Shift4 Payments, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Shift4 Payments, Inc. is a leading provider of software and payment processing solutions, primarily serving the food and beverage and hospitality sectors across the U.S. and internationally.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Shift4 Payments operates in a highly competitive environment, with a number of different payment processors vying for market share. It offers integrated payment processing and software solutions, as well as advanced technology solutions, including point-of-sale systems, mobile payment options, loyalty programs, and data analytics capabilities.

Shift4’s business model primarily centers around providing integrated payment processing and software solutions to merchants, with a focus on the food and beverage and hospitality industries. These services allow businesses to process a variety of payment types, including credit cards, debit cards, and mobile payments. Shift4 earns revenue through a combination of transaction fees, subscription fees for its software platform, and other ancillary services, including hardware sales. The company is expanding its reach into other markets, such as e-commerce, and is making acquisitions to achieve growth and scale.

Revenue Distribution: Shift4 generates revenue through three key streams. Payment processing fees are the primary revenue source, accounting for roughly 75-80% of total revenues. These fees come from processing various types of card payments. Software and services contribute about 20-25% and primarily come from subscription fees, software installations, and recurring fees for enhanced features. Other sources account for a small percentage, and include hardware and some professional services.
Industry Trends: The payment processing industry is undergoing rapid transformation, driven by technological innovation, changing consumer preferences, and increasing regulatory pressures. The rise of e-commerce, mobile payments, and contactless payment options has fundamentally changed the payment landscape. The industry is becoming increasingly competitive, with traditional payment processors battling for share against newer, technology-focused startups and specialized providers. The consolidation in the payments industry has led to significant mergers and acquisitions. The industry also has been influenced by regulations around data security, privacy, and payment processing.
Margins: While Shift4’s revenues have steadily grown, its operating margins and profitability have remained relatively unstable. Gross margins are approximately 25%, while operating margins have shown fluctuations. Profitability, as measured by adjusted EBITDA, remains positive, and the company is attempting to improve margins, by cutting costs and increasing sales in higher-margin products.
Competitive Landscape: The payment industry is crowded. Shift4 competes with large established players like Fiserv, Global Payments, and JPMorgan Chase, as well as other fintech firms and smaller competitors. The key to competition in the sector is offering an integrated payment processing platform with robust technology capabilities, a diverse product set, and high customer satisfaction rates. In the high end, companies compete through large contracts with big box stores while smaller competitors will focus on smaller merchants and niche markets.

The competitive landscape is constantly shifting, especially in the technology sector, which presents ongoing opportunities for disruption. To gain ground against competitors, companies that are not only large and with many years of operations, but are also constantly innovating and moving faster, tend to succeed.

What Makes Shift4 Different? Shift4 differentiates itself by its integrated and comprehensive approach to payment processing, rather than only focusing on one aspect of payment solutions. Its extensive network of partners, including software platforms, payment gateways, and value-added resellers, allows it to reach a broad customer base. The company has also acquired many companies, thereby expanding its offerings and enhancing its competitive landscape, though as noted in Chapter 22 of “Valuation”, there may be a lag in value creation as a result of integrating acquired firms. In addition, Shift4 focuses on the food and beverage industry and the hospitality industry, which could give it expertise and specialized offerings over other players.

Shift4’s financials are characterized by high revenue growth but mixed profitability and some risks arising from its debt burden and acquisition strategy.

Revenues: In the last few years, Shift4 has experienced significant revenue growth as it increased its market share, expanded its solutions, and made acquisitions. Revenues increased 33% in 2023 to $2.4 Billion, reflecting its expansion and rising payments volume. Growth was primarily driven by payment volumes increasing by 46% on a YoY basis. Growth in revenues has slowed, however, when compared to 2022.
Profitability: Despite the strong revenue growth, Shift4 is still struggling to show sustained profitability. The company operates with a low EBITDA margin of 20-25%, suggesting operating expenses remain relatively high. The company has seen a positive and growing adjusted EBITDA over the past few years, mostly from acquisitions and greater volume. Net income, however, fluctuates wildly and it often is negative. For example, for the full year 2022, the company reported a net loss of ($18.6) million. For 2023, it was an income of ($81.1) Million.
Cash flow: Shift4 generates positive cash flow from operations, driven by growing revenue and reduced operating costs. Free cash flow was over $470 million in 2023. Free cash flow was a major focus in the recent earnings call with the CFO specifically highlighting that, it will remain a key focus for the company.
Debt: Shift4 has a relatively large debt load, which totaled around $3.5 billion as of end of 2023. A significant portion of the debt has arisen from acquisitions and convertible note offerings. The high debt burden is a liability, particularly if the company’s growth doesn’t meet expectations or if interest rates rise significantly. However, management is trying to pay down debt to achieve a lower debt-to-equity ratio, for an increase in the company’s investment grade rating.
Acquisition: Shift4’s growth has been achieved partly by acquiring other businesses to expand into new products or markets. While this is often a quick way to scale and grow revenue, there are additional financial and operational challenges with integrating acquired businesses, such as integration of systems and cultures. Also, if these acquired companies are overvalued or don’t perform well, they can reduce overall profitability.
Recent earnings calls: In their recent earnings calls, they highlighted growth in revenues and positive adjusted EBITDA, and also a focus on cutting operating costs and focusing on the long term. They’ve also expressed that they are highly confident in their organic growth and their future success. They are also trying to reduce debt, by either buying back bonds and/or using cash on hand. They have highlighted a lot of success with their new strategic partnership with the sports and entertainment industry. They are also focused on the growing European market and that they are in the process of obtaining the proper licenses to operate over there, and they will be starting international operation in Europe in 2024.
Recent controversies/concerns: Concerns around the long-term impact of a potential recession on the company’s merchant customers have been mentioned by analysts, especially those in restaurants and hospitality, though management has shown the resiliency of their business model.

The company’s future success hinges on managing debt prudently and on continued growth and innovation of its payments platform.

Moat Rating: 3 / 5 Shift4 has a narrow moat, based on strong switching costs due to its integrated software and payments offerings and distribution networks. While a few companies can replicate the company’s offerings, the company is very well integrated with its client businesses and the strong network effects of its distribution networks, and therefore, have very sticky clients that aren’t easily swayed by competitors with similar offerings. The competitive landscape, however, is very intense and many smaller competitors are challenging the market, making this moat not as wide as some others.

Switching Costs: Shift4 provides integrated software and payments systems. Once they are integrated within the customer business, switching becomes costly because of training, setup, and the risk that important systems will be changed or lost.
Network Effects: Shift4’s distribution network in the U.S. is huge, especially in the food and beverage space. This network leads to greater revenues per branch. Also, the larger the network, the less likely they will lose clients due to having so many locations that may be geographically desirable to their customer.

Risks to the Moat and Business Resilience Shift4 is subject to several risks which could harm its economic moat. * Competitive risks: The payment processing industry is becoming increasingly competitive, with low barriers to entry, many established and new companies can potentially disrupt Shift4’s business. Technological changes also mean that their services could become irrelevant and displaced by better solutions. * Debt and financial risks: Shift4 currently has high debt and if they cannot pay it back, the company may go bankrupt. In addition, poor returns on investments from acquisitions may worsen the financial position of the company. If interest rates rise, their debt will become much more expensive. A recession could severely affect their customers and result in decreased transaction volumes and reduced sales for the company. * Technological obsolescence: Technology is rapidly changing, therefore if Shift4 does not keep up with the pace and adapt and innovate, it will be displaced. * Economic/Regulatory risks: The company faces regulatory challenges around data security and privacy in both the U.S. and abroad, any changes in these regulations could severely affect the company’s compliance and future offerings. A changing global and national economic climate may also reduce revenue for the company. Also, if the company expands into other areas, and those areas are poorly handled, it would reduce the overall profitability of the company. * Managerial risk: The integration of acquisitions and new strategic initiatives may be poorly executed, leading to disruptions and lower overall profitability and growth. Management’s inability to accurately forecast its performance could lead to large fluctuations in the company’s share price. A failure in management to anticipate change could put them behind competitors.

Understandability: 2 / 5

Shift4’s business model, involving payment processing and integrated software solutions, is more complex than simply selling a physical product, but is still easy to follow. Their core operations and their dependence on the growth of the payment processing industry are easy to understand. However, complexities regarding accounting methods, especially as regards acquisitions, makes understanding the actual performance of the company very complex.

The company’s accounting methods can be difficult to understand without an analysis of their reported financial statements.
Their business model relies on growth through acquisitions and organic expansion, making their long term profitability and growth difficult to gauge.
The nature of financial services is inherently complex, and for a non-financial-expert, it may be difficult to understand the different aspects and nuances.

Balance Sheet Health: 3 / 5

Shift4 has a decent balance sheet, but it also has issues which need to be monitored. * Strong assets: Although a significant amount of its assets are in intangibles, their cash and equivalents are high. They have had strong and consistent growth in those assets over the past few years. * Moderate Debt Levels: While the company has a good level of assets, it also has a large amount of debt, making the company slightly overleveraged. They have more debt than is desired due to acquisitions and convertible note offerings. * Debt/Equity Ratio: Their debt-to-equity ratio is moderately high, implying the presence of risk and instability in the capital structure. The company is targeting to bring this ratio down, in order to achieve a higher credit rating and is actively targeting that as a main priority of management. * Financial Flexibility: As they try to actively reduce debt, this may limit their ability to act on new market opportunities. They also have high interest expenses that negatively affect net income. * Good Cash Flows: As noted earlier, they have a strong and positive operating cash flow and free cash flow which will enable them to service their debt obligations. However, this is contingent upon their continued success and growth.