As I've mentioned in previous posts, I've been focusing on the small cap growth space, which is showing some relative strength. Another area of interest, for me, is international and emerging markets – beyond China. In recent history, US equities have outperformed, and that may be clouding our bias... but, there have been periods where we International has outperformed US equities; and the recipe for that outcome is arguably strong right now.
So, I want to talk about payment processors Adyen and dLocal – which can provide us with international exposure in a broader sense, but obviously most focused on eCommerce.
I think these are great companies, so you'll want to be here for it 😉
Adyen is a Dutch company that allows businesses to accept e-commerce, mobile, and different point-of-sale payment options. It's basically a payment processor, that's no different from Square (i.e. Block), PayPal, etc.
It was founded in 2006 by Arnout Schuijff and Pieter van der Does, who's still CEO. It employs 2,000+ people in 27+ countries. With a market cap of nearly $65B, it's not exactly a "small" company.
Adyen offers a "full-stack" solutions, including managing gateways, risk management, processing, and acquiring. It makes the payment process easy for vendors – as it should. If you're familiar with any of them, like Stripe, it's basically the same thing.
You might be surprised at how big Adyen is, considering it has clients like Uber, Spotify, Microsoft, Alibaba, etc. Although it's mostly European, they have clients in Australia, parts of Asia, as well as North America. As you can see, most of their growth is coming from North America, but most (40%+) payments processed are in EMEA.
As part of learning about the company, I really wanted to see how its payment volume compared against Stripe – a private company – who I would name as its top competitor. It appears to be processing the same amount of volume as Stripe; but Stripe is likely taking the lead now. For what it's worth, Stripe is one the hottest anticipated IPOs of 2022. But, it just closed a private funding round at a $95B valuation... an almost 50% premium to Adyen. Based off that alone, Aden's valuation is compelling. Just for perspective, PayPal with a market cap of $128B processed $1.2 trillion in TPV last year. So, in terms of EV / TPV (if we can make that a metric), Adyen is relatively valued the same as PayPal – with much nearly twice the growth, but PayPal has nearly twice the take rate.
We'll get into more comparisons in our valuation. But, first...
dLocal, given there isn't much of a moat in the processing space, is the same model as Adyen. So, I won't go into it in detail... but what differs them? Mainly, dLocal is focused on the emerging markets. This is a tough space to enter, and will give it a stronger moat, given these markets have not all adopted cash less, or other electronic forms of payment.
The company was founded in 2016 by four alumni of Uruguay’s biggest private university. Sebastián Kanovich, 31, is CEO of the first unicorn out of this tiny South American country – an amazing success story!
As you can imagine, they're growing fast, and have large clients like Nike, Uber, Netflix, Amazon, etc. In fact 330+ merchants use dLocal in emerging markets. It has a true purpose and place – which is why I like the niche and moat it's carving out as an early mover.
According to Americas Market Intelligence (AMI), local payments contributed 83% of the total e-commerce expenditure of 14 EM countries. In fact, banking penetration rate "can fall below 20%" of the total population in some. There is significant opportunity and Total Addressable Market (TAM) ahead, for companies that can start selling to these markets. dLocal is an avenue to reach it easily (aside from cross-border). But, as you can see below, Cross-border still makes up a very small portion of TAM.
As a reminder, all valuation sheets are available to premium members of The Hawk Letter and Discord. I highly recommend you join, to make your own assumptions and investment thesis :)
In terms of valuation, we will first look at the common key performance indicator (KPI) which is TPV. If you've seen my analysis on PayPal and/or Square you're already familiar with this.
Adyen grew TPV by 44% in 2021; wheras dLocal grew it by ~200% (we're still waiting for Q4 results). As you can see, quite the difference in growth rate, but also size – 10x the TPV for Adyen.
For comparative purposes PYPL grew TPV by 30% to $1.2bn. I will compare PayPal, because I think the valuation there is very compelling at these levels – and I have been adding to that position.
As you'll notice with dLocal, immediately, is their take rate is quite high – above any industry standard... but is declining. It is possible that take rate is not sustainable at scale – near 4%. Adyen's, on the other hand, is quite low (just) above 1% – which is half that of PayPal. The take rate is important, because it is what drives revenue growth.
Operating margins for dLocal are also massive at 30% – which is twice that of Adyen (and PayPal) which is sitting at roughly 15%.
Net income margin for dLocal is also very impressive... but, again, I don't know how sustainable or scalable this is. But, it's nonetheless, very impressive... and a solid company.
Assuming the TPV CAGR of 25% in Adyen and 60% in dLocal up to 2024, and similar margin trends, I get a highly uncertain FV per share of 100% upside on both. But, because there is just so much uncertainty with these early stage companies, I wouldn't rely too much on that for my decision.
But, I also factor in multiple compression for 2024 metrics, that assume a relative PEG ratio as PayPal – which in my opinion is very conservative – I get a 30% upside in their stock prices from here. I have to emphasize, that this is very conservative... if you play around with this model, you'll probably agree.
Let's talk about some of the risks, before I give you my concluding thoughts...
The risks for both of these companies are pretty similar:
- They've both onboarded pretty major customers, and it's hard to sustain those growth levels by adding any significant merchants. I mean, once you've added Amazon, it's going to be really tough to grow.
- Competition is pretty tough, especially for Adyen. There is also BNPL competition, which Adyen is offering some services in, and also crypto – but I think we're still far from either of those being proven. I do think that dLocal has an edge in this risk.
- Overall economic slowdown and a rising rate environment may continue to put downwards pressure on these stocks, so timing the bottom might be difficult.
As you can probably tell, I think these are both solid businesses in growing markets internationally. I would love to own both, at the right valuation. The question is, with a conservative 30% upside, is it worth the risk? The long term upside at that growth is pretty high. The question we need to be asking ourselves is have we bottomed out after these stocks have pulled back significantly form their highs? Of course, I can't answer that, but if we do re-test the recent lows, those are very attractive entry points in my opinion. So, if the market god's allows, I will definitely enter these names on any further pullback. I'm just hesitant to get in now, because I'm not very optimistic of a V-shaped recovery this year.
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