A new bull market might be underway, but someone forgot to tell PayPal (PYPL +0.60%) and Block (SQ +1.84%). The two digital payments and fintech stocks are still trading down nearly 30% over the last year, and have yet to show much get-up-and-go so far in 2023.
PayPal's days of high growth are likely over. It's still putting up decent numbers, but a new CEO hasn't been announced yet. Investors are still waiting to see if the company's new focus on profitability is the real deal or not.
As for Block (formerly Square), it's still growing at a brisk pace. Gross profit was up 32% year over year in the first quarter. However, news came out over a failed investor lawsuit accusing CEO Jack Dorsey and the board of directors of failing to uphold their fiduciary duty to shareholders when it acquired Jay-Z's music streaming service Tidal in 2021. By all accounts, records from the court case nevertheless seem to at the very least suggest a management team that's OK making poor business decisions.
I'm willing to give PayPal and its new activist investor backers some time to find a new CEO and draft a plan, but this recent news about Block has me miffed. The good news is there are plenty of alternative stocks in the digital payments and fintech space.
For instance, you might want to check out Shift4 Payments (FOUR +2.10%).
NYSE: FOUR
Key Data Points
An enduring growth play in a crowded industry
It's been a couple of years since I checked in with Shift4 (June 2021 was the last time I wrote an article about it), and I passed on buying at the time due to valuation). Shift4 is a merchant acquirer, meaning it enables businesses to accept digital payments. Early in the pandemic, all stocks that were in any way associated with e-commerce were booming to unsustainable levels. Shift4's stock was among this group, and it's since fallen back to earth.
I certainly didn't make perfect investment decisions during this time. PayPal and Block were also flying high, and taking some profit off of the table would have been prudent.
At any rate, Shift4 is a bit different, owing to the fact that its core business is focused on restaurants (40% of business in Q1 2023, compared to 55% pre-pandemic due to the company diversifying its customer base).
In fact, despite operating in a very crowded digital payments acceptance industry (including competing against Shopify with an e-commerce store offering), Shift4 has performed well with its simplified payments acceptance tools and competitive pricing. Newer high-growth industries for the company include travel and hospitality and large sports and entertainment venues. Besides a digital payments ecosystem investment, this also makes Shift4 an ancillary bet on the momentum in the large travel industry, which is enjoying resurgent growth thanks to younger generations prioritizing experiences over shopping for physical goods.
Gross profit rose 78% year over year in Q1 2023 to $138 million. Net income under generally accepted accounting principles (GAAP) is also quickly reaching a robust scale, coming in at $20 million in Q1 versus negative $13.2 million the year prior.
Shift4's steady growth and potential for shareholder returns
This is still a small digital payments network, but its core customers made up of small merchants, restaurants, and the like are still growing at a healthy rate. And as it grows its technology stack, Shift4 has shown promise in moving upmarket to serve larger customers, too.
Its new SkyTab system partners with restaurant management apps like OpenTable (part of Booking Holdings). It acquired small peer Focus POS, whose customers include Topgolf Callaway Brands. And recent customer wins include Six Flags Entertainment and the NFL's Washington Commanders.
Growth is clearly the focus right now, but Shift4 has also shown early signs of (eventually) being a very shareholder-friendly company. It repurchased a couple hundred million dollars' worth of stock in 2022 during the bear market -- exactly the timing an investor would like to see excess cash deployed in this manner.
Data by YCharts.
Shift4 stock has had a big rally in the last year, but investors might want to start nibbling anyway, especially if they've grown weary of holding PayPal or Block. Shift4 stock trades for 26 times expected 2023 earnings per share. It isn't cheap, but could be worth the premium given the company's enduring expansion and rapidly scaling profitability.
