Ayden (ADYEN)
Amsterdam, Netherlands
KEY TAKEAWAY: Amsterdam-based Adyen is a $40 billion market cap company that has become the possibly the most important Banking as a Service (BaaS) firm in the world for businesses, and likely the most profitable. We can draw parallels with two household names - Booking and Costco.
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Booking recognized that travelers highly valued destinations and the hosts there, while viewing airlines merely as a means to getting there. Booking "won" its space by focusing on relationships with hosts first and airlines second, while its competitors focused on offering cheap flights, which turned out to be the less sticky component. Similarly, while Adyen's competitors took the path of first capturing the consumer payments market, and secondly the B2B segment, Adyen recognized that the B2B segment was stickier.
Switching costs for a consumer between PayPal, Apple Pay, Google Pay, Visa, etc. are trivial. The ability to seamlessly receive and make payments in 100 countries with 200 different methods with best currency exchange execution and minimizing numerous other fees is highly valuable. The switching costs are massive. India's ecosystem based on Unified Payment Interface functioning seamlessly with PhonePe, Paytm, etc., and China's functional duopoly of WeChat Pay and Alipay make it difficult for foreign players to enter those markets on the consumer side.
Adyen faces no such blockage on the business side, particularly with Indian and Chinese businesses that have substantial cross-border dealings. The Costco parallel shows how scale has been a second competitive moat for Adyen. While most discount retailers tried to offer the lowest prices on the most goods to the most customers, Costco has used simplicity to increase stickiness on both the product sourcing and consumer sides. The membership structure, miniscule margins and delightful experience attract well-off bulk buying shoppers. Offering just a few items means that suppliers have a very steady source of income, and a simple job to provide the same product in massive quantities. Simplicity is easier to scale. Simplicity is more efficient.
Some 20% to 30% of Adyen's net revenues are from platform subscription fees. Like Costco's membership fees, this favors its most loyal, big spending customers while enabling it to focus on those services most desired by their this lucrative, loyal segment. Subscription fees are less volatile than transaction settlement fees. Adyen's platform is based on a single technology stack. Its EBITDA margin is more than double that of its consumer facing competitors - 45% to 50% rather than 15% to 25%.
It is better positioned to withstand a price war. It's EBITDA, net income and free cash flow have grown in the 30% range over the past several years. It has used its simplicity to scale efficiently.