Head of Equity Strategy
Summary: The payments industry is a vast and complicated network of payment infrastructure companies with card issuing and credit risk, banks, merchant providers, buy-now-pay-later services and much more. The industry has undergone rapid technological development over the past 15 years and many of the newer payment companies are growing extremely fast as new consumer behaviour driven by the Millennials generation such as digital wallets, smartphones and wearables used the payment option. Online shopping overtaking more and more from offline shopping is also underpinning the massive growth we are observing in the payments industry. Today, we launching our next equity theme basket focusing on the payments industry with 25 companies of high quality and some them with incredible growth rates and profitability.
Today, Adyen reported 1H earnings with revenue at €445mn vs est. €423mn and 1H EBITDA of €273mn vs est. €251mn showing that the Netherlands-based payment company continues to surprise if the most bullish analysts. Adyen is benefitting from the trend of consumers preferring alternatives to cash and online shopping which “gained five years of future growth” due to the pandemic seems to be continuing at a high activity level. The company is aiming to reduce its exposure to European markets by expanding its presence in North America which topped €100mn in revenue and accounting for 22% of total revenue.
Adyen has communicated to investors that it expect a whopping 65% EBITDA margin long-term and expect to grow net revenue by 25-32% annualized over the medium term. Despite a negative equity market in today’s session Adyen is attracting buyers of its shares with the share price rally 3% to a new all-time high. The fast-growing payment company has gone from a smaller company a few years ago to now being the fourth largest constituent in the AEX Index, the Netherlands’ leading equity index.
The origin of FinTech and the modern take on payments
Our introduction of our new payments basket requires a bit of history background. Today’s fast-growing payment companies are the ones that really ignited the concept of FinTech (Financial Technology) and opened the floodgates from venture capital firms. However, the expression FinTech goes back all the way to the early 1980s, when it was used by Peter Knight, the editor of the business newsletter in the Sunday Times.
Square (part of our payments basket) and Stripe are both founded in 2009, and the popular payments company Klarna was founded in Sweden in 2005. AfterPay which has just been acquired by Square for $29bn was founded in 2014. The newer payments companies are all a phenomenon of around the Great Financial Crisis years and the years following that event. Just like ApplePay, none of these newer payments companies want to have anything to do with the messy infrastructure part of issuing credit cards and process payments in addition to collecting debt. That is why all these newer payment companies are focusing on innovation around the consumer experience in terms of making it easy to pay and store relevant information without duplication (ApplePay). Square’s initial success came through innovating the POS (Point-of-Sales) terminals for smaller merchants such as restaurants.
The core infrastructure the global payments system is complex network of old mature companies such as Visa, Mastercard, American Express, and all the banks that provide distribution and auxiliary services around credit cars integrating them into banking accounts etc. PayPal is not a credit card issuing payment company but it has its own infrastructure with credit risk and debt collection features.
The payments basket
The payments theme basket consists of 25 companies with a good mix of old and new companies, and a good geographical split although the US is overrepresented, but that should not surprise anyone since the world is based on a US centric financial system with the USD still being the world’s reserve currency. Out of the 25 companies in the basket, 11 companies have listed publicly within the past five years. The reason why AfterPay is not in the list is that we expect the acquisition from Square to be approved by all regulators.
| Name | Mkt Cap (USD mn.) | Sales growth (%) | EBITDA growth (%) | Diff to PT (%) | 5yr return |
| Visa Inc | 508,991 | -1.0 | -0.3 | 21.5 | 197.4 |
| Mastercard Inc | 356,176 | 2.6 | -2.7 | 21.2 | 290.3 |
| PayPal Holdings Inc | 315,896 | 24.1 | 43.5 | 22.2 | 605.8 |
| American Express Co | 128,801 | -10.0 | 28.9 | 12.9 | 167.1 |
| Square Inc | 119,365 | 170.7 | 686.8 | 17.1 | 2,100.5 |
| Adyen NV | 86,388 | 50.9 | 27.0 | -8.0 | NA |
| Fidelity National Information Services Inc | 83,042 | 8.3 | 15.7 | 22.3 | 79.9 |
| Fiserv Inc | 75,664 | 7.1 | 14.0 | 22.8 | 122.9 |
| Global Payments Inc | 48,862 | 19.6 | 33.1 | 35.1 | 124.5 |
| Discover Financial Services | 38,673 | -2.9 | 95.5 | 3.7 | 149.3 |
| Worldline SA/France | 24,274 | 69.5 | 74.5 | 21.5 | 169.5 |
| FleetCor Technologies Inc | 21,350 | -3.4 | 3.2 | 19.1 | 54.2 |
| Kaspi.KZ JSC | 21,102 | NA | NA | 9.7 | NA |
| Nexi SpA | 20,689 | 25.1 | 20.7 | 24.0 | NA |
| Pagseguro Digital Ltd | 18,730 | 38.8 | 10.6 | 20.0 | NA |
| Affirm Holdings Inc | 17,146 | 79.0 | NA | 10.0 | NA |
| Nuvei Corp | 15,684 | NA | NA | 15.3 | NA |
| StoneCo Ltd | 15,079 | 25.9 | -1.3 | 74.4 | NA |
| Lightspeed Commerce Inc | 13,172 | 83.8 | -101.0 | 23.5 | NA |
| Marqeta Inc | 13,674 | NA | NA | 31.7 | NA |
| Western Union Co/The | 8,903 | 2.3 | 8.1 | 17.9 | 24.6 |
| GMO Payment Gateway Inc | 9,350 | 27.6 | 23.6 | 12.2 | 459.5 |
| WEX Inc | 7,652 | -1.6 | -65.6 | 33.2 | 75.1 |
| Shift4 Payments Inc | 6,606 | 37.8 | 144.2 | 34.3 | NA |
| Paysafe Ltd | 6,065 | 0.6 | -12.9 | 68.4 | NA |
| Aggregate / median values | 1,981,333 | 21.8 | 15.7 | 21.5 | 158.2 |
Source: Bloomberg and Saxo Group
Our table above also shows that Visa is by far the number one leader in the payments industry. The old guard of Visa, Mastercard, and American Express have hardly grown revenue in the past 12 months compared to the previous 12 months. Of the payment infrastructure companies, PayPal is the only one that is growing at double-digit growth rates. Square and Adyen are the two biggest payments companies among the innovative new class of payment companies growing extremely fast as the numbers suggest. Square’s revenue growth is currently 171% and Adyen is a 51%.
Outlook for the payments industry
Square’s recent acquisition of AfterPay provides a peek into the future of the emergent payment company of the future. The buy-now-pay-later (BNPL) model of AfterPay was a gift to millennials that do not like credit and interest rates as they could buy something and then be charged interest-free every two weeks in four installments. The numbers suggest that this easy of use for Millennials drive more purchasing and merchants liked the deal of paying a small fee on top of processing fees. But the time value of the installments does create an overall credit risk and we do not know the full business cycle risk of this BNPL model. But the move by Square could potentially be copied in Europe with Adyen buying Swedish Klarna. Industry analysts believe these combinations will unlock a lot of value for consumers and shareholders.
While the industry is already growing fast, the indications are still that growth will remain high over the coming decade. Adyen has said that investors should expect 25-32% annualized growth over the medium term. The figures above also suggest an enormous demand in the future coming from the elderly generation adopting smartphone and wearables as a means to payment in stores and using “buy now” buttons.
The 2020 McKinsey Global Payments Report gives good insight into the industry and what the future holds. Global payments revenue is growing roughly around 7.5% annualized with its share of banking revenue going from 28% in 2010 to around 39% in 2019. The use of cash in consumer transactions is still high in some mature economies and large emerging market countries except for China indicating the huge potential for payment companies to grow revenue over the coming decades. Long-term the overall payments industry will experience growth rates equal to nominal GDP growth globally around 5% annualized plus a spread related to interest rate levels which dictates net interest margin for payments. Inside this “low” overall payments growth sits the newer payment companies benefitting from the massive shift from offline to online purchasing. The payments industry is thus tightly coupled to the e-commerce industry just like the logistics industry has seen a tighter link the e-commerce industry over the past decade.
Performance and risks
Our payments theme basket is up 2.2% year-to-date as of yesterday’s close prices putting it the bottom half of our themes in terms of performance. However, the basket is still up 39% over the past year and 347% over the past five years. But as with all of our theme baskets they are created today and thus there is a certain amount of survivorship and selection bias. So the past performance metric on a five-year basis should not be viewed as an indicator of future return.
The key risks for investors in the payments industry are foremost high valuations which require the newer payment companies such as Square and Adyen to constantly perform and deliver high growth rates. Increased regulation of the payment industry is also likely given the accounting scandal and fraud at Wirecard and the Greensill collapse which has shocked the supply chain finance industry. Fraud committed by consumers and merchants is also a key risk for payment companies, and cyber attacks on payment networks are probably the ultimate tail-risk for these companies. It has the potential to completely devastate a payment company. Expansion to emerging markets also come with higher credit and fraud risk. Finally, digital currencies issued by central banks or privately issued cryptocurrencies have the potential to disrupt the entire payment industry once again.
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