Adyen Share Price Tanks. Buy Adyen.

When Adyen reported financial results in August the stock tanked 39%.

Why?

Adyen reported 21% YoY growth with 40% EBITDA margins.

That would make it a rule of 60 company: outstanding.

But, this was apparently a concern, as the half-year prior Adyen grew revenues 37%.

There are now a few schools of thought.

1. Adyen is slowing. They are seeing more competition and are feeling price pressure
2. Fintech is collapsing. The multiples commanded by leading companies like Adyen are never to return

Then the critical thinking among us say:

Uh, Adyen is competing against a bunch of inbred troglodytes. Adyen will continue to win until they run out of market share.

Sure, Adyen “missed” guidance.

But Adyen is head and shoulders above the competition.

And not some minor difference: like giraffe-level.

Adyen has three challenges:

Card Present Parity

Adyen has invested more into card present technology than their modern peers. Card present is dramatically harder than card not present due to gateway and device integrations.

As much as Adyen has invested, they’re still behind legacy players.

Rumors circle about Adyen’s relationships with larger card present retailers, and they’ve even acknowledge these challenges with brick and mortar franchise groups in particular.

But at the end of the day these are just repeatable features that take time: Adyen doesn’t need to reinvent the wheel here.

And Adyen will surpass the legacy players in the next few years while maintaining a solid lead over Stripe and Paypal.

Debit Networks

The only reason legacy processors win large deals at all is because Adyen doesn’t have is its own debit network. This has been how the legacy processors (mostly Fiserv, who own two of its own debit networks) win: lower pricing on their own networks.

Not value.

Not innovation.

Just pricing.

And eventually, price is a dangerous place to be. Unless you have a monopoly (and Fiserv is not Google), you can’t win on price forever.

There’s a great article about the PIN networks written by Nikil Konduru here. Image on the debit networks below is his.

The long and short of it is that there’s only one independent debit network standing – SHAZAM – and someone like Stripe (or Adyen) might be inclined to acquire it.

But SHAZAM’s market share is small.

Still, for large merchants that are highly price sensitive, being able to offer a low-cost routing option for debit is critical.

If Adyen isn’t to acquire this then it needs to figure out how to build it.

Then what will Fiserv do? They spend negligibly on R&D and are going to find themselves a decade or more behind Adyen on the technology front.

Ceding Margin

This is a long way off since there’s so much market share to grab, but at some point Adyen will run out of margin as they continue powering their payment platform for ISVs.

We’ve always said this was the risk for payfacs: all their margin would be captured by the end solution. Which we guess is fine if you’re private and care little for growth, but it’s a problem when companies like Toast are paying a payfac processing partner less than a penny per transaction and they’re processing $120B and the processor needs to show insane metrics or their stock is penalized by 39%.

Adyen will need to rationalize this at some point and have agency over the last mile.

It’s not today, but it can’t be out of mind either.

Near-term competition on the margin front comes from Paypal and Braintree.

These two are giving merchants processing at cost and making hefty margins on the Paypal payment modality. So if a merchant puts a “pay with Paypal” button on their site, Paypal might rip 200 bps of margin if the consumer is using Paypal as a defactor bank transfer, but for everything else not paid with the Paypal button the merchant is getting processing at very low rates.

Adyen is a bank but they don’t have the foothold Paypal does with consumers. There’s a moat here and Adyen would need to get creative with how to replicate the cost structure.

But it’s not insurmountable.

And Adyen has much more modern technology than Paypal.

Until the duopoly of Visa and Mastercard fail – maybe 20-30 years from now – Adyen will continue beating the legacy forebears.

Everyone has to accepts payments, and Adyen is the best technology provider in the space.

Long Adyen.