Europe’s fintech darling faces big challenges
Adyen reported a big loss on sales in the first half on Thursday. The announcement caused a $20 billion shift in the company’s market capitalization.
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Spirits were high when a Dutch payments company Alan launched on the Amsterdam stock exchange in 2018.
The company was leading a wave of growth in the European technology sector and taking on competition from its mega US rival PayPal.
Since then, the company has overcome a turbulent journey, including a global pandemic that greatly increased numbers from travel customers.
The company expanded aggressively in North America, where some of its most prestigious merchants are based, and hired hundreds of employees for turbocharger growth.
As the macroeconomic environment shifted in 2023, Adyen’s growth strategy was severely challenged.
The company’s shares fell 39% on Thursday, wiping 18 billion euros ($20 billion) from Adyen’s market capitalization, as investors drove down the stock after the company reported the fastest revenue growth their slowest ever.
The stock closed down another 2.9% on Friday after Thursday’s steep decline.
What is Adyen?
Recognized as one of the top 200 global fintech companies globally by CNBC and Statista, Adyen is a payment services company that works with customers including Netflix, Meta and Spotify.
It also sells point-of-sale systems for physical stores and processes online and in-store payments.
In addition to a processor, Adyen is what is known as a payment gateway – meaning that it uses technology to allow merchants to accept card payments and transactions through online stores.
The company takes a small cut of every deal that goes through its platform.
It was co-founded by Pieter van der Does, the company’s chief executive, and Arnout Schuijff, a former chief technology officer.
What exactly happened?
Adyen last week reported results for the first half of the year that came in well below expectations. The company’s revenue of 739.1 million euros for the period was up 21% year over year – but it showed Adyen’s slowest sales growth ever.
The analyst had expected 853.6 million euros of revenue and 40% of year-on-year growth, according to Refinitiv Eikon forecasts.
Adyen has generally been viewed as a growth stock, having consistently reported revenue growth of 26% every half year since its 2018 stock market debut.
“With higher inflation, leading to higher interest rates, there’s been a bit of a shift in focus — less focus on growth, more focus on the bottom line,” Adyen chief financial officer Ethan Tandowsky told CNBC’s “Squawk Box Europe” on Thursday.
Tandowsky said the company had “limited exposure” and none of its big customers had left the platform.
But concerns that competitors in local markets, particularly in North America, are moving in with cheaper offerings have weighed heavily on the companies’ prospects.
Adyen said in a letter to shareholders last week that its EBITDA margin (earnings before interest, taxes, depreciation and amortization) fell to 43% in the first half of 2023 from 59% in the one time a year ago.
The company said this was due to softer growth in North America and higher employment costs such as wages, as hiring increased during this period.
Tandowsky said the company was more focused on “activity” than its peers, even though those peers may offer cheaper services.
“Because of the efficiency with which we can develop new functionality, functionality that outperforms our peers leads us to gain the market share we expect.”
At the heart of Adyen’s woes is a business that relies heavily on customers’ willingness to stick with one platform for all their payment needs. The company must also convince these consumers that what it is selling is better than what is available from a competitor.
In its 2023 half-year report, Adyen said that many of its customers in North America are cutting back on costs due to economic weather such as rising interest rates and higher inflation.
“Enterprise businesses prioritized cost optimization, while competition for digital volumes in the sector drove savings over functionality,” Adyen said in a letter to shareholders.
“These dynamics are not new, and it is easier to move books online back and forth. Among these developments, we consciously followed the price for the value we provide.”
Adyen also said its profitability had suffered from an effort to aggressively increase hiring. EBITDA came in at 320 million euros, down 10% from the first half of 2022.
Adyen added 551 employees in the first half of the year, bringing the total number of full-time employees up to 3,883.
Some of the company’s competitors have cut back significantly on hiring. In November 2022, Stripe laid off 14% of its workforce, or about 1,100 people.
The main challenge Adyen faces now is competition from rivals who are willing to offer lower rates than it provides.
Speaking to the Financial Times on Thursday, CEO Adyen van der Does said buyers are “trying to explore local suppliers” to cut costs.
“It’s not that we’re shrinking – we’re just growing at a slower rate,” he said.
Adyen has historically been a lean business, choosing to hire fewer people overall than its main competitor Stripe, which has roughly double the workforce.
Simon Taylor, head of strategy at Sardine.ai, said Adyen may have a “natural ceiling” on the size of the business it can reach before it needs to reduce its margins to grow again .
“Ultimately they’re subject to the same macro headaches that everyone in e-commerce is,” Taylor told CNBC. “And they still grew 21%. Kill owners for that.”