Pie by the Slice Redux
Parking the Bus
Last week, I went to get coffee. I whipped out my phone to pay for parking through the City of Pasadena's app. My payment didn't go through. No worries, parking wasn't metered until 11 AM. It was only 10:45. I tried again a few minutes later. No luck. Then again closer to 11. I hammered the app until 11:05 when my payment finally cashed.
Too late. Pasadena parking enforcement already issued me a ticket. Instead of $1 for parking, the shady street spot set me back $59 plus my $1 payment through the app.
Failed payments are still pretty common problem. 15% of digital (aka "card not present") payments fail. For old-fashioned transaction where you use a physical card and a machine, payments fail just 4% of the time. That drops to zero if you're using cash.
Small, Medium or Large?
Lamplighter previously discussed how Adyen, a payments service provider, helps its customers reduce their overall cost of payments, even when Adyen itself is not the cheapest payments company out there. It reduces the size of the overall cost pie and shares this value with its customers. That's part of the secret sauce that's helped it grow.
You might recall, though, the problem that Lamplighter offered Adyen as a solution was a need was for more — more pizza in our example, not less. People want a bigger pie.
So, can Adyen also make the pie bigger?
Pizza vs Pixels
Most merchants can't force you to pay, like Pasadena can for parking. If you try to pay for something and it doesn't go through, you're annoyed. Maybe you abandon that purchase. If you're ordering a pizza and payment stalls on the app, there are tons of alternatives. The pizza shop loses that sale.
The gap between 85% success in digital transactions versus 96% for in-person ones is a problem for merchants but an opportunity for Adyen. Adyen hangs its hat on reducing failure — authentication friction and improving approval rates — as part of the value it delivers to customers.
Dominos may not craft the finest pizza, but it can't be beat for convenience and consistency. Domino's IPOed about a month before Google in 2004. It turns out that both were digital bets. Domino's online pizza tracker and seamless digital offering caught fire and ignited torrid growth. As Domino's leaned into its digital dominance for pizza, it turned to Adyen for payments.
The napkin math behind this is pretty compelling. Say Adyen improves digital authorizations by just one percent — so Dominos completes 86% of card-not-present transactions instead of 85%. For Domino's, that would mean a return on their Adyen investment of 50x, even if Adyen failed to deliver any additional cost savings from other parts of the pie.
Back to the Future
Adyen likes to point out that "payments are not a solved problem." There's plenty of room to take cost out of the process. There's also room to help merchants improve sales. Merchants using Adyen complete more seamless transactions. They make more money than they would have using other solutions. Their pie is bigger.
But, what does this mean for Adyen, the stock?
Adyen has a small share of the market today, around 2%. If it keeps up its ability to improve customers’ topline performance, its share should grow. Adyen has already show its ability to turn its own topline results into cash flow for stockholders. The combination of expanding value for customers and cash flow for shareholders aren’t reflected in today’s stock price. As Adyen’s performance continues to cook, shares are poised to rise like well-proofed dough.
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.