FOUR - Shift4 Payments Looks Strong Despite Blue Orca Short Report

2023-08-21 05:26:44 ET

Summary

• Blue Orca Capital released a short report on Shift4; however, the market maintained faith in the company.
• Shift4 released strong Q1 and Q2 2023 results, beating expectations, and increasing FY 2023 guidance twice.
• The company's profitable growth story seems to remain intact.
• The market correction makes Shift4's valuation attractive again, while the company increases the top and bottom lines.

Thesis

The short-activist investment firm Blue Orca Capital released a short report about Shift4 Payments ( FOUR ) last April. Despite short-term turbulence regarding the share price, the market didn't seem to lose faith in Shift4 and the share price recovered. The CEO Jared Isaacman issued a response addressing Blue Orca's allegations. A promising Q1 2023 ER followed by another strong Q2 2023 report showed that the company stayed on track, also beating expectations. Thus, the main points stated in my previous article remain intact and investors can benefit from the market correction and buy Shift4 shares at the current or lower levels.

The report

A short report is not something that a public company wishes for. It brings negative attention and speculation. However, there are times when such reports can prove helpful for investors in terms of transparency.

On 04/19/2023, Blue Orca Capital released its short report expressing several allegations about Shift4 and the CEO Jared Isaacman personally. On 04/20/2023, Jared Isaacman issued a confident response to the report addressing some of the issues included, also stating that the Q1 2023 ER was just around the corner, probably meaning that a strong ER should be expected. Stephens analysts also didn't see a threat coming from the short report and upgraded Shift4 shares to Overweight .

Q1 2023 ER

On 05/04/2023, Shift4 presented a strong set of results , also beating consensus. In addition, the company positively revised its FY 2023 guidance. That helped weather the not-so-heavy storm that broke out after the Blue Orca short report.

Both top and bottom lines presented significant growth on a year-over-year basis. The company was net-profitable, while continued pursuing growth.

FY 2023 guidance was positively revised and the company was expected to exit 2023 with a significant increase in revenue, EBITDA, net income, and FCF.

Q2 2023 ER

On 08/03/2023, Shift4 announced another strong set of results for Q2 2023, also beating consensus and raising FY 2023 guidance again. The CEO, Jared Isaacman, appeared pleased about the progress made so far and optimistic about the business outlook in the shareholder letter and during the earnings call .

Shift4 continued marching on the profitable growth path and increased top and bottom lines for Q2 2023 on a year-over-year basis. Margins and FCF are also increased. These trends are expected to continue for the rest of 2023 and into 2024 while the company is expected to grow, organically, geographically, and through M&A.

The company landed thousands of new customers and progressed in its old and new verticals. Finaro acquisition is now expected to be finalized in Q3 2023. In the increased FY 2023 guidance a part of the increase comes from an expected contribution from Finaro in Q4 2023. Further integration, optimization of processes, and the use of AI are expected to contribute to FCF and margins increase. Finally, the company repurchased ~1.5M shares during Q2.

Conclusion

To wrap it up, while deleveraging and controlling expenses are also important matters and should be in management's mind, the most important thing for the company at this stage is to sustain profitable growth. The company seems to have these matters under control and presents improvements while continues growing profitably and beating expectations in an uncertain environment. Thus, although the Blue Orca short report raises some reasonable questions, I think that it fails to prioritize the importance of other issues and I am not persuaded about a major problem regarding Shift4's growth and its financials. However, the report might have contributed to holding the share price back for some time. Despite the H1 2023 stock-market rally and the strong earnings reports the stock didn't reach a new 2023 high. On the other hand, the recent market correction makes the valuation more attractive at current or lower levels, taking into consideration that the company keeps firing on all cylinders, presenting strong results quarter after quarter. As previously stated , the stock should be expected at all-time highs in 2024, unless something broader or unexpected occurs. Investors should still seek momentum to build up their positions and exploit any weakness in the share price. Lastly, considering being a buyer at ~$40 I would examine taking some chips off the table when the share price exceeds $80 without changing my long-term bullish perspective.

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