Shift4: another acquirer coming public?

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Shift4 is an integrated payment processing and technology solution provider in USA. It will trade as a public stock tomorrow. In this post, I am sharing some basic stats on the business, what I like and what I think is worth watching in coming years.

Key data points:

  • Founded in 1999 by Jared Isaacman at age 16 (biggest shareholder); CEO is buying $100M worth stock in IPO
  • TPV $200B+ exiting 2019 / transactions 3.5B+ exiting 2019 / ASP ~high $50 / CNP ~40% of transactions in April 2020
  • 2018 net rev/ adj. EBITDA / margin $252.7M / $89.9M / 35.5%. Same KPI for 2019 are $305.5M / $103.8M / 34%
  • Product offerings: end to end (acquiring, security, tokenization, gateway, risk mgmt., fraud, gift card etc.) or gateway only. End to end offering generates 4x gross profit vs gateway only product offering.
  • Active merchants: 200k+ merchants at 2019 end (64k use end to end offering processing $22B out of $200B TPV but 57% of net revenue [higher yield], rest gateway only paying a fixed fee per transaction)
  • Industry exposure: Food and beverage, lodging & leisure (hospitality) – highly discretionary industries that are hit hardest due to COVID-19
  • Distribution channels: 7k+ software partners including hundreds of ISV and thousands of VAR channels
  • Employees: 734 (as of April 30th 2020) / Furloughed 25% of employees due to COVID
  • Competitors: FirstData, Global Payments, Vantiv, Square, Chase paymentTech, Elavon, Lightspeed…. list is endless
  • Growth strategy: new customer wins, upsell in existing base, launch new products, expand in adjacent verticals, international, M&A
  • Balance Sheet: highly levered (may not be ideal for current market condition) with total $662M long-term debt (~$625M of this debt is maturing after 3 years; <3 years maturing debt is only $37M) [see image]
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Based on all of above, I believe Shift4 is an OK asset over long term as payments is a scale game with incremental transactions coming in at higher margins. As a founder run company with tiny public float and a small cap in Payment space, IPO should work in normal market conditions. That being said, “traditional” acquirer industry is consolidating and big is getting bigger. Scale is the name of the game. Subscale players are at disadvantage. Another big concern I have is very high leverage. If market has another sell off like Q1-20, Shift4 can see a liquidity crisis (similar to FirstData crisis in 2016 when stock traded at $8.67 on Feb 11th 2016 vs IPO price of $16).

If following things happen, Shift4 can be attractive asset (my wish list): leverage <2.5x, end to end offering making up 70%+ of volume, shift from low end SMB to more enterprise customers, ISV and software M&A playbook (similar to Global Payments and Vantiv over last few years) for adjacent verticals, international rollout, dividend initiation and structured buyback. 

Disclaimer:

I don’t own Shift4 stock as of today. I have compiled this data from latest S1 and it can have errors. My views are subjected to change with incoming information.


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