Adyen Share Plunge - the Morningstar View

Morningstar banking analyst on why the selloff on Thursday was overdone and why shares are now cheap

Niklas Kammer 18 August, 2023 | 9:59AM
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Adyen’s earnings call did not seem to ease investors’ concerns, as its share price continued to slide during the call, ending close to 40% down for the day. Although we agree that management was too soft on potential rectifications of what the market believes to be a step change in Adyen’s outlook, we think the selloff is exaggerated.

We took a fresh look at our model and pulled down our revenue growth estimates, now assuming that Adyen will see growth decline further in the digital segment, albeit still double-digits until 2029. We also adjusted our cost assumptions up slightly to account for the additional hiring expected this year and the lagging effect of this hiring, which will weigh on margins through 2024.

On the flip side, we lifted our interest income assumptions, which is a nice boost to Adyen now that rates have left close-to-zero territory for good, offsetting some of its investments into staff. Taken together, our changes lower our fair value estimate to €1,660 per share from €1,870. With shares trading around €900, we view Adyen as cheap. Moreover, we believe our assumptions of 22% revenue growth over the next five years and 16% over the next 10 years leaves room for surprises to the upside. To reach our fair value estimate, Adyen can miss its mid-20s percent revenue CAGR and above 65% EBITDA margin guidance for the medium term.

While EBITDA margin compression to 43% this quarter and price competition in North America paint a cloudy picture for Adyen today, we would caution investors not to extrapolate this snapshot too far into the future. We made this point to investors during the pandemic, when the sky was blue and shares were scratching at the €3,000 mark, and we reiterate a similar sentiment today. We expect margins to start expanding again next year when Adyen slows its hiring push and its scalability will show again in its numbers.

We believe management will be reluctant to give in to any price wars, even if that seems to be what the market demands. As such, investors in Adyen will have to withstand another six-to-12 months of bears driving the narrative and share price before we believe the gap to our fair value estimate is likely starting to close.

This is an edited version of a Morningstar note

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Niklas Kammer  is an equity analyst sfor Morningstar

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