Cash and other legacy forms of transacting business remain the most dominant form of payment around the world. While many digital payment stocks have had a stellar run in the last decade, there is plenty of room for further growth.

To that end, recent IPOs REPAY Holdings (RPAY -1.39%) and Shift4 Payments (FOUR -1.10%) have garnered lots of attention. REPAY was acquired by special purpose acquisition company Thunder Bridge in July 2019 and is up some 150% since then -- including up 75% so far in 2020 alone -- and Shift4 has surged 34% since its public debut in early June 2020.

It's easy to see why. Both companies create software solutions to help customers integrate digital payment processing into their operations. With COVID-19 restricting in-person interaction and reshaping large swaths of the economy, electronic money movement is more important than ever. These two fintech outfits are small but growing fast, and there's plenty of promising runway ahead for both. But neither company is your typical software firm, and they bear some extra understanding before jumping in head-first.

A young woman holding a credit card and smartphone.

Image source: Getty Images.

An untapped cash-dependent industry vs. competitive merchant services

Let's start with REPAY (which stands for real-time electronic payments). The company is disrupting payment processing for the massive mortgage and auto loan and business-to-business sales industries. In total, over two trillion dollars is processed every year in the U.S. alone in these areas. Well over half of it is done via cash or check, and handled by legacy digital systems like ACH (which is not a real-time payment method). Card volume transacted on REPAY's platform totaled just $3.8 billion in the first quarter of 2020 -- which equated to revenue of $39.5 million, a 71% increase from 2019 -- so there is massive upside potential here.

Granted, the sandbox REPAY plays in is cash-dependent for a reason. Cash is historically cheaper than a digital transaction. But with many businesses not able to take in-person payment or bring in employees to process physical forms of compensation, demand for REPAY's software has been holding up quite well during the current crisis.  

Shift4 Payments, on the other hand, operates within the merchant payment universe, including retail and e-commerce, restaurant and hospitality, and gaming companies. Many of these businesses have been deeply affected by economic lockdown, not to mention this being a highly competitive space with some of the largest digital payment companies around dominating the field (think PayPal (PYPL 0.64%) and Square (SQ -1.57%)). Nevertheless, Shift4's wares are designed to integrate seamlessly within its customers' operations rather than appear prominently alongside them.

According to the company's prospectus, filed right before the IPO, Q1 2020 revenue was up 28% from the year prior to $199 million. Though transaction volume fell sharply in late March and early April, Shift4 recently revealed that by the week ended June 21, the number of processed transactions had rallied 164% from the lows in March. Look for more clarity on what that actually means when the company issues its first quarterly report later this summer.

Business-to-consumer transactions is also a big market in the U.S., but already commonplace, with some two-thirds of money exchanged occurring via a credit or debit card. Pair that with some big names already operating in the space, and I think Shift4's addressable market will be easier to break into, but overall be a smaller field than REPAY's. I thus prefer REPAY's addressable market over Shift4's.

Small but growing revenue vs. low gross margin ... for now

As mentioned previously, Shift4 beats REPAY as far as revenue goes. Plus, REPAY's growth has gotten a boost in the last year thanks to a couple of acquisitions of smaller peers. However, revenue growth alone is only part of the story.

Both of these small outfits specialize in financial software. But investors accustomed to investing in software firms are typically accustomed to gross profit margins (revenue less cost of providing the service as a percentage of total revenue) in the 60% range or higher. However, that situation only applies to REPAY at this point. 


REPAY Holdings Q1 2020

Shift4 Payments Q1 2020


$39.5 million

$199 million

Gross profit

$28.7 million

$44.5 million

Gross profit margin



YOY increase (decrease)

(5 pp)

(3 pp)

YOY = year over year. Pp = percentage point. Data source: REPAY Holdings and Shift4 Payments.  

Simply put, while Shift4 looks like the bigger and relatively cheaper company (shares trade at 4.7 times trailing 12-month revenue, versus 11.1 times for REPAY), REPAY has higher gross margins once it pays for the cost of services rendered. If it can sustain its double-digit percentage growth, its revenue is more valuable than Shift4's is.

A few other factors worth noting

It's worth reiterating that both of these companies are very small (REPAY's market cap is $1.3 billion compared to Shift4 at $3.6 billion), and growth, rather than bottom-line profits, is the focus. Nevertheless, a word on earnings before interest, tax, depreciation, and amortization (EBITDA) is important. In Q1 2020, REPAY reported EBITDA of $10.0 million, good for an EBITDA margin of 25%. Shift4's EBITDA in Q1 was $19.0 million, a higher sum but a lower overall margin of 10%.

This leads to a final point: Debt. Both of these companies need to generate plenty of upside to pay interest and service their liabilities. REPAY had cash and equivalents at the end of March totaling $32.7 million but total debt of $247 million -- although those figures are subject to change, as the company raised fresh cash subsequent to its Q1 report. As for Shift4, after raising capital via its IPO and using some proceeds to pay down debt, it expects to have a cash balance of $194 million and total liabilities of $429 million. Regarding balance sheet matters, Shift4 wins.

At the moment, I prefer REPAY. I like the market the company is tackling and the higher gross margin profile, and the balance sheet should look much stronger after the second quarter is reported. Granted, I'll admit I suffer from familiarity bias right now, as I've been following REPAY for a couple of quarters and Shift4 stock is brand-new. And both of these small fintech outfits are growing very fast, so my opinion is subject to change. Nevertheless, both hold a lot of promise and warrant some attention from war-on-cash investors, but at the moment I'm going with REPAY.