By Liam Proud and Karen Kwok
LONDON (Reuters Breakingviews) - Europeans often bemoan the lack of home-grown technology groups. Germany’s Wirecard and Netherlands-based Adyen, whose combined value has soared to 43 billion euros, are notable exceptions. They can justify the hype. Wirecard passed a symbolic milestone on Wednesday when the company replaced Commerzbank in Germany’s blue-chip DAX index. The 23 billion euro group is worth more than Deutsche Bank, and trades at 40 times forward EBITDA – roughly double the valuation of Visa, Mastercard and others who process electronic payments. Adyen, whose shares are up 174 percent since its June listing, is valued at an even headier 118 times 2018 EBITDA. Strip out the jargon, and these are relatively simple businesses. Adyen hooks companies like Netflix and Spotify up to networks run by Visa and Mastercard. It charges a small fee for taking on the risk that transactions fail. Wirecard does the same, although for smaller businesses, and sells services like payment cards. Customers like the pair’s low transaction costs and slick technology, which drops relatively few payments and allows merchants to see useful shopper data. Last year, global electronic payments hit $23 trillion according to the Nilson Report. The data provider reckons the market will grow 10 percent a year, implying volumes of $40 trillion by 2023. Based on Adyen and Wirecard’s average charge of 0.5 percent last year, using Berenberg estimates, that implies about $200 billion of revenue may be up for grabs for intermediaries in this part of the payments chain. Assume Adyen’s net revenue increases by 30 percent a year, near the middle of its targeted range, while Wirecard’s top line expands by 20 percent annually. Together the two would have net sales of $4.4 billion by 2023. That would be equivalent to a 2 percent share of the market. They’re currently at 1 percent, using last year’s results and the same fee structure. Increased scale should boost already-high margins. Risks are plentiful. Competition may force down fees, while tech giants could cut out middlemen altogether: in China, Alibaba and Tencent connect buyers and sellers directly without the need for payment processors. Still, Adyen and Wirecard’s technology took years to develop. Western tech giants are just getting started on their payment networks. That gives the European pair a greater chance of fulfilling their growth expectations – and rewarding giddy investors’ prepayment.
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