at headquarters, it was a great business.

But, EDS stock had a high PE ratio of 500 in 1969 when the stock price was $40. By 1974, despite business being good, the stock price was at $3. Given Adyen’s PE ratio of 225, it is a risk to keep in mind here. Of course, if the growth keeps steady, and the current market keeps caring only about the growth, then so will the stock continue to grow.

Unfortunately, the bull scenario with Adyen stock is too risky for me. Investing is about finding businesses that will do great, but it is also about finding them and especially about buying them at a fair price.

I would not expect something that drastic to happen to Adyen as it was the case with EDS, but simply holding this because someone may pay even more for it someday in the future is not why I invest in businesses. I invest for earnings and business returns.

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About the author: Sven Carlin Ph.D. is a dedicated investing educator and stock market researcher focused on finding investment opportunities with a value investing perspective. His research is summarized on the Sven Carlin Research Platform where he covers many stocks and shows his portfolios. The educational part is shared on YouTube and the Free Stock Market Investing Course.

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