Make the Case
Here's a model of Adyen, a payments processing company: when the economy does well, Adyen's customers do well. When its customers do well, Adyen does a little bit better. When the economy stumbles, so do its customers. When its customers' business fades, so does Adyen. Customers also look for cheaper alternatives. As a premium service, Adyen does even worse than the market.
Makes sense, right? It's an intuitive explanation. Payments can only grow in line with the overall economy. Payments are just a cost for businesses, Adyen might do a little better or worse than payments over all, but not much.
The first rule of investing
There aren't many rules to investing — it’s more about bringing the right tools to the right situations. But, one rule to bear on every investment: bring evidence. Make it good.
If you're an analyst and you come into my office and say "the economy is a risk to Adyen." I'll tell you to put a box around it. If you're going to say Adyen does about what the overall payments market does, back that up. Show me payments volume grew 5% in Adyen's markets and Adyen grew 6%, in line with each of them. Or if the economy shrank 1% in Adyen's markets, show me Adyen's business shrank 2% or whatever the answer is.
So, is that what happens?
You might remember a few years ago COVID-19 delt a bad hand to the economy. It’s a decent check on how broad economic things impact Adyen. Consumer pullback? Check. Recession? Check. Adyen faltering? It grew revenue 28% in 2020. You can barely see a blip from its 30% rate since the beginning of 2019 through the end of 2024.
How? And Why?
Does the economy really matter?
Of course, the economy matters to Adyen. It’s just not the most important thing. In Europe, in digital transactions, Adyen's first, oldest and most mature market, it only processes 20-30% of payments for its customers. Someone else processes the other 70-80%. That means that if economic growth grinds to zero and Adyen doesn't sign any new customers, but it does 3% more of its customers' business, it grows double digits in that market.
Adyen’s management has made this case for its growth. Most of it comes simply from its existing customers expanding the business they do with Adyen. It’s mostly not from their customers growing. It’s mostly not from signing up new customers. It’s mostly not from the economy expanding. Adyen's consistent results support this case.
Lamplighter's talked about the value Adyen delivers to customers before — about why customers go with Adyen despite its premium pricing — about why it usually wins a bigger slice of its customers' business. That 70-80% of transactions still processed by other companies is Adyen's best chance for growth — better than winning new business, better than thriving in a good economy.
In other, newer markets like the US, similar opportunities exist to expand. Adyen recently upgraded its debit processing service. The move increased authorization rates by 0.22%. Higher authorization rates meant more revenue for customers. The new service also decreased customers' overall cost of debit transactions by 25% by smarter routing. By switching from legacy systems to Adyen’s new debit service — a premium service — customers increased profit. Producing this kind of return for customers enables Adyen to grow through economic seasons.
Put it in a box
By putting a box around "The Economy" as a risk to Adyen, the business, you can better evaluate the features that will matter to Adyen, the investment. When answers to questions like "does the economy matter to Adyen?" surprise, pull on those investing threads. They're ones likely to lead to good opportunities. They're more likely to lead to a price for Adyen that doesn't line up with its economics. If investors tie expectations for a company to "The Economy," but real prospects lie in much more stable, durable foundations, that's a setup for an attractive investment. This is the case for Adyen.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.