Adyen's 2023 Performance and Future Outlook: Key Highlights and Strategic Insights

The full Adyen breakdown was the first post on TechBreakdowns in December 2023. We think it’s time for an update.

Since then, the company has reported its full year 2023 results. We also received a brief first-quarter letter, which is a bit sparse on information since Adyen only reports twice a year. In this article, we will break down the two recent reports, dive back into the model, and briefly discuss Adyen’s strategy. First, a quick refresher on what Adyen does.

What is Adyen?

In the fewest number of words, Adyen is a global payments provider.

Prior to Adyen (and similar competitors), the global payments landscape was a mess of steps. Businesses had to cobble together a number of different vendors, each to handle a different step in the process.

Traditionally, a merchant would run a credit card that would then interact with a payments gateway. Risk management would be done, processing and acquiring would come next, and the merchant would have to hope these steps would happen seamlessly. Adyen took all those steps and put them under one roof.

Bringing everything under one roof helped merchants increase their overall approval rates, simplified communication, and allowed businesses to go global with ease.

While there is a lot more to Adyen’s business, we’ll leave it at that for this update. If you are interested in diving deeper check out the Adyen breakdown, or watch the video below:

Adyen’s 2023 Highlights

The biggest highlight of them all is Total Payment Volume (TPV) nearing that one-trillion euro threshold.

In the prior breakdown, we highlighted that TPV was the biggest factor in determining the company's value. It remains so, and the company proved its premium by growing TPV at 26.4% to €970.1B.

The company highlighted that most of this revenue came from existing customers, roughly 80% per the earnings call. This really highlights the value of the “land-and-expand” sales approach that Adyen takes. The company aims to get in the door, then grow from there.

Point-of-sale volume also grew, showing that people still go out in the real world. It now makes up 16% of all volume.

On a slightly negative note, the full-year take-rate dropped to 16.8 basis points from 17.3 the previous year. The drop was largely due to how Adyen uses tiered pricing (more volume = lower rates). Land-and-expand will naturally lead to lower rates, which means the top of the funnel would have to expand to allow for take-rate to remain high.

On a positive note, the company still expects strong growth moving forward. Net revenue is expected to grow annually by “low-twenty” percentage points through 2026. EBITDA margins are also expected to cross 50%, which is great no matter what you think about EBITDA.

First Quarter Update

As mentioned in the intro, Adyen formally reports twice per year. The company does put out a business update on a quarterly cadence, which can provide some insight into how things are trending.

The business update called out great TPV gains. In the first three months of 2024, Adyen processed €297.8B, up 46% year-over-year. Multiplying that by four, without accounting for any new growth, brings Adyen to approximately €1.19 trillion in volume for 2024.

Adyen also reported net revenue of €438M, 21% growth year-over-year. A good chunk of this growth was noted as coming from North America, the company’s fastest growing region. Anecdotally, I have seen Adyen terminals pop up in stores where they were not before, which is interesting to witness as someone following the company.

Everything, Everywhere, All at Once - Adyen’s Approach to Payments

Part of what makes Adyen an intriguing business is the company’s method of going to market. We’ve spoken previously about the company’s single unified platform, and that will lead Adyen down a path to handling even more of the world’s transactions.

Adyen integrates online, mobile, and in-store payments, allowing merchants to deliver a consistent payment experience wherever their customers are.

A new trend, something that Adyen is targeting, is hybrid shopping experiences. Features like click and collect or reserve online and try in store.

Finally, it’s worth calling out Adyen’s approach to payments as a whole. The company aims to be, and if you look at their pricing page is, agnostic to payment method. There’s no preference for Amex or Visa. Adyen supports your payment method without forcing you to use your Mastercard if some form of “local pay” is available.

The Model - Changes Made & Thoughts

All told, the model remains largely the same as when we last took a look. There have been updates to create a 'simple model' that replaces the three financial statements with key performance indicators (KPIs) and margins.

The simple model’s largest drivers are TPV and take rates on those TPVs. You can see a screenshot of the updated simple model above. Anything yellow can, in the downloaded model, be changed to update the final values of the stock down below.

Here, we’re largely keeping in line with company provided guidance of “low 20’s net revenue growth through 2026” with the company growing at 22.6% this year. You can also see that TPV crosses the €1T mark, as expected, this year.

For valuation, at the bottom of the sheet we have various pricing multiples that would be “fair” for a company like Adyen at maturity.

On the low end, Adyen appears to be roughly 40% overvalued. This would obviously be a very bearish outlook on the company, and the economy as a whole. On the high end, priced at 30x FCF, we can see Adyen with a presumed value of $18.71, ~29% premium to today’s prices.

So, what will drive Adyen’s price? Simply put, TPV and take rates. We have the company growing TPV at 26.2% this year, but if it had a great sales year and got to 27%, then the $18.71 noted above becomes $18.82. Not huge, but it adds to your margin of safety.

If growth remained as it is on the TPV side, but Adyen managed to keep ~0.11% on settlement fees, we’d see a big jump from $18.71 to $19.88. A 0.12% settlement fee would take the stock to $21.05.

If you’re interested in playing with the model and coming up with your own valuation stories, here it is:

A reminder that valuation is a story. You could choose to tell the story of a company that starts making 50% margins on point-of-sale systems (Adyen currently sells at cost). Or a company that starts buying back shares at an Apple like pace. Maybe your story involves a reduction in TPV. Whatever your story, you can play around with the numbers above and come up with a valuation.

Takeaway

Adyen is a very well run business. Given its current scale, it’s unlikely investors will reap Nvidia like returns. Instead, this is a name that will keep compounding for years to come, with a number of paths available for continued growth.