Adyen, a payments processing company from the Netherlands, filed its IPO prospectus last week. With a private valuation of about $11 billion, the company’s stock offering could be second largest European company going public, after Spotify. We’ve witnessed several international IPOs this year, spread across several sectors such as fintech, ridesharing, healthcare and e-commerce. Overall, we expect to see several non-U.S. based companies go public in the next 12 months, emerging mainly from Europe and China. Europe boasts 25 unicorns including Adyen, Klarna, Transferwise, Auto1 Group and Deliveroo; 65 unicorns call China home, including Didi, Xiaomi, Meituan and Lu.com.
Growing list of fintech unicorns Several unicorns seemed poised to disrupt the industry and therefore enjoy robust valuations. Among the 237 unicorns in 2017, fintech firms made up 12 percent and boasted a combined valuation of over $77 billion, second only to e-commerce. These fintech unicorns have focused on lending and payments, two markets big banks have traditionally dominated with old infrastructure and virtually no innovation.
Rising VC investments in Fintech Over the past 5 years, investors have flocked to this space, pouring over $110 billion of venture capital money into fintech firms. Last year alone, VCs have invested over $40 billion in over 1,800 startups that have focused on loans, cross border payments, and Blockchain. We’ve also witnessed several successful exits either through IPO (Coupa, GreenSky) or M&A (Vocalink, iZettle.)
Global payments revolution driving up valuations Payments has been a fast-growing space with several American and global startups hoping to disrupt the stale infrastructure traditional banks created decades ago. These companies have focused on improving the way consumers pay for goods and services (Alipay, Paytm), the flow of processing payments (Adyen, Stripe), and, more importantly, transaction speeds (Transferwise, WorldRemit). We expect these companies to offer significant innovations to the payments industry in the next 2 to 3 years.
The table below shows the top 10 payment tech startups, by valuation across the globe. Alipay leads the way with a $150 billion plus valuation supported by the Ant Financial Group, followed by Adyen with a $11 billion valuation. Four out of the top 10 are from the United Kingdom, and only 3 originated from the United States.
Increasing fund raising by payments startups Given the success of Square’s IPO, investor interest in payment startups has soared. VCs have poured in significant amounts of money into alternate payment methods and payment processing companies. Alipay, the highest valued payments company, has raised over $9 billion while Paytm, another peer to peer payment company from India, has raised over $3 billion to date.
Adyen: Largest payments IPO in the past decade
Adyen, a provider of an end-to-end multi-channel payment platform, filed its IPO papers in the same week that GreenSky went public. Adyen’s technology directly connects businesses to major payment networks across the globe, including Visa, MasterCard, and Alipay, enabling merchants to accept payments and boost growth, whether online, in-application or in store.
The Upside Scenario:
Impressive year over year sales growth Adyen has grown revenues to over € 200 million from less than € 100 million in just 2 years. Revenues will likely hit €300 million by the end of 2018. Although the company’s growth rate has declined, revenues are still up 35 percent and projected to hit 40 percent by year’s end.
Exhibit 5: Revenues to exceed €300 million by end of 2018Source: SharesPost Research
Increasing transaction volume Despite a crowded marketplace, Adyen has managed to attract several customers and significantly increase transaction volume to over €100 billion by end of 2017 from €32 billion in 2015. At this rate, we expect the company to easily surpass €150 billion by the end of 2018. Although smaller than PayPal, World Pay and First Data, we believe Adyen will soon offer these incumbents formidable competition, especially with major customer wins like eBay.
Exhibit 6: Over €100 billion in transaction volumesSource: SharesPost Research; based on Adyen’s filing documentExhibit 7: Adyen amongst the top 5 payment processing vendorsSource: SharesPost Research
- Growing list of customers Adyen supports over 5,000 businesses worldwide, including 8 of the top 10 largest Internet companies like Uber, Facebook, Netflix and Spotify. The company recently replaced PayPal as the official payment processor for eBay, one of the largest online e-commerce platforms. To grow its customer base, Adyen has been aggressively pursuing Asia by appointing an executive to oversee this region.
Remarkable profit margins Adyen is one of the very few fintech startups to enjoy profitability before its IPO. The company grew its EBITDA to € 99 million by end of 2017 from €43 million in 2015. Adyen’s EDITDA will likely surpass €130 million by end of 2018. Adyen generates EBITDA margins of 46 percent but hopes to hit 55 percent over the next few years.
Exhibit 8: Increasing EBITDA margin year over yearSource: SharesPost Research; based on Adyen’s filing document
- Integrated product offering Adyen differentiates itself from the competition by offering an integrated omnichannel payments platform for all kinds of payments: e-commerce, mobile and point of sale. Built from scratch, the technology supports all kinds of card payments, including debit, credit and international bank cards, through a single platform. Adyen helps businesses keep track of customers irrespective of the payment mode they choose. The company has significantly increased its transaction volumes by signing up big customers like Uber, Alipay, WeChat and Spotify.
The Downside Risks:
- Increasing competition from both public and private companies. Big and small companies alike already compete for payments; from major banks (Chase, Wells Fargo) and payment processors (PayPal, FirstData and World Pay) to upstarts like Stripe, Square and Klarna. Increased competition leads to lower margins and profitability. Adyen would need to accelerate international expansion and expand its customer base to maintain growth and profitability.
Low and declining take rate Although Adyen is growing transactional volumes, the company’s revenue per transaction has declined over the past two years. Compared to peers like PayPal and Stripe, Adyen generates a much smaller take rate, possibly because the company is charging lower fees to attract more customers.
Exhibit 9: Declining take rate with increasing payment volumesSource: SharesPost Research; based on Adyen’s filing document
Very high implied valuation multiple Adyen is expected to go public at as much as €9 billion valuation. With over €300 million in expected revenues for 2018, the company is looking at an EV/Revenue multiple of roughly 30. In comparison, its peer public companies have much lower multiples: Paypal-6.1x, Square- 8.2x and First Data- 4.3x. Although Adyen has a unique product offering, we are not convinced Adyen deserves such a high valuation compared to its peers.
Exhibit 10: High valuation multiple compared to public peersSource: SharesPost Research; Publicly available information for Square, World Pay, PayPal and First Data; *based on Adyen’s filing document
- Challenges with expansion into APAC Adyen has been very successful in gaining customers from the West, especially Silicon Valley giants like Uber, Facebook and Netflix. However, Asia is much different from the West. Very few people in the region own credit cards. With applications like Alipay, WeChat and Paytm, consumers have even less need for cards. Adyen therefore should partner with these companies in order to access this huge market.
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