Shares in Dutch payments processor Adyens fell by over a quarter on Thursday after its first-half earnings missed analysts’ estimates and the company’s medium-term targets. It cited slower growth in North America, ongoing hiring costs, and rising inflation and interest rates, which it said weighed on margins. Its margin on earnings before interest, tax, depreciation, and amortization (EBITDA) was 43% in the first half, below an average forecast of 48.6% in a Bloomberg survey of analysts.
The sharp selloff in the stock highlights analysts’ concerns about stretched valuations in the digital payments sector and worries about a slowdown in what has been viewed as a high-growth business. The company, which provides services to the likes of Netflix (NFLX.O), Meta (META.O), and Etsy (ETSY.O), has been valued at a multiple of 148 times its annual EBITDA, which is far more than it would be worth at a lower valuation multiple.
Adyen’s advantage is that it focuses on the complexity of global payments, connecting several payment methods into one platform. Its customers can then use that single platform to process payments from international credit cards, local cash-based options such as Boleto in Brazil, internet banking methods such as iDEAL in the Netherlands, and mobile payments such as Blik in Poland. Its approach takes longer to build, but it creates a more scalable and flexible system and allows it to take advantage of opportunities over the long term.
Revenues have increased for several years, but profit has yet to keep pace due to higher labor and operating expenses. In the first half, Adyen’s EBITDA margin was only 43%, compared with an average of 59% in the past four quarters. It also lowered its full-year growth target from 25% to 26%, citing pricing competition and the impact of higher inflation and interest rates.
Unlike many of its peers that have cut jobs during the recent economic upswing, Adyen has focused on accelerating hiring as it prepares for the next growth stage. But Jefferies analyst Hannes Leitner says the hiring drive has weighed on profitability, and the impact of the currency move will continue to weigh on results.
The dollar’s rally has pushed up the cost of importing goods from Europe, which in turn is pushing up the prices that Adyen charges its clients. It’s a challenge that will be amplified as the European Central Bank tightens interest rates and other central banks raise their rates, likely dampening the growth of overseas sales for its clients.
Investors have rushed into the payments industry this year, fueled by expectations that it will be the next ample tech opportunity. But it will take more than a strong earnings report to get investors excited about the sector again. It must show proof that it can sustain its robust momentum. This will be easier said than done.