Why Did Adyen Stock Go Down?

On August 17th, Dutch fintech company Adyen (OTC:ADYEY) saw its stock plummet as investors pulled out of the previously promising company. By the end of the day, Adyen had shed 39 percent of its value and lost the equivalent of $20 billion in market capitalization. Why did Adyen stock go down so much and will it recover? 

Adyen provides a unified payment processing service that allows merchants to accept a wide variety of different payment methods. The company focuses heavily on eCommerce but also provides in-store point-of-sale payment processing.

Using Adyen’s platform, companies can integrate all of their payment processing needs through a single platform. It’s important to note, however, that Adyen does not have a consumer-facing payment application equivalent to the more familiar PayPal.

Why Did Adyen Stock Go Down?

Adyen’s share price drop occurred after the company released its earnings report for the first half of 2023. While processing volume rose 23 percent and net revenue rose 21 percent on a year-over-year basis, the company still massively underperformed analyst expectations. Net revenue came in at €739.1 million, while analysts had expected over €37 million more. 

Adyen saw its EBITDA shrink by 10 percent to €320 million in H1, another major blow to investor confidence. Management was quick to clarify that this was due to ongoing spending on growth initiatives, but this information clearly did little to assuage concerns that the company’s earnings were heading in the wrong direction.

Adyen has hired heavily as it prepares to expand further into the US market, but the costs associated with that hiring could be a long-term drag on the company’s profitability. 

In the wake of the report, Adyen’s stock was downgraded by a number of institutional investors. Among these was Berenberg Bank, which issued a hold rating on shares of Adyen. With institutional investors souring on the company, the stock could lose a key price support if the remaining large holders decide to sell their positions. 

It’s worth noting that the stock has not shown any signs of correcting upward since August 17th. On the 5-day time frame, Adyen has lost over 48 percent of its value. This suggests that even bargain hunters are not buying the dip. Adyen management itself has also ruled out using some of its capital for share buybacks, implying that executives may not believe the shares to be significantly oversold.

Can Adyen Stock Recover?

At this time, sharply negative investor sentiment and lower expectations for future growth both stand in the way of an immediate recovery for Adyen. Until investors regain confidence in the company due to improved performance, it’s difficult to see how the stock could regain more than a small amount of the loss it suffered earlier in August.

The company also faces competitive pressures that could significantly hinder its growth runway. As Adyen moves into the US market, the company will be forced to compete with establishes payment processors like PayPal and Stripe.

Both of these companies are actively working to lower their costs to attract and retain merchants, so Adyen will likely have to accept lower-than-expected revenues and more likely margins in order to compete effectively in the United States. 

It’s worth noting that, even after the August 17th selloff, Adyen is still trading at a valuation that implies high forward growth rates. The stock is currently priced at 41.7 times forward earnings and 88 times cash flow.

While the company’s earnings per share are expected to increase more than 21 percent over the coming 12 months, the prospect of slower ongoing growth and struggles in the US market could mean that Adyen is still overpriced. 

Analysts Outlook Bearish On Adyen

This view has been echoed by at least one prominent Adyen bear, Pavan Daswani of Citigroup. Mr. Daswani, who has offered the lowest price target for the company’s stock, believes that high costs related to hiring and growth initiatives will continue to put pressure on Adyen’s earnings going forward. His projection for the stock’s future reflects this, implying a further 14 percent downside over the coming year.

A further cause for concern for investors is management’s response to the selloff. While the company’s executives have stated that they have lost investor trust, they have not put forward a plan to regain that trust or rebuild the business.

Adyen says that its management team will pursue meetings with key investors before deciding on a course of action. This lack of a concrete recovery plan leaves remaining shareholders with little information about what the future will look like for Adyen’s business strategy. 

The Dominos Fall For Adyen

A final problem for Adyen is the cumulative impact of higher inflation and interest rates. With consumers reducing their discretionary spending and companies placing more focus on payment processing costs, the macroeconomic environment isn’t particularly friendly to payment gateway companies at the moment.

Although this problem isn’t unique to Adyen, it could put the company at higher risk as it continues to invest more of its capital into growth in a negative market environment.

With that said, Adyen does still have its positives. As noted by management in the aftermath of the selloff, none of the company’s large customers have left its platform and the churn rate remains quite low. Its products are focused on offering better customer experiences than its competitors, potentially allowing Adyen to get away with charging higher prices. The 21 percent year-over-year revenue growth reported for H1 is also difficult to ignore, even if it came in well below analyst expectations.

Taken as a whole, however, the set of headwinds Adyen faces make a near-term recovery appear unlikely. While the company may claw back some of its losses over time, it’s far from clear that Adyen has bottomed out. As such, investors will likely want to stay away from this stock until the company’s competitive position, growth prospects and future strategy are clarified. 

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