Chit Chat Stocks - Adyen (ADYEY) with Mostly Borrowed Ideas

Episode Date: May 26, 2022

Adyen is a payment company that allows businesses to accept e-commerce, mobile, and point-of-sale payments. The company is based out of the Netherlands. Listen as Brett and Ryan ask MBI questions about the company, its business model, and valuation. Enjoy the show! This episode is sponsored by Commonstock, a social network for smart money investors. Check-out the platform here: https://commonstock.com/ Subscribe to 7investing with the code "Money" and get $100 off: https://7investing.com/subscribe/aff/4/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested to see more of MBI's work? Find more here: https://mbi-deepdives.com/ Contact us: [e-mail]  Timestamps Adyen | (3:19) Competitors| (13:20) Is Adyen Number One? | (26:32) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive episode where we interview a single investor to discuss one company. And today we have on mostly borrowed ideas and we're talking about Adyen. This was a very fun discussion. You can tell how in-depth his research is and how much of a grasp he has on the payments business as a whole. Before we talk about our sponsor, did you have any highlights from this interview? Yeah, the whole thing was great. You can tell he has great passion for his work and he does great write-ups on the mostly prioritized ideas, investment research service. Let's give him a little shout out there.

But I did like the talk about employee compensation and comparing that to Stripe, why Adyen's been so different and whether that's sustainable. Yeah, that was definitely one of the highlights for me as well. But we want to talk about our sponsor for the episode. It's Common Stock. Common Stock is a social network for investors. It's similar to financial Twitter. but you're getting more thorough write-ups, I think more thoughtful discussion. The signal

to noise ratio is much better there. And it's really a community of experienced investors that you can connect your brokerage account. So, you know, you're getting real-time data, real information. And it's a really valuable platform to discuss any investments you might have. You can call it kind of a Bloomberg terminal for Main Street. I like that analogy. So yeah, go ahead, check them out. I got to start going on there more myself because I'm finding, I've heard from you and Ian that the discussion on there is more thoughtful. So make sure you send the website.

Oh, of course. It's commonstock.com to join. So yeah, one more time, commonstock.com to join today. Yeah, go ahead, check it out. Without further ado, let's get to our interview. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests

is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. Today, we are joined by Mostly Borrowed Ideas. That is his pseudonym on Twitter. That's probably how you're familiar with him. Or by his research service, Mostly Borrowed Ideas Deep Dives. Is there a specific name to it? Well, MBI Deep Dives. So it's basically the in abbreviation of most important ideas, MBI and deep dive. All right. And today we are talking about Adyen and you just released your deep dive for the month and it was Adyen. So we got the chance to read it. We've got a whole bunch of questions around it. Let's start with their role in the payment space. I know a lot of people,

there's a lot of love for Adyen, but it isn't always super clear what exactly they do or how they fit into the payments ecosystem so can you explain that and can you talk about how they actually generate revenue yeah yeah no that's a good question because i feel like uh you know payments uh can be quite complicated even though it may seem very you know simple from consumers and uh you just feel like oh i just you know have my credit card and i just you know used it and that you know transaction was successful so it seems very simple but there's like an incredibly you detailed work or dizzying amount of work that's being like done and behind the scenes so maybe it's probably helpful like if i just you know explain how that how like a hundred dollar

transaction works like any at a there's a retailer like at walmart or target uh and that that can probably be clarifying uh for the listener so uh so you know uh once you insert the credit card into uh you know target or walmart's uh you know point of sales terminal uh your card credentials and transaction data are captured uh like your name and like in all the details and like the card numbers and then the margin accruer which in this case let's say adian can be a margin accruer sends the data to the card networks which are you know visa mastercard who subsequently queries the customer's issuing bank for authorization issuing bank can be like you know if you are using a you know chase card like you know your issuing bank could be in a chicken market chase

uh and the issuing bank you know when they are checking for authorization they will check for whether you have enough funds you know whether this this is a potential fraud you know risk analysis like all all the stuff will be done done in that phase and once the issuing bank basically green lights the authorization flows through the card networks to the margin acquirer again such as addion and the merchant uh the retailer like walmart or or target receives the confirmation from its margin acquirer that the transaction is authorized and then the sale is completed like this is called the authorization phase and then there's another phase that begins which is called settlement phase. So to start the payment process, a credit card issuing bank

provides credit on behalf of the customer to settle the transaction, which is routed through the card networks, who then passes a transaction to margin acquirer's backend processor for settlement. The backend processor then settles a net outstanding balance between the card issuing bank and the merchant acquiring bank, and the merchant, you know, merchant bank will basically credit the merchant's account for the amount of the purchase in this case, like $100, less the fees charge, which typically is, let's say, $2.50 or $2 to $3, let's just say, for facilitating the transaction across multiple parties. So that's like the whole, you know, cycle for the both authorization phase and the settlement

phase. and there's still like in a bunch of stuff maybe i i probably should go on uh because you know actually it's still not completed the transaction because the fees are you know that i talked about two and two to three dollar of fees are you know mdr or margin discount rate so it's probably helpful to talk about how how that gets distributed right so these fees can be segmented in three ways uh interchange fees which can range from 150 to 300 pips uh basis points uh paid to the issuing bank. One and the other could be acquiring spread, which can vary from 10 to 100 bps paid to the margin acquirer, such as Adyen, and that's how they will generate revenue.

If front-end processor is separate from back-end, front-end processor gets a majority of the spread. Basically, when the customer receives a credit card statement, he or she either pays a bill in in full amount or can choose to pay interest on unpaid balance, and the issuing bank receives the interest in that case. That's basically the whole cycle of how a $100 transaction that happens on Walmart or Target ends up being paid by the customer who is basically buying that product from Target or Walmart. It's a fairly lengthy cycle, although it can seem pretty simple.

I have been speaking for a while, just explaining a hundred dollar transaction, but it takes like a few seconds to get confirmation. Right. Right. From the customer side, it just, you know, all you see is the transaction complete, but you don't see everything in the backend. And so what does, how does Adyen, I guess, differ or what's their role? Yeah.

Yeah, so, you know, Adyen reports like gross revenue and net revenue, and basically net revenue is the primary focus, and I'll explain why. So, the gross revenue is segmented in four categories, the settlement fees, processing fees, you know, like Adyen reports in four categories, but they can make like more, they can generate revenue streams from multiple sources. So the four categories that they mentioned, settlement fees, processing fees, sales of goods. Sales of goods is basically the point-of-sales terminal. And lastly, other services.

Other services is basically like a whole bunch of things like data analytics, risk analytics, fraud analytics, like all the value-added services that Add-In provides to the merchants. As a whole, Addient basically is known as a PSP or Payment Service Provider. They can do acquiring, they can do processing, and all these risk analytics and fraud analytics services as well. Settlement fees is basically 90% of the gross revenue but 56% of the net revenue. fees is 5% of gross revenue, but 29% of net revenue. So there's, you know, this obvious question, what's driving these differences? So for settlement fees, Adyen follows an interchange

plus pricing. So Adyen has a transparent pricing model and charges fees to merchants based on its own in-card costs, plus a markup for its acquiring services. So like, you know, if they settle like $100 of payments, you know, they get to keep like $10. And the rest, you know, interchange fees and other stuff that, you know, gets back to, you know, the issuing banks or card networks, and, you know, and many other players within that like process. So and the settlement, like, sorry, the interchange fees vary widely from like, you know, country to country based on regulations, like for in the euro, it's like 20 to 30 bps of interchange fees. But in the US, it can vary widely based on the issuing banks, you know, total assets.

So if issuing bank has more than 10 billion of total assets, the interchange fees are a lot lower. I think it's 21 cents plus 5 bps of your transaction value. But if a issuing bank has less than $10 billion of assets, then it can be a lot higher because of the Durbin Amendment and Dodd-Frank regulation. That's probably beyond the scope for this podcast, but yeah, it can vary widely. But add-in has no control over and obviously has no control over interchange fees or how the regulation is being done in a particular geography. So gross revenue is basically not the most important part to look at. It's basically the net revenue.

After the interchange fees and all the unavoidable costs, what Adyen gets to keep from that payment volume? And generally speaking, it's around 20 bps. So if there's like a $100 transaction, it just keeps 20 bps of that $100, and that's their net revenue. So it's a very small slice, but once you do like a, you know, they did 500, I think 16 billion of, not dollars, 516 billion euro payment volume last year. So, you know, 20 pips of that is a billion, right? So, yeah, payment market is exceptionally large.

Like it's so large, it probably defies most people's, you know, expectation. it's actually so payment market theoretically it's actually bigger than world's gdp so world's gdp is like 85 trillion uh like i was looking at like credit sucess you know payments primer and they mentioned it i think it's 2019 or 2020 that world's gdp was 85 trillion and payments market was basically 240 million 40 trillion dollar because you know every each level of gdp output you know is being paid multiple times right so that's why the payment market can be actually bigger than Warren's GDP, which if you don't know about how the whole thing works, it may seem laughable, but then you look at like Stripe did $640 billion last year of payments

volume. JPP, Chase Payment Tech did $1.4 trillion of payment volume. So these are exceptionally large markets, and if you can't keep just a small, small slice of that, it becomes a huge deal for these players. La Quinta, tomorrow you triumph. Book your stay at LQ.com. stride versus those legacy players so what causes someone to choose at in you know why are they growing so quickly because of it yeah yeah so as i said you know payments market is an exceptionally large market and there are so many there are many different ways you kind of you know slice that you

know large market uh so broadly speaking i would say there are like two types of you know competitors uh one is like legacy players like you know uh chase payment tech which is owned by jp morgan WorldPay, which is owned by FIS, or Fidelity National Information Services, a publicly listed company. And the other is like First Data, and they are owned by Pfizer, again, another publicly listed company. So these are the legacy players. And there's other group of players, I would say, fellow disruptors who are trying to kind

you know gain share uh in in this market uh in in the payments market uh and uh you know there there can be more than uh i i there can be a lot more uh players in that market than i probably know of but the two that kind of you know has gained a lot of attention over the last let's say you know uh two three four five years is basically stripe and and checkout uh so so you know so broadly two types of competitors, but there are also different ways to look at the market itself. One could be you have an enterprise market and then the other could be a small merchants market. Those two markets can have very different needs, very different problems, and because they have different problems, they actually want different solutions as well. Some companies are better

suited to solve those problems you know uh then then then let's say other players in that in in that market so maybe it's good to kind of talk about how uh that need differs in in these two markets right so uh so you know as i said small margins and enterprise markets i think uh small merchants have basically simple payment needs like you know uh they uh let's say uh a mom and pop uh you know uh retailer in in the us uh they are probably just processing an us dollar uh they're you know all domestic you know debit or credit cards so very simple like you know people are coming to the store you know buying stuff and paying with their debit or credit card right very simple very plain vanilla uh and for for them they don't need all you know all

the complex stuff uh but on the other hand enterprise uh you know customers like think about Nike, Adidas, Amazon, they're dealing with extremely complex payment flows. It's not just a debit or credit card. It could be about a customer who wants to buy now, pay later services. Customers may want that. You may want to give customers a discount. You're emailing them saying, hey, if you click this link, you get a 20% discount. you can also like split payments like you know uh you know you you buy you pay half now and upon delivery you pay the rest 50 so you know for enterprise customers there can be like uh you know a lot more ways payment methods and you know a complexity uh that can arise uh

compared to the you know like the small margins who basically just need a payment uh like you know uh you know like a single currency uh uh and like you know david and trade card payment methods and that's pretty much it uh and and and that's why like you know uh any plain value like in any legacy player uh can can give a very you know competitive solution to the small margins and in many cases what happens is uh you know these legacy players bundle a lot of different services and sell along with the PSP services, like payment service provider services, and also some, let's say, lending products

or other banking products or savings accounts and anything banking related. All those can be kind of bundled together and then sold to some of these players. So they can afford to be very price competitive in those markets. Enterprise customers, because payment is very crucial. Payment is mission critical.

If you can't accept payment, let's say if your customer wants to avail buy now, pay later services, but you are losing sales. You are losing revenue, right? So it's just not, you know, for enterprise customers, cost is perhaps not the most deciding factor, right? It's about like, you know, whether, you know, the most important probably thing is authorization rates, right? So authorization rates is basically like, you know, if 10 people go to my website and, you know, subscribes to my work, and let's say eight of them was able to, you know, for let's say eight of their transactions went through and two failed. So the authorization rate, let's say for my business is like 80%, right? So there's 20% sales that I'm losing.

And for small merchants or even someone like me, it's important. It still hurts, but it's not like a deal breaker. If you are generating $100,000 of revenue and you are losing 10%, you are losing 10,000 sales. That means a lot to you. But like in the grand scheme of things, like it's probably not a huge deal, but if you're generating $1 billion of TPV, like total payment volume, and you lose 10%, that's like $100 million of lost revenue. If you can solve that, if your PSP or payment service provider is able to give you 95% authorization rate versus, let's say, a legacy player who is giving you 85%, 90%, that's a massive difference. So it's not just about picking the legacy player or picking any player who is giving

you the most cost competitive rates. It's more about who can give me high authorization rates. And it requires real skill. It requires a lot of capabilities. Like, for example, in Mexico, I was just reading, they don't process transactions overnight. right so and there are many other there are many other nuances that you need to know like in which countries in which regions like where when it will be easier for the transaction to go through like even for my own website i see like uh uh there you know i probably lose like one percent

of my subscribers every month just you know because of payment failure right yeah so that's monthly, right? So if you're on an annual basis, I'd probably lose like 10, 12%, you know, my revenue because of payment failure. And I see like Stripe, so I use Stripe in my website and basically Stripe tries to, retries to kind of, you know, go through that transaction like, you know, multiple times. So you need to like, you know, Stripe or any sort of, you know, A PSP needs to understand where this transaction is coming from, when exactly, it's much, much more likely that it will go through successfully. You need to do this in a very intelligent way, and you need that level of data and understanding and capabilities. is. And that's why it can be quite challenging and difficult task, especially if you have like

multiple platforms and acquisitions that you did over the years. Because if everything is integrated, if everything is one single platform, then it's just easier to understand, easier to kind of see why a transaction was not successful. So I even on my own, I can see like, oh, this transaction didn't go through because, let's say, the card has expired. By the way, 3% of card expires every month, globally, 3% card. So, you need to have a capability that will automatically update the cards and everything once it's expired. So, it takes a real effort from the PSP's perspective to be able to see through what's happening.

Like as I was explaining, like what the dizzying amount of work that's being done in the background. So it takes a lot of like, you know, understanding to know why exactly a transaction didn't go through. And if it's like a hodgepodge of like different platforms,

which in many cases, the legacy platforms are, like I, just to give an example. So, Adyen was, you know, the Adyen founders basically had, you know, their first company was called Bibit, and they sold it to WorldPay. Actually, they sold it to Royal Bank of Scotland, RBS, and RBS basically sold that business, sold their PSP business, which later became known as WorldPay. WorldPay then was bought by a PE firm during the global financial crisis. Then WorldPay came to IPO, I think, in 2015 or 2016. Then Vantive merged with WorldPay, and then Vantive itself was acquired by FIS.

I'm just talking about just one company here. Right. So you can think about how many platform integrations, how many, you know, and all these companies like acquired like a bunch of other companies. So it's just, you know, it's very difficult to have a very holistic view of what's happening in the background. And anytime you lose a bit of data in that, like, you know, integration process, then you don't know why a transaction didn't go through. So you are not being able to help your customers to kind of improve the authorization rate. And as I mentioned, you know, that's a revenue that you're losing. And it's true for any sort of internet-scale businesses because most of these businesses are global in nature, you know, so they need solution that can, and in many cases, you

know, they are in multiple channels, like omni-channel, like they are in physical locations, They are online, and they also have omni-channel capabilities. You need a holistic solution. You need a single platform to be able to see, locate, and be able to explain why a transaction didn't go through and what the customer could do to improve the authorization. Authorization rates, I would say, is the most important factor for the enterprise customer. It doesn't mean that the costs and all the other stuff are not important. For example, it requires a cultural mindset change.

So, for a long time, even the enterprise customers used to look at it like, oh, the authorization rates are kind of similar among these legacy players. Let's just go with the lowest cost provider. Right. And in many cases, you know, it used to be some, you know, a company that has like, you know, that also gives them banking services. And so everything's bundled, just like, you know, for small merchants, they used to think from the cost perspective. But now I think with the rise of Adyen and a few other players, the focus has been shifted to more of authorization rates and how it can increase. So that's like the more focal point in the industry at this point. Thanks to advanced security, included with Cox Panoramic Wi-Fi. Advanced security must be enabled in the Panoramic Wi-Fi app.

Restrictions apply. One clarifying question here. Is add-in number one in authorization rates? So I haven't seen like a public data. I don't think anybody really discloses this data. But there have been like a lot of instances, I would say. And I think I did see, I think it's in Brazil where MasterCard mentioned that Add-in had the highest authorization, but I'm not sure about the global authorization rates and all that. And I mentioned in my write-up, it's such a critical data point, but unfortunately, nobody really discloses it publicly.

and if you go through like you know everyone's report like they'll all say authorization rate is important and our authorization rate is good and all that but uh what's good mean what does good mean and you know and how how do i compare between these different platforms right that's that's the difficult part because they don't disclose this i would say uh based on my due diligence and just drilling through different customers' experience and why they chose one PSP over another, Adyen is generally regarded as

the best in authorization rates. They are known as a premium product. Everybody knows they are the premium product. There are PSPs out there who charge less than ADN. So the only reason you'd still pick ADN basically, if they allow you to give higher authorization rates and the way the kind of the math works, like, you know like the cost is irrelevant. If you can, if someone comes up, like if tomorrow a new payment company comes and says, we are able to give 99% authorization rate. And let's say ADN gives 95%, like the cost, like it just not matter because you are losing real revenue, like 4% of revenue. And the cost

is basically minuscule. Like I said, if someone is charging you 20 bps instead of 10 bps, it doesn't matter if that same company, the company that's charging you 20 bps, is also giving a 4% or 5% higher authorization rate. The math is so significantly skewed to just pick the ones that have a higher authorization rate that the cost is basically much less important uh you know top top you know topic in in these discussions but uh at the same time all you know most merchants i would say almost all merchants uh enterprise enterprise merchants basically uh have multiple psps so it's not just add-in it's not just right it's not just you know chase payment deck it's probably all three four or five right so what happens is one or two players

get like bulk of the payment volume let's say 70 80 percent of the volume and the rest like two or three gets like the you know 10 or 20 percent uh and because uh oh there are a couple of reasons one is the merchants want negotiating leverage right so uh they when they are renegotiating they want to you know kind of kind of have like a fallback option they want to say hey we have you know uh if when they're negotiating when they are talking about costs and all that like uh they want to make sure they have other alternative out there. And also, you need to be able to kind of compare, right? So if you have two, three, four, then you know exactly who is giving a high authorization

rate and whether the value add is making sense after taking into the costs into the account. The other thing is, other big reason why they all need, almost all need multiple PSPs is basically uh every company has their downtime so even if like a company is down like down for one hour in uh like even if a company says uh that you know we are operational like 99. you know 989 percent of the time uh like i said payment is extremely you know mission critical like you can't afford uh not to have your payments functional payments functional right so uh but Even if your company is like an operational 99.989%, it means you are down one hour out of like, you know, one hour in a year, right?

So one hour out of 8,760 hours, which is like a total hours in a year is basically 99.989%, right? So you don't want to miss revenue. You don't want to lose revenue when a particular, you know, PSP is down for one hour, five hours, 10 hours, whatever. And there are instances where a lot of legacy players at times lost their primary PSP status when they were down for a long time for technical reasons. So these are the things like why at any point of time, most enterprise merchants would have multiple PSPs. Okay. And Addian has obviously grown quickly over the last several years. What do you think is going to help them continue that growth? What are going to be the driving factors?

yeah so uh well as i said like you know a payments market is just exceptionally large market so uh although they did uh 516 billion euro of payments volume last year which was more than 200 billion euro compared to 2020 right so so you know uh i i you know i was thinking like if i were looking at this company in 2020 and if i were if i were if i were if i wanted to project like how much they would grow i would definitely not project like you know they would grow another 200 billion of payments volume uh but you know these markets are just so so large right so there are basically three ways that adrian has uh kind of grown over the years uh one is uh you know when your customer base is basically the ubers the spotify's you know the netflix's of

of the world, like these businesses have themselves grown rapidly, right? And you are just basically processing their, you know, payments volume, right? So if your customers grow, you grow with them, right? As long as you, you know, remain their PSP. The other thing, so that's one. The other, the second one would be just, you know, like, you know, if you are, let's say, If you are starting from being a PSP of Spotify or Uber in, let's say, Australia or Norway, and Spotify and Uber can see, hey, Adyen has consistently provided such a high authorization

rate compared to any other PSP, and let's also give them, let's say, Sweden or some other markets. And over time, you will just gain wallet share within your existing customers, right? And as I mentioned, like 80% of their growth basically comes from their existing customers. So it's basically 80% of the growth is basically coming from their customers growing themselves organically, and also they are gaining wallet share within their customer base. And the third would be basically just, you know, find new customers, find new, you know, merchants that are not your existing customers right so if you look forward i think uh those

those are again very powerful uh growth drivers uh i think ideal will continue to gain wallet share their customer base these are again internet scaled businesses they will probably continue to grow uh and and they will continue to uh you know attract new customers to their platform And as payments volume continue to grow, Add-In will probably just grow in tandem with them. And at the same time, they also are introducing new products and services. So, for example, they're currently working on issuing an Add-In capital. So their take rates can also improve. So if they take rates improve, you know, their net revenue can also grow in tandem with them.

So I think Adyen will continue to grow at a pretty, they actually themselves guide like low 20s to, sorry, mid 20s to low 30s net revenue growth in the medium term. They don't define what medium term is, but that's what they guide, like, you know, mid 20s to low 30s. We're always in the medium term. Hopefully permanently in the medium term. We've done basically the unit economics down to net revenue, but let's go down to the bottom line or whatever one you think is the best. I don't know if it's free cash flow or EBITDA margins here, but they have quite impressive profit margins. I think even higher than Visa MasterCard of 65%. Maybe go through that and why, because I thought there was an interesting part of your report.

Why is it so much better than what you're hearing Stripe has? Yeah, so yes, they have a 65% EBITDA margin and their incremental EBITDA margin is like more than 70%. So these are exceptionally profitable business. I would say PSP, generally speaking, these are very capital efficient business. Like I was in a checkout, for example, a competitor for Adyen. I was listening to a podcast of the founder and CEO, and he was mentioning that he basically bootstrapped checkout for the first like seven years, six, seven years. Right. I mean, they raised like almost one point eight billion dollar over the last three years.

So they raised money, but, you know, they didn't raise money at all for the first seven years, similar to Adyen. Adyen also, Adyen actually raised, this is crazy, like they just raised $266 million, right? Their current market cap is basically almost $50 billion, right? So it's just crazy, like, you know, how capital efficient Adyen was. Adyen also, first five years, they didn't raise any money, outside money. uh you know i think so they started in 2006 in 2011 they uh raised outside money and when they came to ipo they actually didn't raise money uh it was just a liquidity event for existing shareholders uh so so yeah you know it's extremely profitable company uh part of the reason is

basically you know once once you come to net revenue uh basically majority cost is your uh salaries and wages. Unlike other tech companies, Adyen has surprisingly been able to really keep the cost for its employees down. It's only 20% of their net revenue. When you just take 20% of net revenue and the 10% of other operating expenses and some other stuff, you're basically left with 65%, 70% EBITDA margin. There are no other costs. It's basically the personnel, salaries, and wages, which I have a bit of a mixed feeling about. That's one of the reasons why AddIn is so loved by its shareholders and so loved by investors because it's such an incredibly… Not only is it a very profitable company, but

But, you know, and also there's no SBC, there's no stock-based compensation. So 65, 70%, these are not like non-GAAP numbers, right? There's hardly any stock-based compensation. I think they paid like 6 million, if I'm not wrong, of SBC last year, which is like, you know, peanuts compared to any other tech companies out there. But yeah, so that's why they're such a profitable company. There's basically no other cost apart from, you know, salaries for employees and they don't pay much. I was just looking at Stripe's and Adyen's salaries in the US. I was just

comparing an entry-level software engineer salary, and Stripe's offer is basically 50% higher than Adyen's. I guess there are a couple of reasons why Adyen was able to keep the costs low one is uh you know people talk about like you know it's a dutch company it's another company and dutch people are uh you know slightly more frugal conservative and all that i'm not a big believer in that argument uh every every i'm pretty sure all the companies out there would love to pay companies less if they could uh so so so i was curious like you know why they were able to do it and uh the probably a much better explanation is basically regulations so in netherlands where where is basically 60 percent of adn's employees are uh your variable compensation cannot exceed

20 of your fixed compensation so it's not like you know if you're paid 100k base uh you know it can't be more than 20k uh bonus uh you know like silicon valley needs that rule i think that could be uh that might not be a bad rule to implement over there i don't know so give and take baby give and take baby yeah so that's the thing i i i that's why i was mentioning like and i have a mixed feeling about it i feel like uh so when you think about it like why do you think or this is a question i asked myself like why like if in 10 years if Adyen remains the top-notch payments PSP, why would it be the case? There are many different reasons, but one of the reasons would be their platform remains technically top-notch because they were able to hire top-notch talents.

But how could Adyen hire great talents if they pay like 50% less, right? Right. So so, you know, obviously you can't invent the rules. You have to play play the game in a way that, you know, the rules are given. Right. So you can't just say I'm not going to pay people. Right. Because it's just too high. If everyone else is paying, you will just lose out on talent. Right. So the question is whether adding will whether the talent that adding is attracting is below par. right uh do you think that being based in europe at that point then is an advantage for them because they can it's sort of a different talent pool so maybe they aren't necessarily competing

with the other payments providers as much as just the other companies in europe and fang and right yeah so so so that's that's what i was saying like 60 percent of uh their employees are for are in netherlands and netherlands has that regulation even i think uh in eu i'm not sure about this like i was just looking at some consultant consulting firms uh like you know research and it mentioned like it can't exceed more than 20 percent for another lens and it cannot exceed more than 100 for uh the other eu region so maybe even like other you know uh european countries uh uh they have some sort of like in a cushion in terms of keep how to keep their salary expenses low uh the thing is uh they generate 23 percent of their revenue in north

America, net revenue, right? Last year, but their employees are like only 12% of the total like companies in like employee base. So they're not really hiring like, you know, like crazy in the US or in North America, like probably because they think the costs for hiring a good talent in the US is too high, right? And which is probably the right, you know, the right thing to say at But I guess, yes, one way we could probably think about this thing is basically whether Adyen has a better system to extract value from its employees or from its talent. So, you know, the way I kind of explain it is basically, it's not like, you know, you just hire the best talent and you will get the best products and the best platform, right? You also need to be like, whatever talent you are hiring, you still need to be able to have a system to extract value from your talent. If it's like a haphazard culture within the company, you may not be able to extract value

from your employees, from your talented employees, even if you pay them a lot higher than the other companies. And yes, Adyen does have an interesting approach when it comes to talent. One thing that Peter Vanda does, who is the CEO and founder of Adyen, mentioned that One of the six board members in Adyen will always interview a new hire. So only six people, they have, I think, roughly 2,000 employees now, more than 2,000 maybe. So every one of them, no matter whether they're an engineer, sales and marketing person, or receptionist, everyone is being interviewed. at least one round of interviews being done by one of the six board members, right? So that kind

of, you know, shows how, like, you know, dedicated and religious they are in terms of keeping the quality of the resource pool and talent pool. The other thing I think that may work in favor of Adyen, so sometimes it's not just your talent pool, but also whether you have the right strategy at the top, right? So Adyen, for example, like they never did any acquisition ever. So one of the reasons Peter Vendor does wanted to start a new company,

Adyen basically means start over again. So the reason he wanted to start over again and founded Adyen was because he felt the legacy companies, they are just hodgepodge of different platforms and acquisitions that these companies have done over the years. And now, in many cases, those companies don't talk to each other, right? Or it becomes very difficult to kind of, you know, innovate and, you know,

and integrate with new releases and like, you know, with new payment flows or new complexity that arises in the payment value chain. So he never wanted to do any acquisition. And it's actually very difficult not to do an acquisition because, you know, it's it's very it's very tempting to do like if you uh if you don't have a particular capabilities in a market you can just you know buy a company integrate that in your platform and increase take rates or if you are not in a particular geography you can just buy like a a company that's doing well in that or a PSP that's doing well in that market and you know and just integrate

that platform. Peter basically realized that's the problem. That's the problem that he needs to solve, that the merchants cannot be nimble, agile, if they have to integrate all these different hodgepodge of acquisitions and platforms that these PSPs did in order to respond to the need of the customers, the end customers, right? And maybe, this is a question that remains to be seen, maybe Adyen can survive even with, like, you know, let's say average Sheldon pool just because their broad strategy, their strategy of having a singular platform

and having a very simple, agile platform with a clear view of what's happening around the value chain in the payments complex may just give them a decided advantage over any other legacy or, you know, fellow disruptors that's out there. So, yeah, that could be one of the reasons that, you know, they may not even need the best talent out there because they are, you know, broad strategy from the top is just, you know, probably a better approach

to solve enterprise customers increasingly more complex payments problems. I think I heard someone make the analogy that it's like they're competing against a car that was assembled with a bunch of different parts from different cars. That was in his report. That's what it was. I like that analogy. I do want to touch kind of on, maybe touch a little bit on the culture. I know you kind of just alluded to it, but a lot of that can sometimes be, from an investor's perception, sometimes that feels like fluff. Do you feel like that is a true advantage for them? Yeah. So, I do agree. It does feel like a fluff at times. Everybody talks about culture. There's no company out there in the world who says

our culture is bad, right? Everybody's proud of their culture. So, I'm mindful of that. uh so i i kind of have neutral you know opinion on this uh uh yes i have never heard any company like where a board member is interviewing every single people who is coming into the door right that's pretty unique right uh that requires commitment uh that you really care about who's you know getting into your company who's getting who's it's it's just you know it's it's never easy to kind of scale your company and ensure the quality of the resourceful remains intact. So they're definitely mindful and careful of that. But at the same time, like, you know, when I went through, like, you know, like, different forums on blind, which is like an

anonymous, people anonymously post their opinions on, on the on their company that they're working in and yes you know the common complaint is basically add-in doesn't pay much right and the most people who leave add-in i think it's because of you know lower pay and they get a better offer uh so so yeah you know i i do think you know that's something they uh you know people people seem to really like the fact that you know they have 65% EBITDA margin 70% intermittent EBITDA margin. I kind of feel like that's a lopsided value distribution between labor and capital, right? I know like most tech companies basically don't make any money. Like they post even, you know, a negative gap EBITDA margin or even negative non-gap EBITDA margin.

There are also many companies like that. And obviously investors are asking questions on many of those fronts. And because ADN doesn't have those problems, investors seem to, I didn't seem definitely is in the probably in the good book of investors, but I feel like that's, that's not probably a right balance between labor and capital, like 60, like when you are generating 65, 70,

70% EBITDA margin, you certainly have capacity to pay your employees a lot higher than your some of your companies. Like, you know, I've heard some numbers on Stripe's margin or Checkout's margin. They are nowhere close to Adyen's margins, right? Maybe at some point they can be, I don't know.

But they are nowhere close to like 65% EBITDA margin, 70% EBITDA margin. So is Adyen taking a risk here? I think yes, Adyen is probably taking a risk here by being an employer who is paying below average market salary. So that's something, you know, I guess investors need to keep an eye on whether they lose a lot of good talent through attrition to, you know, to other competitors or peers. So that's something I would definitely keep my eyes on. Okay. And I think we've covered the business pretty well. So to kind of talk more, I guess, about the stock or Adyen as an investment, what do you think needs to go right for this to result in a good investment? And then what multiple do you think Adyen deserves to trade at?

Yeah, so I have reasonable confidence that the business will do well and a lot less confidence that the stock will do well. right uh so that's a nice way to say a premium valuation yes right uh so yeah you know there are basically two questions uh that i need to probably three uh you know uh you need to be confident about uh to make sure the stock does as well as the business so the more revenue streams like the new products that they're launching, issuing, capital, and maybe a few others down the line as well. Right now, I don't think people are really modeling those revenue streams. I certainly didn't.

So to the extent those are exceptionally successful revenue streams, again, there's also not as much clarity in terms of the economics of those products. like when add-in is launching add-in uh low as add-in capital uh like who is financing you know who gets to keep what take rate like you know if they are financing they're providing financing to sellers uh does it keep some of that you know revenue stream uh what percentage you know is kept by add-in and and maybe a few other players in the value chain so i i don't know much clarity uh in the economics of those things uh so yeah so that's that's one one thing that if they are really successful in kind of you know again the payment volume is so large uh so 20 bps is their

current take rates if they increase it to i don't know even a few bps uh it can definitely uh add a lot you know a lot more revenue at a pretty you know like i said in the 65 70 percent maybe the margin uh your revenue if you add more revenue uh you know your profitability is also uh pretty compelling uh at the same time i i think uh i would i would definitely keep as i mentioned earlier i would keep my eyes on uh the margins they have raised i think margins almost by 10 15 percentage points over the like last few years i don't think we we can see similar sort of you know, expansion, it may also be even possible that their margins may go down, right? So to the extent that's not the case, you know, if they continue to, if they find ways to, like, you know, keep the

salary expenses low, you know, keep hiring decent people, you know, outside US and all that. So maybe it's possible to uh maintain these margins so i say yeah so three things one is basically the more revenue stream uh uh margins oh the other thing that i wanted to mention is basically uh the market share gain so again how do i define markets right so uh tam you know it's for me it was hard to find a reliable estimate so it doesn't operate in in china so the global payment volume uh excluding china would be it's like you know cam total addressable market uh so it's hard to find uh reliable estimates for global payment volume x china like over the years maybe there's out there i i i i maybe i just didn't find it uh so what i did was basically

i just took visa and mastercards uh payments volume that they report consistently and make some assumptions to find out what percentage of TAM add-in is penetrating. It used to be 70 bps in 2017. Right now, it's 2.3%. So they gained 30, 35 bps of market share in 2019 and 2020. But in 2021, they gained 70 bps market share. Right. So now the question is, going forward, whether their market share gain will be around 30, 40 bps or is it going to accelerate from here?

Right. So from it. So maybe 70 bps is the floor. It could be 80, 90, 100 bps. Right. So, again, this is a very hard question to answer at this point, but that's definitely an important piece of the puzzle. So how, you know, like, even if they gain like 10% in 2030, right now they're 2.7%. If they gain 10% in 2030, stock is probably undervalued. So, you know, I'm talking more in like fundamental terms and less about multiples, because multiples are basically a function of that, right? Right. So whether you want to, like, they're currently trading at 45X-ish, you know, next 12 months EBITDA. But, you know, whether that's the right multiple is dependent on basically how much their growth runway is out there, how much their growth runway is left. And that kind of ties back to what percent, what's the market share will be like, you know, in 2030.

Right. And then also the other important question is what more revenue stream they can launch in the interim years. What's the profitability that is that's going to be sustainable over the next few years? So, you know, when you tie those back, you know, I think if they accelerate market share, if they accelerate their penetration, the stock can, you know, can still do fine. But if we are looking at, you know, 30, 40 bps of market share gain, the stock is probably still, I would say, pretty rich. Right. That's a very hard question to answer, as anyone listening will know. I want to do a fun one here, though. This may be an impossible question to answer, but I think a lot of people are they really compare Stripe to add in whether that's fair or unfair. they focus on that a lot. What do you think would happen where Stripe has way more total payment volume in 2030? And what do you think could happen where we invert the situation and Adyen is much

larger in payment volume? Is there any sort of, because they seem to be growing in tandem, is there any sort of way where one do you see get separate from the other? I know you may not be as big of an expert on stripe as as add-in yeah uh so you were asking uh like which one will be larger or what like uh not what you think but like is there any with any advantages to add in or any advantages that stripe has that could propel them to be say i'm just throwing out a number here say stripe is doing four billion in total payment volume adding it's only doing two or inverted what could happen for for you know one to grow quicker than the other yeah i would be surprised if it's uh four trillion versus two trillion in 2030 uh for either direction right so i don't

think the differences will be that large uh my guess is so stripe is pretty big on uh like the startup ecosystem like you know they mentioned like uh they want to start with the first few line of codes to ipo uh and they want to uh be you know partnering with those companies right uh so they're pretty big on the startups uh uh new type of businesses like in subscription businesses like my you know i uh process my payments to strive uh and adian basically always has been about enterprise customers. So Nike, Adidas, Amazon, Uber, Spotify, it's all the world.

Adyen actually is not the primary PSP for Amazon, Chase Payment Takers. So I think, but Adyen is also trying to get into the marketplace model, right? So Adyen for marketplace is one of the ways they are trying to get into the small margin space in a kind of roundabout way, right? So they're not directly addressing small merchants out there,

but if you're processing marketplaces payments, they're indirectly also probably getting into those markets as well. My guess is they will start competing against each other much more closely, let's say in 2030. They still do, but I don't think Stripe is a strong competitor in the enterprise markets yet. But, you know, Stripe has 7,000 employees and Aydin has 2,000 employees, right?

So you can imagine, like, you know, the differences in resource. So, you know, but then again, you know, if private market becomes softer, which it probably is becoming. Stock will probably have to cool it down in terms of investing more. They probably will not raise fund anytime soon unless they want to do a down round, right? So I think my best guess would be it will be similar

and not like a significant difference between the two. But yeah, to your point, And it's funny in a way that people talk about Stripe, like, you know, just in a post on Twitter, which is going to, which private company is going to be a trillion dollar company in like 10 years, 20 years? I guarantee you, a lot of people will basically reply to your tweet saying Stripe. Well, what's the market cap of Adyen? Right? Adyen is a publicly traded company, has $50 billion of market cap. Better margins.

Right. Way better margins. Not even comparable, right? Just imagine you have 7,000 employees and 2,000 employees for Adyen and Stripe pays 50% more, generally speaking, compared to Adyen. You can do the math. It's not in the same universe even, right? So I think, yes, Stripe enjoys a massive narrative premium, incredibly massive narrative premium compared to Adyen, right? So, yeah, you know, a lot of people say that Adyen will probably have a tailwind if Stripe becomes public

and people realize that, hey, Adyen's numbers are just way better in terms of profitability. Even if the TPV is similar, even if Stripe's revenue is higher, potentially because their take rates are probably higher because they are in like, you know,

they're, you know, meeting the demands of like small merchants and subscription businesses, which have generally higher take rates compared to enterprise markets. But I don't know which way it will go. It can also be the other way around. People can just wake up and say, hey, Stripe is not that valuable. We have a company called Adyen here, and they process this amount.

They have their take rates, and they have these advantages and all that. And on the other hand, Stripe has way less margin and all. So, you know, people may just think Stripe is not as valuable as, you know, many people thought it was. So, yeah, it's hard to say exactly who will have more. I mean, Stripe right now has 10% more. So, I mean, the easy bet would be just to bet for Stripe in terms of processing more volumes. But to me, it's not super clear.

And Stripe is a private company, so we don't have a lot of information, you know, to compare on like a quarter-by-quarter basis or like, you know, year-by-year basis. Oh, by the way, so Stripe, as you know, probably Stripe processes payment for Shopify. right? And that's an extremely low take rate business. Add-in, as far as I have studied, they don't do any sort of like, you know, exceptionally low margin or take rate business,

right? So, you know, Add-in is kind of, you know, in a way they're very rigid, right? They say we have the best product. We have better authorization rates than anyone. We are not a cheap product. you know this is a premium product you got to pay for it right uh so we're not playing the tpv game like hey we play we uh process like you know trillion dollar of tpv right so even uh chase payment tech uh they process uh they're the primary psp for amazon and i can bet you amazon doesn't you know you know give them a higher take rates right so they don't generate a lot of pay rates from Amazon. So yeah, Adyen probably would not be interested in a customer like that. There's a lot of nuances. Yes, Stripe can process more TPV than Adyen does,

but then they may still be less profitable. I think that's a better question. In 2030, who will have higher profit? As a shareholder, we don't care about TPV. We care about profit, free cash flow. And I think it's probably not the riskiest bet to say Adyen will have better or higher profits than Stripe in 2025 or 2030. All right. I have one more question on this, Ryan. Do you have one more? No, go ahead. I think this is something investors may be thinking of if they know adian well and that is expanding into what i guess just call them emerging markets is there a blue ocean there because i know we have adian it's got europe

i don't know if it's correct me if i'm wrong like the leader there you know north america they're doing well too but what's stopping them from succeeding and say india southeast asia africa etc. Is that a blue ocean opportunity for Adyen? Blue ocean? I don't know about that. Checkout is pretty big in the Middle East, for example. There are companies, and like I said, Adyen is not going to do any M&A. They're not going to acquire a company in Nigeria, which Stripe did. I don't know whether it's in Nigeria, but it's an African payment company Stripe acquired. That's the thing. I feel like, yes, because of the rigid philosophy of no M&A, they may miss out on certain opportunities to process more payment volume.

Right. But at the same time, like, you know, I think investors or market in general are kind of getting past those sort of naive metrics. Right. So I don't I think we're past that market where we are talking about who is processing more payment volume, because that's probably not the relevant number. You can always do more TPV when you buy a company that's doing well in a particular geography, acquire them, and basically their TPV becomes your TPV. You just process more payments. But if it comes at the expense of higher authorization rates, then in the long run, you're probably behind. right so add-in may take more time to get into more markets uh to expand their geographical

footprint right uh they may even you know they are already behind stripe in terms of tpv but in the long run right if you uh maintain your high authorization rates even if you are slower into those markets those customers will probably become those those you know uh like you enterprise or those markets will eventually become your customers. You may become their eventual primary PSP because you maintain your high authorization rates. You have to play a very long game. I'm pretty sure it's not easy to stick to the philosophy of no M&A when everyone else is doing it. Everyone in the payment industry do M&A, except ADM. Do you have any more questions? Okay. I think, I imagine listeners love that. So

kind of, can you give a pitch for MBI, your research service? Maybe teach some upcoming companies? If you can, what do subscribers get and where can any listeners that want to keep up with you do that yeah i hate to break that to you but i don't think my subscribers will get much it's basically you know i do one deep dive every month and that's it like you know i i i don't provide much more than that i basically just pick a company do a deep dive uh on that company and write uh like a you know 20 30 page piece uh you know on that company and uh it can be i can be neutral i can be long i can i don't short stocks uh but i you know i can be uh like i don't you

know yes i can i i would say i i can be either neutral or uh like long right so uh and yeah and yes even if i'm long like i'm happy to talk about uh the risks i see or uh or the challenges i see uh but yeah it's a pretty simple you know service i guess you know i just uh pick one company do a deep dive and publish it. And anyone who's interested in something like this, this is not a stock picking service. This is a investment research service. And yeah, so that's how I do it.

It's not a very strong pitch as I see it. You're downplaying it. We are subscribers to the service and the write-ups are fantastic. The value definitely outperforms the price. I know that you have that framework for doing that for your own service. and that's how a lot of people look at uh portfolio companies as well so i can say as a as a customer

that is true you're on that you're on that path and what is what's the what's the twitter handle for anyone that wants to follow you there oh it's uh at borrowed uh underscore ideas so yeah borrowed ideas our full name is mostly borrowed ideas um yeah and uh i i really enjoyed and I was speaking with you guys. Thanks for inviting. I, like I said in the beginning, before you hit record, that I enjoy your podcast.

So I was very happy to be here. Yeah, thank you for joining us. We want to hit the disclosure before we go. Brett and I are not financial advisors, so anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners for Arch Capital, so clients may have positions

in the securities discussed in this podcast. Thank you all for listening. We'll see you next time. We'll see you next time.