Should You Consider Shift4 Payments for Fintech Growth?

With interest rates expected to decline in 2024 and 2025, fintech companies are well positioned to benefit from the resulting economic growth and increased market liquidity. This environment appears favorable for fintech stocks with innovative solutions and strong business models.

Shift4 Payments, Inc. (FOUR) is a payment processing company that offers end-to-end payment solutions and business analytics tools. Its software is used by large companies such as eBay Inc. (EBAY) and the Marriott hotel chain, and has a strong focus on the hotel, lodging and sporting events sectors.

During the fiscal first quarter, FOUR generated gross revenue of over $700 million, up 29% from the previous year. While this growth rate is impressive, it falls short of Wall Street’s expectations of $751 million. Additionally, the company has failed to beat consensus revenue estimates in the last three quarters. Finally, in the end, it reported quarterly earnings of $0.54 per share, which fell short of analysts’ estimates of $0.61 per share.

Typically, a stock that fails to meet Wall Street expectations would see itself tank. However, the stock has held up as investors focus on the company’s stable financial guidance for the full year. Shares of FOUR have gained 8.3% over the past month, but are down 2% year-to-date to close the most recent trading session at $73.55.

Here’s what could influence FOUR’s performance in the coming months:

Mixed financial performance

During the first quarter ended March 31, 2024, FOUR’s gross revenue increased 29.3% year-over-year to $707.40 million, while its gross profit increased 27.3% year-over-year to $175.90 million. FOUR’s operating income improved 143.2% year-over-year to $21.40 million.

However, the company’s comprehensive income decreased by 40.8% compared to the previous year, reaching $10 million. In addition, FOUR recorded an adjusted EBITDA of $121.70 million, down 10.5% compared to the last quarter. In addition, its net cash flow from operating activities decreased by 28.6% compared to the previous year, reaching $56.70 million. As of March 31, 2024, Shift4’s long-term debt stood at $1.75 million, with total liabilities of $2.51 billion.

High valuation

In terms of non-GAAP forward P/E, FOUR is trading at 20.10x, which is 87.5% higher than the industry average of 10.72x. Similarly, its forward price-to-book multiple of 7.99 compares unfavorably to the industry average of 1.07. Additionally, the stock’s forward EV/EBIT ratio of 21.96x is 101.5% higher than the industry average of 10.90x.

Low profitability

FOUR’s trailing 12-month gross profit margin of 26.79% is 55.3% lower than the industry average of 59.92%. Similarly, its trailing 12-month EBIT and net income margins of 6.90% and 3.38% compare to the industry averages of 23.13% and 23.18%, respectively. Furthermore, the stock’s trailing 12-month leveraged free cash flow margin of 10.74% is 38.6% lower than the industry average of 17.49%.

POWR Ratings reflect weak outlook

FOUR’s poor prospects are reflected in its POWR RatingsThe stock has an overall grade of D, which equates to a Sell in our proprietary rating system. POWR Ratings are calculated by taking into account 118 separate factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. FOUR earned a D grade for Value and Quality, consistent with its extremely high valuation and lower profit margins. It also earned a D grade for Stability. FOUR’s 24-month beta of 1.70 supports the Stability rating.

As part of Technology – Services Industry, FOUR is ranked 68th out of 79 stocks.

Beyond what I stated above, we also gave FOUR grades for Growth, Momentum, and Sentiment. Get all the FOUR grades here.

Conclusion

The fintech industry is extremely competitive, often forcing companies to lower prices to maintain market share and profitability. For Shift4 Payments, this competitive environment could pose challenges, particularly in maintaining healthy profit margins.

Although the U.S. economy and labor markets currently appear robust, defying prior expectations, any slowdown could significantly impact consumer spending in industries where Shift4 operates significantly, such as travel, hospitality and entertainment.

Given FOUR’s recent below-expected financial performance, high valuation, low profitability, and poor growth prospects, it might be wise to avoid investing in this stock.

Actions to Consider Instead of Shift4 Payments, Inc. (FOUR)

Given its uncertain near-term outlook, the chances of FOUR outperforming in the coming weeks and months are compromised. However, many industry peers have much more impressive POWR Ratings. So consider these three A (Strong Buy) rated stocks from Technology – Services industry instead: Leidos Holdings, Inc. (LDO), RADCOM Ltd. (RDCM) and Crexendo, Inc. (CXDO).

To discover more A and B rated technology services stocks, Click here.

What to do next?

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FOUR stock was trading at $72.85 per share Wednesday afternoon, down $0.70 (-0.95%). Year-to-date, FOUR is down -2.00%, compared to a 16.76% gain in the benchmark S&P 500 Index over the same period.

About the Author: Shweta Kumari

Shweta’s deep interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help individual investors make informed investment decisions. More…

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