Here's Why Adyen Stock Is a Buy Before Feb. 13

Adyen (OTC: ADYE.Y) was a huge beneficiary during the height of the COVID-19 pandemic. As with other pandemic beneficiaries, this tailwind turned into a headache for the payments processor in 2022 and 2023, causing the stock to fall as much as 75% from all-time highs. Shares have recovered a bit but are still down around 50% from highs as of this writing in early February.

Unlike other pandemic high-flyers that are seeing their competitive advantages erode, Adyen's business is actually humming along just fine today and is poised to keep growing in the coming years. Here's why investors should consider buying the financial technology giant before its fourth-quarter earnings are released on Feb. 13.

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Reinforcing competitive advantage at scale

Payments is a monstrous and confusing industry. When you swipe a card or make an online payment, there might be a dozen services working to authorize and fulfill the transaction.

Adyen's founders aimed to improve on these mashed-together services with a vertically integrated payments processor. Now it's one of the largest players in the industry, but this philosophy still describes Adyen today. With a full-scale solution built from the ground up for modern online payments, Adyen's payments success rate is much higher than industry peers', which leads to customer wins and happiness.

Beginning with online payments in Europe, Adyen has now expanded around the globe and into virtually any payments processing category. It wants to be a one-stop shop for its payment partners, which are typically large platforms. For example, Spotify and Uber both run with Adyen payments, which have to be up there with some of the most complicated payments solutions in the world. 99.99% of the time, when you order an Uber, the payments process is seamless, even in different countries. That's the beauty of Adyen's modern payments processing software.

Adyen started out with a competitive advantage with its modern technology, but it will increasingly grow a new competitive advantage with scale. Why? Because it can drive its pricing lower than any upstart competitor's. In 2015, Adyen's annual payment volume was under $35 billion. In 2023, it processed over $1 trillion in payments. As this grows, the company will be able to lower prices while still maintaining high profit margins, due to its fixed cost structure and high incremental profit margins.

Expanding margins and market share gains

Another attractive quality about Adyen is its culture of discipline. Perhaps because its headquarters is far from Silicon Valley, the company is much more cost-disciplined than other financial technology players. This led the company to achieve an EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of greater than 50% during the pandemic boom.

However, in the 2022 bear market for technology stocks, Adyen's profit margin started to decline. This was not due to the pandemic growth unwinding, but to Adyen management's contrarian nature with hiring. When every other software company was doing hiring freezes or layoffs, Adyen expanded its employee count to prepare for its global expansion. This temporarily brought Adyen's EBITDA margin down, but it has already started to recover. EBITDA margin grew to 46% in the first half of 2024, compared to the first half of 2023.

Upfront investments in a bear market have helped Adyen take market share from the competition, and should do so in the future as well. It processes a trillion dollars in payments every year, and while that may seem like an enormous number, Adyen is still a pipsqueak in digital payments. There is a huge market for Adyen to go after, and it's setting itself up beautifully to take advantage.

ADYEY data by YCharts.

Adyen's long-term opportunity

With Adyen's business model of taking a small slice of every payment processed through its systems, the company's revenue will grow along with payment volume growth. Management is guiding for at least 20% annual revenue growth through 2026. I would bet that double-digit revenue growth will continue past 2026 as well, as annual payment volume hits $2 trillion, $3 trillion, and eventually much higher levels. More people around the world are adopting digital payments, and inflation helps raise the total addressable market every year.

Over the last 12 months of reported financials, Adyen generated just over $2 billion in revenue. I believe there is room for the company to double this revenue to $4 billion within a few years and eventually hit $10 billion, given how large the payments processing industry is. With guidance for long-term EBITDA margins of 50%, Adyen could be doing $5 billion in EBITDA in the future. Compared to a market cap of around $50 billion today, Adyen looks like a durable growth stock trading at a reasonable price.

Now looks like as good a time as any to buy some Adyen stock, right before it reports Q4 earnings on Feb. 13. Buy this stock and hold it for the long term.

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Brett Schafer has positions in Spotify Technology. The Motley Fool has positions in and recommends Adyen, Spotify Technology, and Uber Technologies. The Motley Fool has a disclosure policy.