Adyen has put Block and the entire payments industry into trouble
The payments industry was one of the big winning themes of the pandemic and growth looked sure for decades to come inflating valuations to insane levels in late 2021. Since then, as a function of lower growth and higher interest rates, valuations have come down hard. Investors have gone from valuing Block at 5.6x enterprise value to sales in 2019 to 1.6x in 2023 reflecting lower expectations for growth but also operating margin as the industry has matured and technology advantages have converged among industry players. Adyen latest big miss on volume and operating margin was a big hit to the industry and has raised questions about whether payment companies outside American Express, Mastercard and Visa will ever be as profitable as the big three.
Block, formerly Square, generated revenue of $19.7bn in the last 12 months with EBITDA of $225mn (1.1% operating margin) and thus it is quite clear that investors want to see the operating margin expand. The industry narrative has changed to that of profitability instead of high revenue growth at all costs. Analysts remain bullish on Block with an upside of 55% to their price target.
Nvidia remains center of attention for analysts and investors
The AI hype and outrageous growth that Nvidia is experiencing have caught everyone’s attention in equity markets this year. 12-month forward revenue estimates are up 42% over the past three months which is something we have never observed before for a $1.1trn market value company. Not only is Nvidia growing fast it is also highly profitable (33% operating margin and expanding). Analysts are also maintaining their positive outlook with a price target 43% above the current price despite the strong performance already this year.
As we have noted in a recent equity note, the key risk for Nvidia shareholders is that the huge demand increase is driven a lot by the long tail of VC-backed AI startups that have gone all in on the gold rush. For Nvidia’s growth to continue over the coming year it is important that this gold rush into AI turns into commercial ideas that can be monetized on a grand scale. Adobe earnings Thursday after the US market close might give a clue of whether this is possible.
