I really like Adyen at this level. If there weren't any uncertainty, the stock price would be somewhere else entirely. But that's exactly where the opportunity lies. Although, to be honest, I think the level of uncertainty is way overblown. I really like the company's VERY long-term approach. It's countercyclical by nature.
Agree with all those streams bar non-organic growth. If you are including non-organic growth in your valuation then you have not considered the cost of it anywhere. That’s either a payout from FCF or increased dilution.
Adyen have built a huge cash pile over the years. No dividends. No repurchases. Just a war chest.
They have come under attack from investors and analysts for not putting it to work or not returning it to shareholders.
Now they are putting it to work.
Dilution isn't an issue.
Free cash flow, when calculated properly, should be operating cash flows less 'maintenance capex' (minus other things outside the scope of this discussion).
Applying capital to accretive acquisitions is growth capex. It is an investment.
So I do not agree with your assertion.
Adyen has grown for 20 years entirely organically at well over 20%. Even if organic growth rates slow due to the laws of large numbers (which isn't a certainty given the huge TAM and new revenue streams opening up), then the residual organic growth will be augmented by inorganic growth.
I don't think my assumptions for the next 5 years are unreasonable. In fact, they may be too conservative.
Remember that I am looking at CAGR. It doesn't need to be linear. Growth could slow for a year or two, then expand significantly due to agentic commerce, before slowing again. That would give the 5 year CAGR I am looking for.
Anyway, earnings are out on Thursday 13th Aug, so let's see what progress is being made.
Acquisitions aren't free. The fact that Adyen funds them from its existing cash pile doesn't make the expenditure disappear. If Adyen spends €1bn acquiring a business, that €1bn comes out of the net cash position that ultimately belongs to shareholders. Refer to the large net cash position in my model that increases the equity value.
That's the part your valuation is overlooking. You're effectively giving Adyen credit for the incremental earnings and cash flows generated by acquisitions, while not deducting the capital required to acquire those earnings. That can materially overstate the value created through inorganic growth.
I'd have no issue with assuming Adyen can accelerate growth through acquisitions. The question is what Adyen has to spend to achieve that growth, and whether the return on that capital exceeds the cost of capital.
Adyen has never been an empire builder. Its prior aversion to M&A was due to reluctance that it would be able to integrate other players, with what it cosnders a sub-par operating model, into its own business.
That was sensible.
The fact that it is now acquiring tells me that the new acquisitions have surpassed a high bar. The reason is probably that they are not payment companies, but adjacent bolt-ons that bring synergistic benefits without the concerns over integration.
Of course time will be the final adjudicator of whether this M&A was commercially sensible or not. But I am optimistic.
The multiples paid are not excessive. Both ought to be accretive to earnings, unless something goes horribly wrong.
For me, the most important aspect of any investment is the quality of the management, and Adyen have a first class team with a great culture.
Personally, I would have preferred some more aggressive M&A (a merger with Wise or dLocal would have been very interesting).
Good spot. The model uses an EBITDA-based FCF conversion approach rather than a traditional EBIT-to-FCF bridge. The main reason is that Adyen's working capital movements are unusual due to the merchant funds it holds on behalf of customers, which can create significant volatility in reported cash flows that does not reflect the underlying economics of the business.
For an asset-light payments business like Adyen, I felt EBITDA less CapEx and lease payments was a cleaner way to assess the underlying cash-generating ability of the business, while avoiding distortions from merchant fund movements.
Would also add Checkout to the list of competitors. They're doing pretty well and Spotify moved significant volume from Adyen to Checkout for instance. Don't think this impact the forward assumptions in your model, they seem fair to me.
Thanks for the write-up! Very much in line with my thinking. I have them generating between €2.4B and €2.6B in FCF in FY30, ending that year with around €12B in net cash. From current levels, I expect to achieve 15-20% yield per year througout FY30, excluding any share buybacks that could further boost that yield. Adyen is my largest position.
One of the European high quality names I have yet to take a closer look at! I know so many quality-focused investors who like the business a lot.
Now is probably a good time to take a look. I know you follow Wise closely so shouldn’t take you long to get up to speed with this fintech.
I really like Adyen at this level. If there weren't any uncertainty, the stock price would be somewhere else entirely. But that's exactly where the opportunity lies. Although, to be honest, I think the level of uncertainty is way overblown. I really like the company's VERY long-term approach. It's countercyclical by nature.
I recently analysed Adyen and came out at a stronger valuation than you. I don't use DCF. If you are interested, https://rockandturner.substack.com/p/adyen-king-of-payments?utm_source=publication-search
I think a 21% revenue CAGR until 2031 and assuming multiple expansion is very much on the optimistic side. My assumptions are much more conservative.
It's a fair call, but my assumption is based on:
- Non-organic growth (it is making acquisitions now)
- Agentic commerce (a huge tailwind)
- Unified Commerce and Platforms are still growing strongly
- The banking licenses that fundamentally change the shape of the business
Adyen has such a huge opportunity to grow into.
It has sustained growth over 20% for the last 20 years, another 5 years is not so much of a stretch.
Agree with all those streams bar non-organic growth. If you are including non-organic growth in your valuation then you have not considered the cost of it anywhere. That’s either a payout from FCF or increased dilution.
Adyen have built a huge cash pile over the years. No dividends. No repurchases. Just a war chest.
They have come under attack from investors and analysts for not putting it to work or not returning it to shareholders.
Now they are putting it to work.
Dilution isn't an issue.
Free cash flow, when calculated properly, should be operating cash flows less 'maintenance capex' (minus other things outside the scope of this discussion).
Applying capital to accretive acquisitions is growth capex. It is an investment.
So I do not agree with your assertion.
Adyen has grown for 20 years entirely organically at well over 20%. Even if organic growth rates slow due to the laws of large numbers (which isn't a certainty given the huge TAM and new revenue streams opening up), then the residual organic growth will be augmented by inorganic growth.
I don't think my assumptions for the next 5 years are unreasonable. In fact, they may be too conservative.
Remember that I am looking at CAGR. It doesn't need to be linear. Growth could slow for a year or two, then expand significantly due to agentic commerce, before slowing again. That would give the 5 year CAGR I am looking for.
Anyway, earnings are out on Thursday 13th Aug, so let's see what progress is being made.
Acquisitions aren't free. The fact that Adyen funds them from its existing cash pile doesn't make the expenditure disappear. If Adyen spends €1bn acquiring a business, that €1bn comes out of the net cash position that ultimately belongs to shareholders. Refer to the large net cash position in my model that increases the equity value.
That's the part your valuation is overlooking. You're effectively giving Adyen credit for the incremental earnings and cash flows generated by acquisitions, while not deducting the capital required to acquire those earnings. That can materially overstate the value created through inorganic growth.
I'd have no issue with assuming Adyen can accelerate growth through acquisitions. The question is what Adyen has to spend to achieve that growth, and whether the return on that capital exceeds the cost of capital.
I overlook nothing. ROIIC is a key metric for me.
Adyen has never been an empire builder. Its prior aversion to M&A was due to reluctance that it would be able to integrate other players, with what it cosnders a sub-par operating model, into its own business.
That was sensible.
The fact that it is now acquiring tells me that the new acquisitions have surpassed a high bar. The reason is probably that they are not payment companies, but adjacent bolt-ons that bring synergistic benefits without the concerns over integration.
Of course time will be the final adjudicator of whether this M&A was commercially sensible or not. But I am optimistic.
The multiples paid are not excessive. Both ought to be accretive to earnings, unless something goes horribly wrong.
For me, the most important aspect of any investment is the quality of the management, and Adyen have a first class team with a great culture.
Personally, I would have preferred some more aggressive M&A (a merger with Wise or dLocal would have been very interesting).
Where is the tax expense here? (unless its a pre tax discount rate)
Good spot. The model uses an EBITDA-based FCF conversion approach rather than a traditional EBIT-to-FCF bridge. The main reason is that Adyen's working capital movements are unusual due to the merchant funds it holds on behalf of customers, which can create significant volatility in reported cash flows that does not reflect the underlying economics of the business.
For an asset-light payments business like Adyen, I felt EBITDA less CapEx and lease payments was a cleaner way to assess the underlying cash-generating ability of the business, while avoiding distortions from merchant fund movements.
Would also add Checkout to the list of competitors. They're doing pretty well and Spotify moved significant volume from Adyen to Checkout for instance. Don't think this impact the forward assumptions in your model, they seem fair to me.
Agreed, good one to add to the list
Thanks for the write-up! Very much in line with my thinking. I have them generating between €2.4B and €2.6B in FCF in FY30, ending that year with around €12B in net cash. From current levels, I expect to achieve 15-20% yield per year througout FY30, excluding any share buybacks that could further boost that yield. Adyen is my largest position.
Agreed, I really don’t think much has to go right for this to provide solid returns from here.