I have been a longtime lurker of the board (I think I stumbled upon it in the fall of 2019) and I can’t thank Saul and all of the contributors here enough for the insight and education I have gained over the past few years. I figured it’s high time I started contributing as a way of saying thank you for everything!
Shift4 is a payment processing business founded and run by Jared Isaacman. Shift4 has traditionally focused on payment gateway solutions for restaurants and hotels, but through smart acquisitions and organic growth, they have expanded their offering into a full end-to-end payment processing solution. Jared credits a large share of their current revenue growth (26%, 36%, 35%, 45% the last 4 quarters, respectively) to their operation called Gateway Sunset. This operation converts older payment gateway customers to their end-to-end payment solution and results in higher take-rates and higher margins. Jared has mentioned that Gateway Sunset will take many quarters, if not years, to complete so expect to see continued growth from existing customers!
Shift4 is unique to other payment processing solutions in that it focuses on complex businesses that have multiple touch points with the customer and require many software integrations. Shift4’s POS solutions are unique in that they integrate with over 450 software providers. Below is a list of their current verticals:
- Food and Beverage
a. As of 2022, Shift4 serviced 125,000 US restaurants, or around 15.5% of the US market-share.
b. Shift4’s new end-to-end POS solution, SkyTab, was launched last year and has 0 upfront costs compared to their competitor Toast that requires upfront costs of $11,589. Over 5 years, SkyTab is estimated to be less than a third of the cost of Toast. All the while Shift4 is a significantly more profitable business than Toast!
- Hospitality and Travel
a. As of 2022, Shift4 serviced over 21,000 hotels which comes out to around 40% of the US market. However, it only has a 10% penetration rate for its end-to-end solution. The majority of their hotel customers are currently just payment gateway customers.
- Sports and Entertainment
a. Shift4 is dominating the stadium and arena space since their acquisition of Venuenext. I believe they are the only business that offers a fully comprehensive payment processing solution for sports and music stadiums without the need for several vendors. Take a look at their recently quarterly reports for how quickly this vertical is expanding.
- Retail and E-commerce
a. Shift4 purchased 3D cart in 2020 and rebranded it to Shift4Shop. This is a small segment that I don’t follow much.
- Sexy Tech – (Their words not mine!)
a. Shift4 is the payment processor for Starlink.
a. Shift4 is now integrated with Ticketmaster, Seat Geek, and Paciolan. Jared has mentioned before that tickets are the ‘Holy Grail’ for their Sports and Entertainment vertical in the long term.
- Casinos and Gambling
a. Shift4 is making headwind with casinos as another complex business requiring multiple software solutions for their customers.
a. Acquisition of The Giving Block, partnership with St. Jude.
Shift4 has, in my opinion, been a smart capital allocator in acquiring businesses that allow them to immediately enter a new vertical or to capture new customers in an existing vertical. One of their more recent acquisitions is Finaro, which will give Shift4 the ability to sell their solutions internationally. This should be a smooth transition for them as Europe is much more fragmented than the USA in terms of payment solutions. Many of Shift4’s existing customers in the USA are international businesses, so that should be an easier sell too.
I find Jared Isaacman to be a very inspiring and impressive leader. Some of you might know him from his Inspiration4 netflix show that documented his Shift4 sponsored flight into space utilizing SpaceX’s Falcon9. This launch raised more than $250 million for St Jude and created 2 new valuable partners/customers for Shift4: SpaceX and St Jude. If you wish to gain insight into Jared’s leadership qualities I highly recommend watching the Netflix show Inspiration4. The relationships created from this mission will probably pay for the mission itself several times over.
You might be wondering why businesses like Stripe or Adyen wouldn’t roll over Shift4 so I thought I would include some info from Jared’s perspective on the differences between them and Shift4. While Stripe and Adyen are both impressive payment processing businesses, they prioritized their growth in the card-not-present world. Shift4 has come at the payment processing problem the harder way. Take this quote from Jared on their Q2 22 earnings call: “We look at our path as we start from an incredibly powerful card present payment platform here in the US. That is very hard to do. Nobody created a global commerce platform from a strength of card present. Period. It’s just – it’s so much harder. I mean you can take all of the card brands all across the world in a card-not-present arena without having to navigate the pain points of local debit networks through various EMV and PCI and other encryption certification challenges that exist like sometimes by country. You don’t have to worry about any of those things in the card present world – in card-not-present. So building out like an Adyen or Stripe platform globally from a card-not-present and APM Focus world is easier. Now we are way behind on when it comes to international rails relative to those two companies. But we do have the strength of our card present platform, we do have 450 plus integrations that have given us a unique right to win and grow in the US, that will be applicable anywhere in the world.” – Jared Isaacman
- Gateway Sunset
- Expansion in USA through existing verticals
- International expansion after closing of Finaro acquisition
Profitability over growth at all costs:
- Shift4 is run much more efficiently than Block or Toast and has much stronger GAAP operating margins to show for it.
a. Shift4: 5.61% TTM
b. Block: (1.92%) TTM
c. Toast: (10.31%) TTM
- Adyen has strong profitability metrics but may struggle to maintain its margins in its next growth frontier in the more competitive US.
- Jared highlighted in Q2 23 earnings letter that growth in profitability should continue to exceed revenue growth:
a. “We continue to remain very disciplined with expenses as we fight to maintain flat headcount, upgrade talent and implement automation, AI and other tools to improve the efficiency of the business. We also are just naturally becoming more efficient as we further streamline and monetize our gateway offering, sunset legacy POS brands and generally keep moving up market to higher volume/lower overhead customers. As a result, we delivered $36.8 million of net income and $110.0 million of Adjusted EBITDA for the quarter, while continuing to expand margins and deliver robust free cash flow. We expect the margin and free cash flow profile of the business to continue to expand especially in 2024 as we further rollout our Project Phoenix AI & internal system initiatives.” – Jared Isaacman, Q2 23 Letter to Investors
- Shift4 is trading around 7x 2024 EV/EBITDA compared to 18 for Adyen and 7.5 for Paypal which had revenue growth last quarter of 7% compared to Shift4 at 26%.
- I believe a fair price today for Shift4 should be somewhere around Adyen on an EBITDA multiple.
Shift4’s stock price has been hit with the rest of fintech in the past few months. I believe that based off of strong fundamentals Shift4 has been unfairly punished and the current valuation combined with Jared Isaacman, smart acquisitions, and growth potential presents an interesting investment opportunity.
- If the consumer weakens and we have a recession, this could create an even lower entry point for investors than where Shift4 is today.
- Shift4’s balance sheet could be stronger with Goodwill and other intangibles making up 52% of total assets.
- Blue Orca short report raised questions to the integrity of leadership, their acquisition of 3rd party sellers/distributors, and their accounting practices.
a. Blue Orca Capital