Digital payments giants PayPal (PYPL 2.90%) and Block (SQ 2.32%), as well as their European peer Adyen (ADYE.Y -1.57%) all captured headlines this summer. As the economy slows this year, competition among a crowded field of digital payments companies -- which has been leading to slimmer profit margins as they duke it out for customers -- has been the story. Stock prices for all three got punished by jittery investors, even as the S&P 500 index has been rallying.
Data by YCharts.
Meanwhile, a far smaller player in this arena has been more than fine: Shift4 Payments (FOUR 0.22%). The company is still growing and reporting higher profit margins as it scoops up market share from some of its larger peers.
Here's what investors need to know.
Expanding beyond its small niche
Shift4 and its founder and CEO, Jared Isaacman, got started with a laser focus on supplying digital payment acceptance services for the hospitality industry (especially hotels and restaurants) where Toast (TOST 3.42%) is a competitor. Isaacson alluded to a price increase and later backpedal at Toast earlier this summer as creating some positive momentum for Shift4.
New customers in recent years have included large entertainment venues (like professional sports arenas), merchants that want a modern e-commerce experience (the key competitor here is Shopify), and nonprofit organizations. The pending acquisition of cross-border payments company Finaro, which has a small but notable presence in Europe, has potential to help Shift4 with its next goal to expand outside of the U.S.
Meanwhile, as PayPal, Adyen, and others duke it out to win big merchant accounts for increasingly smaller profit margins (at least for now, in 2023, when big customers are in cash conservation mode), Shift4 is growing its top and bottom lines. In Q2 2023, the volume of payments processed increased 59% from last year to $26.8 billion. Shift4 is profitable by all metrics. When calculated according to generally accepted accounting principles (GAAP), net income was up 145% year over year to $36.8 million, and adjusted free cash flow (which subtracts the effects of a small payment for an acquisition) was up 137% to $64.4 million.
Image source: Shift4.
Not bad for a 2023 featuring a big economic cooldown and macroeconomic worry spurred by the U.S. Federal Reserve's interest rate hikes.
2024 will be even better?
Shift4's Q2 was good enough that management slightly upgraded its growth expectations for 2023, but Isaacman said in his prepared letter to shareholders that 2024 could be even better for the company. Among its ongoing efforts to expand in its core markets in the U.S. and into new international territory, Shift4 is implementing new AI and other automation tools to further streamline its business operations.
Of course, small digital payments outfits are popping up all the time, and many of them get squashed by the same intensifying competition that is damaging the biggest players right now. Shift4 is riding impressive momentum as it picks up more customer volume in its hospitality customer core, from big sports stadium and entertainment venues, and from select e-commerce merchants. But elevated competition could throttle progress. If Shift4 interests you enough that you decide to buy, stay cautious and start with a small position. Let Shift4 prove its merits over time. That's what I intend to do.
Shift4 stock currently trades for 33 times trailing-12-month earnings per share. It isn't cheap, but if this small digital payments company can continue growing at a profitable pace, as it thinks it can, shares could be a compelling long-term value right now while investors hyperfocus on the likes of PayPal, Block, and Adyen. I plan on starting a dollar-cost average plan in September to accumulate a small position.
