Shift4 (NYSE: FOUR) Analysis and Fair Value Estimate (Huge upside!)
By: Value Of Growth
Tags: Value Investing, Investment, Investing, Stocks, Stock Market

Note: In a hurry? Skip straight to the Fair Value and Analysis section, skim through it and check out the tables, then read the summary at the bottom. Or, if you’re just looking for the end result, skip straight to the summary at the bottom (and come back when you have more time!)

Global debit, credit, and other alternatives to cash payment have been on the rise for several years. Many have predicted a completely cashless society sometime in the distant future, and the COVID-19 pandemic earlier this year only increased the desire of many to move away from touching dollars and coins that have been passed along by thousands of other people.

This has, perhaps unsurprisingly, resulted in some big winners in the stock market for 2020, such as SQ (Square, +256% the past year) and PYPL (PayPal +118.7% the past year). There’s roughly 174 billion non-cash payments each year totaling almost $1 trillion, with about 20% of payments still done with cash. This is truly a huge market. But with SQ and PYPL up so big, there has to be better value somewhere, right?

Background

FOUR (Shift4 Payments) is the leader in integrated payment processing solutions. It is well positioned to capitalize on the transition to cashless payments as the world settles into the “New Normal”. Shift4, formerly Lighthouse Networks, debuted on the NYSE earlier this year on June 5th. It’s been a hot commodity ever since, but there’s still a ton of upside in this company.

Shift4 is led by founder and CEO, Jared Isaacman. Founder led companies often outperform the market. In fact, a portfolio of 136 founder led companies has outperformed the S&P 500 to the tune of +383.8% to the S&P’s +81%. But not every founder is Jared Isaacman, a high school dropout who is now a billionaire. He started his first business at age 16 which led to a job at MSI (Merchant Services Intl), which led to starting a MSI competitor of his own. He had a hobby of flying aircrafts, saw an opportunity, and started the world’s largest private airfoce, Draken. Eventually, MSI was looking to be bought out, so Isaacman sold half his stake in Draken to acquire MSI. Eventually, he sold Draken to Blackstone for 9 figures, and then went on to complete 7 acquisitions and form what’s now known as Shift4. They recently added another acquisition to that list when Shift4 bought out 3DCart, an e-commerce platform. In addition to Isaacman, they have a very talented management team including CFO Brad Herring (Fmr. CFO Digital Banking at Fiserv, CFO of Elavon, Equifax) and CTO Michael Russo (Fmr. CTO of Micros Systems, acquired to become Oracle Hospitality).

Fair Value and Analysis

FOUR is currently trading at $71.79, with a marketcap of $3.24 billion. TTM revenue is $731 million, representing over 30% YoY growth. This year, despite the pandemic affecting hotels and restaurants which is Shift4’s bread and butter, they have done $556 million the first 3 quarters and are on pace for $781.3 million, a 7% YoY growth. Shift4 serves businesses such as KFC, Popeye’s, Caesars Casinos, Outback Steakhouse, Dairy Queen, Arby’s, and thousands more. They process over $200 billion annually with over 3.5 billion transactions. They dominate the hotel and restaurants industry, with about a 33% market share. So the fact that they are still growing despite the pandemic shutting down most of these venues is promising.

Now, looking at the competitors which are more well known, we see that FOUR is extremely undervalued. PYPL has a marketcap of $279.6 billion with TTM revenue of $20.2 billion. SQ has a marketcap of $103 billion with TTM revenue of $7.65 billion. LSPD (Lightspeed POS), another competitor, has a marketcap of $8.04 billion with TTM revenue of $150.3 million. And finally, SHOP (Shopify, a competitor of the recently acquired 3dcart and thus FOUR) has a marketcap of $150.3 billion with revenue of $2.45 billion.

So, here’s the breakdown of these 5 companies and their respective marketcap/TTMREV ratios.

Ticker MC/TTMREV

SQ 13.45x

PYPL 13.78x

LSPD 53.51x

SHOP 61.17x

FOUR 4.28x

The value of these companies in comparison to revenue clearly shows one thing — FOUR is relatively undervalued by a staggering amount. It could be that FOUR is still unknown to a majority of investors, or due to the fact it mostly caters to restaurants and hotels which are facing uncertainty from the pandemic, but hedge funds have been accumulating and FOUR’s growth despite the pandemic so these hinderances may soon be shrugged off leading to a surge in FOUR price. Based on the table above, here’s some Fair Value Estimates(FVE) for FOUR if it traded at each of the comp MC/TTMREV ratios:

At 13.45x, FOUR FVE = $225.86 ($10.2b Marketcap)

At 13.78x, FOUR FVE = $231.39 ($10.45b Marketcap)

At 53.51x, FOUR FVE = $898.56 ($40.57b Marketcap)

At 61.17x, FOUR FVE = $1,027.19 ($46.37b Marketcap)

A few of those multiples likely mean the corresponding stock is overvalued more than the under valuation of FOUR. However, excluding LSPD, the highest FVE for FOUR of $1,027.19 implies a marketcap of $46.37 billion which is less than half of SQ, less than 1/3 of SHOP, and less than 1/5 of PYPL, so it certainly isn’t out of reach. On the more conservative end, the FVE of $225.86 would give FOUR a marketcap of $10.2 billion, which is less than 1/10 of SQ Marketcap, about 1/15 of SHOP, and less than 1/27 of PYPL.

Next, we’ll look at Discounted Cash Flow multiples. Currently, FOUR is positioned to end 2020 with $83m in Free Cash Flow. This number is conservatively expected to grow to $400m by 2025, representing a CAGR of 49.8%. EBITDA is expected to grow from $90m to $435m in the same time period. Comparing these with the numbers of 10 competitors and previous FOUR price action, the conclusion is:

Fair Value Estimate of $92.64, representing upside of 29%

The risk averse investor may be turned off to FOUR because the company in it’s current form hasn’t turned a profit. However, previous versions of the company have been profitable for several years according to Isaacman. Furthermore, FOUR is on the verge of profitability. Analysts suspect it will take on a final loss in Q4 2020 before turning a profit in 2021. They also expect an average annual growth rate of 145%, much higher than FOUR’s own conservative estimates.

The cautious investor will also be comforted in the fact that hedge funds have been loading up on FOUR in recent months. The last round of 13-F filings show hedge fund holdings grew 113%. These include hedge funds with incredible track records vs. the market, including Senator Investment Group, Skye Global Management and Islet Management, which has FOUR as it’s 8th largest holding in a portfolio of 100 companies. Other notable buyers of FOUR include Steve Cohen and Louis Bacon, two of the most well-known billionaire investment managers in the world. Here’s how the hedge funds stack up compared to the market:

Name 1y returns 3y returns 5y returns

S&P500 +14.3% +38.3% +81%

Senator Inv. +31.8% +65.4% +122.7%

Skye Global +63.2% +168.4% +284.2%

Islet Mgmt. +39.2% +64.7% +115.3%

Clearly, if these funds are buying, there’s some reason to be optimistic.

Summary

We came to a few different Fair Value Estimates in this article, with a pretty wide range of outcomes spanning $92.64 to over $1,000, and all very plausible considering the current marketcap, comp marketcap, revenue and revenue growth, and hedge fund sentiment. The mean of these FVEs is $495.13, making FOUR a potential 7x with a marketcap of $22.7 billion. Considering the marketcaps and revenues of similar companies in this sector, I think that is a good estimate for the fair value.

Conclusion: FOUR FVE = $495.13

This is not investment advice, please make your own decisions and use this data as one of many sources for research. I am not responsible for any investments made by readers.