Dutch Mania Whips Us Back to the Dotcom Bubble
(Bloomberg Opinion) -- Payment-processing companies are surfing a wave of cash. Not just the relentless credit card swipes from regular folk, but also the enthusiasm of investors who reckon they're onto the next big thing.
The initial public offering of sector darling Adyen BV suggests that the understandable interest in good, profitable companies has morphed into a fervor bordering on dotcom mania. It’s a little unhealthy.
On the morning of Adyen's first day of trading in Amsterdam, the stock popped 100 percent – doubling to 480 euros ($564). While usually that would be a screaming signal that the IPO bankers had seriously undervalued their client, in this case you could hardly argue that Adyen's initial price was cheap. At 240 euros per share, it was already valued at about 100 times last year’s earnings. Now that multiple is closer to 190. It's a nosebleed valuation worthy of Netflix Inc.
Obviously, the word “bubble” shouldn’t be thrown around recklessly. Unlike the internet startups being that were pumped up beyond all reason by bankers in the late 1990s, Adyen isn't an untested business sketched on a napkin and sold to retail investors before breaking even. Quite the opposite. It's a fast-growing, high-margin company with an easily understood business model. Its payments platform for the web world is taking market share. These are solid foundations.
The first-day mania is being exacerbated by technical factors too. Only a small slice of the company was up for sale: about 14 percent. The crush of investors trying to get exposure has jacked up the price. It’s more a squeeze than a pop. One assumes the owners knew that something like this might happen – but not to such an extreme degree. The sliver of stock being sold suggests most wisely chose to hold on rather than cash out.
But even taking all of this into account, it seems unlikely that institutions buying into Adyen at a market value of 13.7 billion euros ($16.1 billion) – bigger than Germany's Commerzbank – are going on cold analysis alone. Yes, net revenue is expected to increase by at least 40 percent this year. But it also warned in its prospectus of a “very intense” competitive environment, and that expansion may squeeze margins.
Maybe after a whirlwind round of mergers in the payments industry, there might not be many Adyens left for public consumption. If you think more consolidation is inevitable, and that the new breed of web-focused specialists are going to erode the lead of the incumbents, then the Adyen story makes sense.
But pricing the company at double where its bankers think it should be assumes this is the kind of story where nothing goes wrong. Adyen's underlying Ebitda was about 99 million euros in 2017, and this morning’s valuation effectively prices in five to seven years of underlying earnings growth at 25 to 30 percent.
These kinds of fairytales don’t always end well.
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