Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Adyen valuation is more realistic but the pressure could continue
Peter Garnry
Chief Investment Strategist
Summary: Adyen is down 22% this year as investors are worried that volume growth is coming down hard and will converge faster than expected to the industry leader PayPal. If this convergence is true then the equity valuation of Adyen could continue to be repriced as Adyen is valued at a steep premium to both Block (former Square) and PayPal. Sell-side analysts remain very positive on Adyen with a consensus price target that is 54% above the current price suggesting that the current price level could gather buying activity by investors. Long-term we remain very positive on the payments industry due to its high growth rate and its free cash flow generation, but sometimes good assets can be too expensive.
It has been a tough start to the year for payment companies with our payments theme basket down 4.6% as growth related stocks have been sold off by institutional investors as portfolios have been reallocated in light of rising inflation expectations. Adyen, which has been one of the hottest payment companies in Europe over the past couple of years, has felt the unlove particularly hard down 22% this year. Sell-side analysts have not budged much keeping their consensus price target at €2.758 which is whopping 54% above the current price. However, analysts have very dispersed views on stock with the lowest price target at $1,430 and the highest at €3,650, suggesting significant disagreement about the company’s value.
Many have argued that Adyen has been particularly hard hit because of PayPal’s lower growth target and the assumption that the two companies’ volume growth is converging. If the convergence is in fact the true underlying dynamic then Adyen’s expected EBITDA of €1.98bn in FY2025 is still potentially attracting a too high valuation with the enterprise value at €52.4bn which equals a forward EV/EBITDA multiple of 26.5x on FY2025 EBITDA expectations compared to 17.8x for Block (former Square) and 12.4x for PayPal. But the premium on Adyen shares is driven by the higher expected growth rate compared to PayPal, but if the volume growth is converging to PayPal’s then the valuation could slide even further. With €216bn in processed volume in the first half of 2021 up 67% y/y, we are leaning towards the case that Adyen will not see its volume converge to PayPal’s anytime soon.
Adyen reports Q4 earnings on 9 February and the volume growth and especially forward guidance on volume growth will be very important for investors. Adyen must also show that EBITDA margin can continue to expand. Long-term we remain positive on the payments industry which is experiencing rapid technological change and many new players such as Block and Adyen that will take market share over time from the established players in the industry.
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