Shift4 Payments: The CEO Is Buying, And So Am I (NYSE:FOUR) (2024)

Investment Thesis

Shift4 Payments (NYSE:FOUR) has been mired in volatility this year. After rumors of being sought to be bought by two giants such as Fiserv and Amadeus, and then the negotiations being canceled by its CEO, the share price has been affected.

With a -0.8% YTD return, the market seems uninterested in FOUR, however, the CEO has been buying heavily this past month (more than $10 million in shares) so I think something good awaits in the coming months. If we also do a valuation projecting a more than reasonable FCF growth of 18% annually, I conclude that the company is very undervalued for the quality of the business and its growth, and this investment could offer more than 20% annual return in the next 7 years in my view.

Business Model

The company offers services for payment processing, point of sale software and payment security. Generally, tools that help its customers with payment management while protecting sensitive customer data during the process. For example, one of its flagship products, SkyTab, allows payments with credit and debit cards, as well as Apple Pay and Google Pay. It also manages tips, inventories, analyzes sales and customers, resulting in software that makes its customers' lives easier.

Shift4 primarily targets the retail, hospitality and restaurant sector. Currently, it has clients ranging from hotels such as Tropical Shore in Florida, restaurant chains such as Pizza Hut, stadiums such as the American Airlines Center of the Dallas Mavericks, among other businesses. The expansion has been great, and in Europe, they have already won a partnership with Barcelona of Spain to be used in their Camp Nou stadium.

The company became profitable in 2022 and currently has an EBIT margin of 6%, although with potential room for expansion if we look at PayPal or Fiserv margins. The expansion of margins could come thanks to the fact that FOUR's fixed costs are significant, but once it has set up its payment processing network and reaches break-even, each increase in the volume of processed transactions would go directly to the profit margin.

Shift4 has grown its revenue by 50% annually since 2020 and for this year the expected growth is 40%, as we'll see later in the valuation section. Business is good and is reflected in the growth of the top line.

So, No Deal?

On February 28, FOUR shares rose 12% following news that Fiserv and Amadeus IT were looking to take over the company. Regardless of whether it was a good deal or not, the euphoria was about the sign that large corporations saw value in Shift4's services. However, just a few days later the founder and CEO put an end to the rumors and officially canceled any negotiations, commenting that the offers were too low. In my opinion, this is just the reaction I would expect from a founder who not only has skin in the game (he owns 3.7% of the shares, equivalent to $236 million) but also has "soul in the game" and will always seek the best for the company and its assets.

In the end everything remained rumors, no more information was given about target prices or negotiations and Mr. Isaacman commented the following in his letter to shareholders:

In short, our customers are the envy of the industry, we are not going to stop growing and it was going to take a big premium to walk away from Shift4.

CEO Jared Isaacman during Q1 2024 Shareholder Letter

The company later presented Q1 results on May 9 and since then, the CEO has been buying shares on the open market. Specifically, on May 14, he bought 85K shares, on May 23, another 39K shares and on June 6 he added almost 30K more shares. Without a doubt, it seems that something is brewing and that Q2 could be very good, either due to the results presented or due to some positive change in guidance. It cannot be a coincidence that in just one month, the founder has increased his stake in the company by 4% (equivalent to $10 million) at an average price of $67 USD per share.

Valuation

Current management guidance projects growth of approximately 40% in FY2024 for gross revenue. I'll consider this to project the Free Cash Flow 7 years from now.

Assuming this 40% growth in FY2024 and then reducing it to 15% annually —something not unreasonable considering that last year the FCF grew 39% and in the last 5 years the revenue has grown 36%— the company would reach almost $1 billion of Free Cash Flow generated in 2030.

I think a multiple of 20 times EV/FCF wouldn't be aggressive, since Fiserv itself (which wanted to acquire FOUR) usually trades in this range. If this were the case, I would expect an upside of almost 300% by 2030, equivalent to a compound annual return of 21%. This would represent a price per share around $150 by 2028, so I feel more than comfortable buying currently in a range of $70 and $80 per share.

Whether there's going to be positive news or not, I completely understand why the CEO would be buying so much.

Risks

A major risk is competition. Shift4 competes in the aggressive payment processing market and although it has sought to focus on the hospitality and restaurant niche, competitors can be Square, PayPal, Stripe, Adyen, Lightspeed Commerce, Worldpay, among many others. Such aggressive competition increases the danger of losing important customers and therefore reducing payment processing volume and revenue.

Another risk that we were able to notice recently is that of a take over. If a company like Fiserv or PayPal (which has almost $10 billion of cash on its balance sheet) decided to buy Shift4, even at a premium in valuation, I think we would still miss out on an extraordinary investment for the next 5 or more years. Unless a premium of 100% or 150% is paid, which I don't see as feasible, my feeling would be that we missed out on a good investment.

The Bottom Line

I understand why everyone wants to buy Shift4, both other large companies and the CEO himself. The business is good, finding a space in the niche of places for entertainment and leisure mainly, and the growth is exciting with the announced arrival to Europe. This will be one of the main catalysts to make our projection of 15% annual growth rate possible. Hotels, stadiums and restaurants are all over the world and managing payments is a key and quite complicated task to carry out when you have to use many different software providers to enable online reservations, check-ins, tips, parking, among many other tasks, so FOUR has a fairly scalable business worldwide, solves the problem of unifying processes on a single platform, and its current market penetration is low.

This, added to a good valuation, makes me consider it a great investment option. Perhaps one of the most exciting ones I have found this year. I really hope that there's no take over in the near future, because if the current pace continues, I believe the company could bring some joy to its shareholders.

My name is María Fernanda and I am currently studying an MBA. My inspiration investors are Warren Buffett, Peter Lynch and Terry Smith, so I look for quality companies at a reasonable valuation. I believe that, in the long term, fundamentals are what drive the share price, so I look to predict what a business's earnings per share will do. My favorite investment approach is quality-growth, but always looking for valuations that can provide a ~15% return in the next five years with conservative assumptions to have a margin of safety. From my point of view, a quality company must present sustained top line growth, but a profitable bottom line as well. Also a healthy balance sheet, generation of free cash flow, a high ROCE and an attractive potential market are necessary.I'm interested in sharing my research with the Seeking Alpha community to obtain relevant feedback to help me improve my analysis process, as well as being able to read other analysts as well and thus obtain more investment ideas.