Adyen: Numbers Do Not Lie, But Managment Might
Ask Penn Jillette
Adyen: Numbers Do Not Lie, but Management Might
Have you ever watched the TV magic show “Fool Us” with Penn and Teller? It happens to be one of my favorites as I am a lover of magic and also the way Penn delivers his code to the magicians to let them know if they were able or unable to “fool” the two hosts. Adyen is a terrific company that Penn Jillette would love to describe to his audience:
“Wow, Adyen, you have a terrific act. You have grown so fast in the past with your amazing goals of 25-35% revenue growth and 65% EBITDA margins. But, you do know that type of growth and profitability will attract competitors and fintech advantage can change quickly, the same way you came in and swooped up market share? Teller and I love the way you barely answer the questions on your conference call with the stock down 40%, telling investors you are focused on the long term. That is masterful! And you only report twice a year so we have little visibility into how you are doing. Brilliant! Your description of “competition for digital volumes” as something you aren’t going to chase, I mean, wow, that is the best non description/description of a price war ever. Sorry, Pieter van der Does (CEO), you have a wonderful company, just like Stripe, PayPal and Square, but we do not think you fooled us!”
Adyen stock plummeted almost $20 billion (down 40%) in market capitalization this week after reporting revenue growth the first half of 21% to $739 million euros while EBITDA declined 10% to 320 million euros. It is ALWAYS tempting to buy something that is on sale especially when the company has $6.4 billion euros in cash and no debt on their balance sheet, generates solid free cash flow, is growing 20% and should generate about $500 million in free cash flow annually (and growing). The problem we have seen time and time again the past 5-10 years is investor lack of discipline on how to value a business when the story is intact (defined as growth acceleration with increasing profit margins) or when the story is broken (revenues deceleration and margins under pressure). Peter Lynch said to buy good companies you understand for the long term and whose products you utilize daily. He did not say to ignore valuation or business trends.