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“Unprecedented” float of payment handler for Netflix, Facebook sparks echoes of Dot-com bubble

The meteoric debut of payments handler Adyen in its first day of trading has led many to compare it to the same frantic speculation that pervaded the tech sector in the late 1990s
Dot com bubble
There is a note of familiarity and caution in the air

The backend payment handler for tech giants such as Netflix (NASDAQ:NFLX), Facebook (NASDAQ:FB), and eBay (NASDAQ:EBAY) has conjured up memories of the infamous late 1990s ‘Dot-com bubble’ with an “unprecedented” float on Wednesday on Euronext.

Following a highly sought-after initial public offering (IPO), Dutch payments company Adyen saw its share price double within the first hour of trading to €480 from an issue price of €240, effectively lifting its market cap to around €14.2bn.

With its range of blue-chip customers, combined with a relatively small number of shares on offer and the recent strength in technology shares, institutional investors are eyeing up the previously obscure company as a potential indirect investment vehicle for its corporate clientele.

Spirit of the 'Dot-com bubble' lives on

However, there is a note of familiarity and caution in the air, as some analysts have echoed the debut as similar to those of various companies during the ‘Dot-com bubble’ of the late-1990s and early-2000s, in which speculation in technology and internet-based companies pushed stock prices ever higher before a crash facilitated by overspending by various telecoms and tech firms caused the tech-heavy Nasdaq to fall 25% in one week.

While the Adyen float may not be the prelude to a stock crash on the same level as the ‘Dot-com bubble’, there are indicators that the speculation may be running away with investors.
For example, the issue price was more than 70 times the company’s 2017 underlying earnings (EBITDA) of €99.4mln, with the company expecting growth in sales by around 25%-30% annually.

The other major risk factor to Adyen is its competition and its reliance on large clients. The payments market is fierce, with larger company’s trying to muscle in on the action (such as PayPal’s acquisition of smartphone payment terminal iZettle for US$2.2bn in May).

With its top 10 clients, which include Vodafone (LON:VOD), Uber, and Spotify (NYSE:SPOT), currently amounting for 33% of its revenue, even one or two big losses could quickly push down Adyen’s market cap.

While a drop in Adyen’s share price is unlikely to cause a big a panic as the bubble bursting in 2000, it is an interesting side-note on just how far investor speculation can drive a company’s shares, rightly or wrongly.

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November 08 2018

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