Adyen (ADYEN) May be a Growth Stock Worth Considering
Valued at €38.3 billion with a 1-year price target at €1,340, implying a 12% downside
I valued ADYEN at $38.3 billion, but the stock has a few kinks investors should know about.
First, here are the results of my quick valuation:
Est. Intrinsic value €38.3b or €1247 per share
1-year price target €1339.3, 12% downside
Since this is a growth stock, we should note that the present value of future cash flows will grow as time moves forward - assuming wise management a.k.a. excess return on capital.
So, while the stock may be overvalued, a better way to phrase it, is that currently investors are 1 to 2 years ahead.
The next question to ask, is: “are there risk asymmetries?”
In order to answer this, we fast forward to the end of the forecast period and re-evaluate the stock with a sustainable growth model.
In this case, we just use the terminal value (correcting for est. debt and cash) to calculate the value at maturity. This gets us an estimated value at maturity of €1806 per share or €55.443 billion with an 18.9% from today.
One way to think about this is that the stock is trading around fair value, and as the company matures, it will start returning capital to shareholders, either reducing the number of shares via buybacks or issuing dividends and shareholders will gain stock appreciation or dividend returns.
Before we look at the model, it is important to know that this valuation is made without a deep dive of the risks and assumes the company will be successful, while young companies like this have a very real risk of being taken down.
In the next chart, you will see how the company’s income is envisioned in this valuation:
The model looks took good to be true at first glance, but let me elaborate.
The high revenue number is gross revenue, which dwindles when we take out partner fees and the company is left with net revenue or gross profit of about €800 million - which suddenly makes much more sense for a young company like this.
Currently, the operating income of the company is €670 million, which is the true starting point of the valuation. The company has an EBIT margin of 9% which I estimate will grow as the company progresses through its growth stage, but not by too much as it must retain low prices in order to be able to compete - having a great developer experience can only take you so far. Thus, I estimate a convergence EBIT margin of 15% in 10 years. Which is much more conservative of the EBITDA margin that the company pushes in their IR site and reports. I think that their EBITDA prints are true, but ultimately unimportant for investors.
Next we move to the cash flows. I estimate a €3 billion FCFF at the end of the forecast period, starting from the €330 million estimated next year. Now, here is where smart management comes in: The company will have to reinvest into scaling up en masse, and this has to be done right, which is reasonably difficult, and consequently where management takes the easy road - growth via acquisitions. If during the next decade, management takes on the route of acquisitions, they will lack the ability to focus on their own company and pay premiums to buy companies from what would have been stockholder cash flows.
In conclusion, the stock seems to be trading around fair value, and may provide investors with returns if the bull case valuation materializes and management doesn’t waste it along the way. This is a high-risk, long term hold with a lot of pain possible along the way. Investment horizon 5 to 10 years.
Full model:
https://docs.google.com/spreadsheets/d/1voBQTtZz4Zcy-g2eX5MP-ugjc07FwFTR0pb7VTLSgps/edit?usp=sharing