Company Introduction - Shift 4

[JFlow]

Hi Everyone,

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:

1. 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!
2. 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.
3. 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.
4. 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.
5. Sexy Tech – (Their words not mine!)
   a. Shift4 is the payment processor for Starlink.
6. Ticketing
   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.
7. Casinos and Gambling
   a. Shift4 is making headwind with casinos as another complex business requiring multiple software solutions for their customers.
8. Non-Profit
   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

Growth Catalysts:

1. Gateway Sunset
2. Expansion in USA through existing verticals
3. International expansion after closing of Finaro acquisition

Profitability over growth at all costs:

1. 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
2. Adyen has strong profitability metrics but may struggle to maintain its margins in its next growth frontier in the more competitive US.
3. 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

Valuation:

1. 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%.
2. 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.

Risks:

1. If the consumer weakens and we have a recession, this could create an even lower entry point for investors than where Shift4 is today.
2. Shift4’s balance sheet could be stronger with Goodwill and other intangibles making up 52% of total assets.
3. 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

[MFChips]

Excellent writeup. A stock I’ve owned and given up on a few times only because the street doesn’t ever seem to look at this the same. For paid subscribers, Bert has written extensively on Shift4.

I personally believe that the street believes that spending at restaurants, hotels and stadiums is likely to moderate for some time, based on US economy concerns. Why it’s valued so much less than peers however has long been a mystery.

[addedupon]

@JFlow

Growth Catalysts:

1. Gateway Sunset
2. Expansion in USA through existing verticals
3. International expansion after closing of Finaro acquisition

FOUR is also grabbing market share in all verticals. Isaacman’s Inspiration4 project has also been good for Shift4, gaining all of Starlink’s operations globally which has served as leverage for the company to expand internationally. They also picked up St Jude’s as part of that project, opening up the non profit sector to Shift4.

Unlike nearly every other hypergrowth stock on the market, Shift4 growth rate continues to increase. FOUR has been constantly my number one holding for two years, having first picked up share shortly after Bert introduced the company 3 years ago.

I have never had higher conviction in a stock longer term. Primary risk I see is the possibility of the stock being taken private at $70-$80 per share. I would feel ripped off.

I remain underwater in FOUR. My other top holdings are SMCI which I was lucky to enter early and have trimmed, TSLA, which I’m always worried about but the captain keeps me hanging in there, and Adyen (ADYEY) after it crashed, I acquired at an average cost of $8. Adyen is the extraordinary global model to which all payments companies aspire to emulate.

Adyen is the best payments company in the world while FOUR is the best payments stock, with ambition to be like Adyen in many ways (per Isaacman). I know, I know, I don’t have a hot relationship with diversification. But I know what great leaders look like.

FYI, as Isaacman has stated publicly many times, SQ and FOUR do zero competition with each other.

While Shift4 has consistently outperformed and never once disappointed, the stock has dropped with the growth sector and remains by far the cheapest by any measure that I can see. However, what is not known is that the FOUR stock has held up far better than any other stock in the sector since the highs late in 2021. Yet, due to its superior growth and profitability, the stock is a better value than ever.

This stock is destined to go much, much higher. Can’t tell you when.

[MAS4R]

Excellent write up, thanks. I have owned it since January–it has been one of the businesses that have kept doing great in 2023 but also that have failed to see the stock price keep up with the company.

Unfortunately, it loses valuation with every rumor yet strong quarterly performance fails to result in a sustained bump after calls.

One thing I especially like about the CEO is that he is a survivor of both 2000-2002 and the GFC. Given the current state of heightened uncertainty, that counts for a lot in my book.

[Iamnzane]

I backed into buying FOUR as one of my top 5 holdings after watching Inspiration4 spaceflight movie on Netflix. Jared Isaacman, the CEO, simply inspired me as a good leader and the St Jude astronaut selection girl (forgot her name) won me over. BTW I am a space junky spectator and did 5 years on GPS operations in a former life. The Shift4 strategy looked solid after I researched it. I first purchased FOUR after the heavy 2022 HiTec stock market selloff at a good price and incrementally increased my position in several different accounts at a now not so good price. We had macro forces driving the FinTech stocks down in Q3 and FOUR is caught in the downdraft. Remember FOUR is transaction driven and economically sensitive. The Gateway integrations are the moat and the execution juice of targeted marketing is the fuel. Selling to a large customer is selling rocket science. I expect continued customer growth per the strong value proposition. Running these large venues and hotels is like running a city. The many financial services get really complicated to coordinate and optimize (tickets, parking, team sports stores, performer clothing stores, food vendors, food ordering/pickup, POS credit card processing, accounting, etc. etc.). This is what FOUR offers as one stop shopping with a later optimization for the customer and greater profits for FOUR. But the headwinds are strong. I do not expect to see any falloff of interest rates in 2024 and the economy will be sluggish. Wednesday is the Q3 ER so I am holding my breath and hope the macro slugs can be overcome. JFLOW did a great introduction write up and glad he did. I held back from bringing to Saul’s board as I have macro fears. I firmly believe FOUR is a long term winner. But when will that be is very hard to predict?

-zane

[MAS4R]

Thanks for this!
I sold 1/3 fortuitously in early August before the big fall from mid-60s. Although we should exclude nominal revenues from the P/S calculation, it is still atrociously cheap. So either the market “senses” something or it is just a dislocation from which we should benefit at some future point.

The most anticipate recession ever may or may not happen. The Sahm recession indicator, designed when Sahm worked for the Fed is the only one I care about. And if it shoots up again after the next employment report, it will technically signal incoming recession.

I am focusing on ad-tech for 2024 and so far that’s proven a good bet already; let’s hope TTD does not spoil the party:)

If FOUR cannot recover after this coming report, I have to see if it could become a year-end tax casualty and perhaps I might temporarily exit altogether. Last year end was absolutely brutal.

[Iamnzane]

Why did Shift4 Payments stock go up today? Q3 earnings beat, strong guidance. Stock jumped 13.9% on Wednesday after the provider of software and payment processing solutions posted better-than-expected Q3 earnings and boosted its outlook for adjusted EBITDA.

The company now sees of $456M-$464M, up from the prior view of $435M-$460M.

-zane

[buynholdisdead]

@Iamnzane

Why did Shift4 Payments stock go up today?

Because they are studying strategic alternatives, IE they are looking for someone to buy them out.

Andy

[JFlow]

I think Shift4 had a good quarter and great guidance. While revenues less fees were only up 24% YoY, Gross Profit was up 34% YoY. FCF was up 68.5% YoY to $75.5M.

They highlighted the Appetize acquisition, purchased at $100M and are expecting $15M in Adjusted EBITDA next year from this acquisition which highlights their smart, responsible allocation strategy.

This Finaro acquisition closed and Shift4’s goal for 2024 is to add over 10,000 restaurants and hotels in Europe and Canada.

Q4 Guidance: Gross revenue less network fees up 37-45%! Adjusted EBITDA up 40-49%. Page 15 of their investor letter shows organic vs acquisition contributions on these 2 metrics.

I wanted to grab a few quotes from the call but I got a bit carried away…I apologize if its too much!

Here are quotes related to their acquisition strategy. I know some on the board after the let-down of Lightspeed Commerce might be hesitant about Shift4’s strategy, but I believe Shift4 has much better leadership and has a history of a smart M&A strategy that has and will continue to be successful. I decided after Lightspeed Commerce to mostly avoid researching companies that do heavy M&A, but Shift4 has done such a good job with this historically that I was convinced to give them a chance:

“On that note, we are often asked how are we able to sustain growth rates well in excess of industry averages. It’s our successful capital allocation strategy alongside bold execution. Keep in mind, this is now always an M&A story……examples of organic investments include building our flagship POS product, SkyTab or back in 2021 when asset prices were out of control, we elected to invest organically in new verticals that are now driving substantial growth…This is part of our IPO promise to try and always be where the puck is going. We are also quite good at M&A. And I understand there is some rightful skepticism about M&A. I don’t think many of our peers have executed as well as we have, and now there is a general distaste for acquisitions. That is a mistake.”

“We’re very good at identifying differentiated technology assets where we believe we have a unique ability to unlock an embedded payments opportunity. We can then confidently underwrite those cross-sell synergies and ensure there is a path to leverage those assets to accelerate net new wins and be deleveraging inside of 24 months.”

“If you do your diligence, you won’t find a banker that has Shift4 on top of the bid list. We have our own proprietary pipeline, our own processes and oftentimes bankers are just as surprised by our announcements as the Street.”

“We are very excited about the prospect to pursue the significant embedded payments opportunity as we migrate 600-plus Appetize customers over to our VenueNext platform.”

“And as Taylor will go into shortly, we are taking Appetize which is a business that is hemorrhaging cash since its inception, has overlooked payments and adjacent opportunities like ticketing, and we will turn it EBITDA positive by the end of this year. And in fact, we expect to exit 2024 with $15M of run rate EBITDA on a $100M purchase price with a lot of room to grow from there.” - Jared Isaacman

Quote on their land and expand strategy:

“Land and expand involves capturing the existing embedded payments opportunity that already exists in our installed base of merchants, such as converting a gate-way only merchant to end-to-end or capturing, say, the ticketing opportunity associated with one of our sport and entertainment clients. You can think of this as ARPU expansion as every merchant is using our software or our unique software integration.” This strategy represents 50% of their production each month and the other 50% are new customers.

A quote on their competitive victories in restaurants in the quarter:

“As a reminder, for a restaurant processing $1.5M of annualized volume, our SkyTab POS solution is less than 1/3 of the cost of our primary competitor, including zero upfront costs. Restaurant operators are extremely focused on cost, especially in this environment and we’re also seeing benefit from our recent promotions that took advantage of the actions taken by one of our competitors over the summer months to push through an online ordering fee that caused a great deal of consternation among their restaurant clients.”

A quote on growth in the face of macro headwinds:

“Unlike many others in the industry, we have known projects and customers that will deliver volume and allow for growth in the face of any economic headwinds. Some examples of this are the numerous football stadiums, the MSG sphere, Fountain Blue, In-town Suites and others that began processing during Q4.”

They highlighted that Finaro was purchased for $575M, but they are already expecting over $45M in Adjusted EBITDA from Finaro for 2024.

These last 2 quotes are from the relatively new CFO, Nancy Disman, to highlight the competence of the C-suite, but also to highlight the wise decisions the management team made during COVID that they are now reaping the benefits from:

“We remain highly committed to a disciplined approach to cost management while continuing to balance investments to support our growth. Many opportunities are still on the horizon as we harness the productivity of AI tools, implement new internal systems and continue to take out the parts across the business to further enhance scalability. We are monitoring Fed updates on the potential reduction of debit interchange, which would also be positive to our business and our overall margin profile.” – Nancy Disman CFO

“As a reminder, we raised capital when the market supported us to do so attractively. Our weighted average cost of debt is currently 1.35% and we do not have any maturities until December 2025.” – Nancy Disman, CFO

How many of the companies that we follow were prescient enough to reduce M&A at the high valuations, but also to lock in low cost of debt??

I apologize again if I added too many quotes into here, but I honestly thought each quote provided viable information! BuynHoldisDead, Jared has been publicly speaking about potentially looking for a private buyout for several weeks now. I don’t think the market generally chases up a private buyout rumor after its been out there for several weeks anyway. You might be right and some of the price fluctuations today were from the potential buyout, but surely most has to be from strong fundamentals and strong guidance??

Thanks in advance for any input.

[addedupon]

@buynholdisdead

Because they are studying strategic alternatives, IE they are looking for someone to buy them out.

The strategic alternatives statement is “very old news,” as Jared Isaacman said to Morgan Brennan on CNBC Overtime today. He has been talking about this for months, starting when the stock was selling for $59. Thereafter, the stock sunk further down to $43 a week ago.

More likely today’s pop is because Isaacman delivered good results with excellent guidance augmented by one of the most inspiring conference calls you will ever hear. We’ll see if there is follow through.

Compared to Toast (TOST), Shift4’s US rival in restaurants, the market seems to finally begin to notice that FOUR should be selling at a much higher valuation. TOST is a pure play US restaurants business while FOUR is #2 in that sector plus #1 in hotels, sports franchises, arenas, non profits, and now is entering international markets. FOUR is grabbing market share, expanding verticals and markets and converting low margin Gateway only customers to it’s Adyen like high margin end to end processing service. FOUR has been profitable all along.

The market is finally starting to make sense in this sector. Jim Cramer is wrong when he says this is a bad commodity type business. Good service and better software are not commodities. FOUR was up 14% today while TOST was down 14% today. Adyen (ADYEY), the best Payments company in the world based in Amsterdam, was up 34% today following a video release of its Investor Day.

There is still an irrational valuation gap between FOUR and TOST which I believe will be eventually closed and reversed. IOW, the valuation increase for FOUR has much more to go. Not intending to dis TOST, which should continue to grow in this rapidly growing market. But if TOST is fairly valued right now, Shift4 needs to triple to reach FMV.

FOUR is an extraordinary buying opportunity and so far few have noticed. No wonder Isaacman, the voting majority shareholder, threatens to take the company private, though my guess is he won’t do so.