When we are looking for investments, we like to say that we seek out businesses with three characteristics: a durable competitive position; doing no harm to society; and the ability to adapt to change.
In our view Dutch-based payment solution provider Adyen ticks all three boxes. It is not only adapting to change, but creating it in one of the fastest-evolving markets in the modern economy: the rise of ecommerce and the opening of the payments market to non-banking groups has created a complex environment for disruption by those able to bring superior functionality. Moreover, Adyen’s founders are disrupting this market not for the first, but for the second time; Adyen is Surinamese for “start over again,” which is exactly what the founders did in 2006, after selling their previous payments company and creating a new one that would build on the lessons they learned.
Adyen is based on a single software stack, created in-house, but based on open source code, and directly connected to payment-card networks and hundreds of other local payment methods across the world. It is a solution built for all merchants, with no client-specific customization, which in our view makes Adyen’s infrastructure more resilient and operationally seamless compared to legacy providers operating with multiple IT systems. The single software stack also makes it extremely scalable, which is reflected in its high profitability: while charging an average of just 20 basis points of processed volume, Adyen generates EBITDA-margins greater than 60%. Scalability enables growing volumes, generating better insights from its payments data, which in turn improves authorization rates and helps prevent fraud. Ayden’s unique, unified solution offers merchants a holistic view of their shoppers regardless of their transaction method. The business’s roots in proprietary technology give it a strong competitive moat, as does its focus, from inception, on providing superior functionality to large ecommerce merchants—a demanding set of customers that only a few players can service well. Its low client-churn rate of less than 1% per annum reflects a high degree of customer satisfaction, based on Adyen’s removal of complexity and superior data insights.
When it comes to doing no harm or doing good in society, in addition to merchants’ high authorization rates and lower fraud and the promotion of consumer choice in payment methods, human capital is the key material ESG factor for an innovation-driven company like Adyen. In contrast to many legacy payment service providers, Adyen has a highly diverse workforce. Its demanding clients encourage innovation, which are reflected in the company’s weekly update cycles, and this results in rewarding work for engineers, who represent four out of every 10 Adyen employees. These engineers work alongside their commercial colleagues in a highly informal, entrepreneurial environment that rewards teamwork. We find that employees can increase their responsibilities early in their careers in this kind of culture.
Global annual credit card transaction volumes are north of $30 trillion. Last year, Adyen processed €304bn. Within the ecommerce segment Adyen has a market share of around 6%, but beyond its roots the group is just scratching the surface. Since its IPO in 2018, at least 80% of the revenue growth has been driven by existing clients, including expanded wallet share within that client base. We believe the payments market will continue to grow at a rate in high single digits for years to come, on the back of economic growth combined with the ongoing replacement of cash. In short, the size of the opportunity for Ayden is massive.
Adyen generated around €10m over 2011 and €100m over 2015, and is expected to generate €1bn this year. Adyen has grown its revenues by more than 40% over recent years and its medium-term growth target is ~25 – 34%. Considering its still-small market share, its strong growth with existing clients and its pace of innovation, we expect to expand its market share from the current level of around 1.5% to around 11% in a decade, and to grow its revenues and EBITDA faster than its target over the medium term, at a CAGR of ~35%. We think its revenues are likely to cross the €10bn threshold by the end of this decade.
