2023-08-30 17:01:35 ET
Summary
- Shift4 Payments, Inc. presents an intriguing investment opportunity, notably due to its attractive valuation.
- While competing with global giants like Adyen, the company's main competitive risks center on price wars in the dynamic tech landscape.
- Strong revenue growth rates and impressive free cash flows make Shift4 Payments an appealing investment prospect in my view.
Investment Thesis
Shift4 Payments, Inc. ( FOUR ) is a payment processing and technology solution that primarily operates in the U.S. It's a cheaply valued stock with strong prospects, particularly now that its growth rates have stabilized.
In my previous bullish analysis , prior to its Q2 results, I stated,
[...] [Shift4 Payments] is still clearly growing at more than 30% CAGR.
I fully suspect that Shift4 could end up positively surprising investors as it approaches Q4 2023.
At the time, I pointed to the following table and made the argument that Shift4 Payments had what it took to positively impress investors.
With one more quarter of earnings results from whence to base my investment thesis, I remain bullish on FOUR. This payment solution provider has reasonably low expectations that it could end up delivering investors with strong results over the next 12 months.
What's Shift4 Payments? How It Compares With Others in the Space
Shift4 Payment is a prominent independent provider of software and payment processing solutions in the U.S. Their services cater to a wide range of businesses, from small local establishments to multinational enterprises.
The company's primary focus is to simplify commerce for businesses by offering integrated payment solutions, point-of-sale systems, and various technology tools. They aim to address the growing complexity of commerce, especially for businesses that use multiple software systems for various aspects of their operations. Shift4 Payments provides a unified platform that streamlines payment acceptance and offers versatile payment processing solutions.
In my previous analysis, readers wanted me to flesh out the competitive landscape. So here it goes.
Adyen N.V. ( ADYEY ) is a peer who has recently made many headlines. The negative kind . Adyen has more of a global presence. Adyen specializes in international payments and e-commerce, making it a preferred choice for businesses with a global customer base. While both companies provide payment processing services, they serve different market segments due to their geographic focus.
Closer to home, another competitor to Shift4 Payments is Block, Inc. ( SQ ). Block offers a range of payment processing and financial services, including POS systems, online payment processing, and mobile payment solutions. Like Shift4 Payments, Block serves businesses of various sizes and aims to simplify payment acceptance and business operations.
The competitive risks for Shift4 Payments are mainly about dealing with strong rivals, such as those mentioned above, and these competitors pricing more aggressively.
Then there are other peers, such as Toast ( TOST ), that are more specialized and targeted at restaurants, with more of a niche offering.
Moving on, price wars are a key risk for Shift4 Payments, as competitors might lower their prices to get more customers. This means Shift4 Payments has to keep its prices competitive while still seeking to make money.
Essentially, Shift4 Payments has to figure out a way to deliver end customers with value in a rapidly evolving technology backdrop. Shift4 Payments must effectively differentiate themselves and provide value to customers while figuring out how to remain competitive aside from relying on price cuts. In this market, reputation alone only goes so far. Customers demand value.
With this context in mind, let's discuss Shift4 Payment's recent results.
Revenue Growth Rates Remain Robust
In my previous analysis, prior to its Q2 results, I said,
Given the relatively easier comparables for the remainder of 2023, it appears possible that Shift4 could end up growing in the high 30s%.
Altogether, this means that there's a high likelihood that Shift4 could deliver mid-30s% growth rates in 2024. And if that were the case, together with a strong free cash flow profile, this would make paying about $5 billion for the company a compelling investment.
Since Shift4 Payments has succeeded in slightly increasing its full-year guidance. Therefore, I remain comforted that Shift4 Payments will continue growing into 2024 at approximately 30% CAGR.
Very Strong Free Cash Flows
The graphic above demonstrates Shift4's free cash flow guidance for 2023. Given that 2023 is by now for the most part in the rearview mirror, I believe that we should form a view on 2024.
I believe that if Shift4 Payments continues to deliver 30% CAGR on the topline next year, this should easily translate into 30% CAGR on the free cash flow line. Accordingly, I believe that $310 million of free cash flow is likely to be reported in 2024.
This leaves Shift4 priced at around 15x next year's free cash flow. A figure that I believe is more than reasonable, considering its attractive growth rates.
The Bottom Line
Shift4 Payments, Inc., a U.S.-centered payment processing and technology solutions provider, has caught my attention due to its intriguing valuation.
While it competes with global giants like Adyen and domestic challengers like Block, its competitive risks largely revolve around the potential for price wars in the constantly evolving tech landscape. To flourish, Shift4 Payments must excel in differentiation.
However, what truly piques my interest is Shift4 Payments, Inc.'s strong revenue growth rates and impressive free cash flows, which, when considered alongside its appealing valuation, create a compelling case for investment.
For further details see:
Shift4 Payments: A Bargain In The Transaction Aisle