Shift4 Payments’ rapid growth is predicated on taking market share, no matter how fast the broader business grows.
Ammentorp/Dreamstime
Owning online payment stocks has been painful for the past two months. That’s created an opportunity in at least one smaller company in the space— Shift4 Payments .
Everything was fine for payment stocks for much of the year. The ETFMG Prime Mobile Payments exchange-traded fund (ticker: IPAY) had gained 5.8% through Oct. 19—not great, but not too bad, considering its 34% rise in 2020. Then the bottom fell out. Since then, the ETF has dropped 20%, while big players like PayPal Holdings (PYPL), Block (SQ)—formerly Square—and Global Payments (GPN) have tumbled even more.
The main problem is that growth of digital payment transactions is slowing—and quickly. Total volume is expected to rise at just 8% a year from here through 2027, down from the double-digit gains seen in 2019. That makes the business more vulnerable to declines in consumer demand, says RBC analyst Daniel Perlin. “Payments is more cyclical than investors previously believed, which suggests the group isn’t as much of a secular story,” he explains.
The companies have also taken a hit as the Fed accelerates its taper and will likely increase the pace of interest rate hikes, too, which could lift the discount rates used to value highflying growth stocks and cause their valuations to tumble.
Enter Shift4 Payments (FOUR), which both processes and analyzes transactions for hotels and other clients—combining two functions that are typically performed by separate companies. Its growth is predicated on taking market share, no matter how fast the broader business grows. It’s taken steps to keep that growth coming by adding assets and boosting market share.
Still, the stock, which closed Friday at $55.94, is down 45% from its all-time high in April. Part of the problem is its valuation. The company, which has a $4.6 billion market capitalization, trades at 43 times 12-month forward earnings, according to FactSet. But its growth isn’t slowing. Earnings per share are expected to advance at an annual rate of 85% over the next three years, giving it a PEG ratio—its price/earnings ratio divided by earnings growth—of just 0.5 times, far lower than the S&P 500 index’s PEG ratio of just over two. “Eventually, the market should reward that [growth] with a multiple double where the stock is trading at,” says Darrin Peller, an analyst at Wolfe Research.
Even without that kind of multiple expansion, rising earnings could still lift Shift4 stock. Analysts see EPS hitting $3.47 in 2024, six times the 2021 figure, along with sales of $1.1 billion, two times higher than 2021’s. Earnings growth could outpace revenue gains because Wall Street expects profit margins to increase as the company slows its spending.
That growth could be even better than expected. Management said at its November investor day that it can service $160 billion of total spending in 2024 at hotels and restaurants, its main customer base. That would translate into more than $3 billion of sales, given the percentage of transactions that Shift4 charges. And the fact that it is able both to process and analyze should help it attract new customers who are tired of paying multiple providers. “Winning new customers or taking market share is really the biggest driver of growth for them,” says Chris Donat, a Piper Sandler analyst.
The big risk is if the large payments players invest in the capabilities Shift4 owns. But Shift4 has been acquiring smaller companies to maintain its edge. It bought payments processor Venue Next for $72 million in March, for example.
“We have been adding [to the stock] because we think the opportunity, the risk reward, is fantastic,” says Dana Kelley, portfolio manager at the Columbia Small Cap Growth fund.
There’s plenty of growth left in the payments business. Finding it just means looking in the right places.
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Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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