Small Fintech Firm with Big Potential

Founded just a year after the much more widely recognized PayPal, payment software company Shift4 (NYSE:FOUR) has been quietly humming along in the shadow of larger service providers for nearly 25 years.

Following a robustly positive Q3 report, however, Shift4 started to attract renewed investor attention. So, is it time to buy?

Shift4 is a payment processing company that provides customers with end-to-end payment solutions and a variety of business analytics tools.

While Shift4’s services extend to businesses of all sizes, its software is used by several major companies. Two of Shift4’s large customers, for example, are eBay and the Marriott hotel chain. The company focuses heavily on the hospitality, lodging and sporting events categories.

23% YoY Top Line Growth Wows Investors

Shift4 performed very well in Q3, reporting 23 percent year-over-year revenue growth to $675.4 million. Payment volume rose 36 percent, while gross profits increased 34 percent to $171.0 million.

Earnings per diluted share were $0.55, compared to $0.57 in the year-ago quarter. For the nine months ending on September 30th, however, EPS increased from $0.58 in 2022 to $1.22 in 2023.

Looking forward, Shift4 expects to deliver further strong performance in Q4. The company is increasingly eyeing the sports ticket market as a key growth driver, and multiple teams have formally joined Shift4’s customer base since the Q3 earnings release.

Late in October, the company also completed its acquisition of European payment processor Finaro. This, alongside continued momentum in the sports ticket category, could provide it with a stable foundation for long-term growth.

The Future Looks Bright

Shift4’s future earnings potential accounts for much of the stock’s attractiveness to investors. Over the coming five years, analysts predict that the company’s earnings will grow at a compounded rate of 45.8 percent. While lofty, this projection seems attainable in light of Shift4’s strong revenue growth and entry into the European market.

In Q4, management projects revenues to reach $766 million, a 42 percent increase over the year-ago quarter. Payment volume is expected to rise by 57 percent to a total of $33 billion, driven in large part by the increased volume Shift4 will see from Finaro. For the full year, the company’s adjusted free cash flow is expected to exceed $259 million.

Despite already being profitable, Shift4 operates on a fairly slim net margin of 4.2 percent. The company’s return on equity, however, is a rather impressive 26.4 percent. Given that Shift4 is still in a phase of fairly robust growth, there is still ample time for the company to improve its margins while scaling up revenues.

Total assets have also grown respectably from $2.55 billion to $2.65 billion. During this period, Shift4’s cash reserves has fallen marginally from $702.5 million to $692.3 million. In spite of this reduction, however, the company appears to have enough cash to sustain its operations without encumbrance for the foreseeable future.

Is Shift4 Stock Undervalued?

Shift4 stock is undervalued by 14.2% according to the consensus estimate of 20 analysts who have a $76 price target.

The range of estimates spans from $49 per share to $97 per share, and relative to near-term earnings growth the PE ratio is low, which is likely another reason for the overall bullish consensus. Its PEG ratio now is just 0.45, further confirming the Street view that the stock is on sale.

Other key metrics that favor Shift4 include, 23.1x forward earnings, 26.5x cash flow and 2.3x sales. 

Things To Think About

With dominant platforms PayPal and Stripe making up over 61 percent of the online payments market, Shift4 lacks a robust competitive moat but it has still managed to produce consistently rising earnings and net income is forecast to climb again next year.

With $776 million of cash and $1.7 billion in debt, the burden from interest payments is likely to create a headwind over time but it’s not an anchor dragging on the stock to any meaningful extent now.

Perhaps a larger concern is how choppy levered free cash flows have been, bouncing around the zero line until this past year when they came in well positive at $213 million.

Is Shift4 a Buy?

Shift4 has a great deal going for it, not least its high quality and very consistent earnings. Combine those with a low PE ratio relative to near-term earnings growth and you’ve got a combination that’s hard to ignore.

Tack on the bullish consensus among analysts about how high the stock can go plus a discounted cash flow forecast analysis that pegs fair value at $89 per share, suggesting as much as 33% upside, and you can find reasons to get excited.

It’s also notable that Shift4 is trading at levels it was at back in late 2020, so it’s not as if the valuation has grown to lofty levels in tandem with the improving fundamentals, quite the opposite.

Still, prospective buyers should be aware that FOUR share price has been highly volatile, eclipsing $100 per share in 2021 before crashing by almost 70% in 2022. Now with it up to the $60 plus price level again, optimism has creeped back into the market about the firm’s prospects, and with good reason.

Revenues are up massively from 2020, when $731 million in sales was reported. Last year they were $1.99 billion. And operating income turned positive for the first time in half a decade last year too, with management posting a figure of $108 million.

If you’re looking for a company that continues to grow impressively, yet somewhat quietly, Shift4 is well worth a close look. Just don’t buy it for income because it offers no dividends, and is unlikely to anytime in the near future.

This is solidly a bet on a payments enterprise growing quickly, posting consistent earnings, while remaining undervalued.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.