2023 has been yet another tough year for many digital-payments and financial-technology companies. With markets like e-commerce slowing in the wake of the pandemic and consumers increasingly under pressure from higher interest rates, growth has been much harder to come by versus previous years.
But one small fintech has been holding its own and could be heating up for 2024: Shift4 Payments (FOUR 0.22%). Despite intense competition from the likes of Block (SQ 2.32%) and fellow small fintechs like Toast (TOST 3.42%), this small stock could be ready to rock for the new year.
Business outperformance set to continue in 2024
Shift4 is a digital-payments platform, processing physical-card acceptance, as well as contactless-card -- tap-to-pay or mobile wallets like Apple (AAPL -0.35%) Pay or Alphabet's (GOOGL 10.22%) (GOOG 9.96%) Google Pay payment acceptance. There is also a bit of software-as-a-service (SaaS) business here as Shift4 also offers things like business-intelligence software and an e-commerce store setup and management tools.
Steep competition abounds in this market, including point-payment solutions like Fiserv (FI 1.70%), integrated-payment providers like the aforementioned Block and Adyen (ADYE.Y -1.57%), as well as e-commerce offerings like Shopify (SHOP 1.11%) that also provide various point-of-sale digital-payments acceptance solutions.
Competition has been well highlighted in the fintech arena this year, especially as it has put some downward pressure on some companies' profit margins. But Shift4 has done well by focusing on its niche in hospitality and restaurants. Gross revenue after payment of network fees (think of this as toll fees paid to digital-payment "rails" like Visa (V -0.23%) and Mastercard (MA 0.07%)) is expected to be as much as $960 million for full-year 2023, up about 31% to 32% year over year. And free cash flow (FCF) is expected to be at least $259 million, up 76% year over year.
Focus on profitable returns a winning strategy
Shift4, led by longtime CEO and founder Jared Isaacman, touts its focus on growing profitably. Since its June 2020 initial public offering IPO, Shift4 appears to be really hitting its stride in this department. Isaacman started his company about two decades after its IPO. The company changed to its current name in 2017 after an acquisition.
Besides its high-growth core, now supplemented by Shift4's move upmarket to address bigger customers like sports stadiums and entertainment venues, two recent acquisitions will also contribute to profitable revenue growth in the next year. First is Appetize, purchased for $100 million from competitor SpotOn. This acquisition will increase Shift4's go-to-market with big stadiums and venues. And the long-awaited Finaro acquisition is also now complete, which will begin Shift4's expansion into Europe. Both of these purchases are expected to contribute to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) beginning in Q4 2023 and accelerating in 2024.
Even before these two opportunistic acquisitions (as many of its peers are struggling with profits right at the moment), Shift4's ramp-up of FCF was already underway. 2024 could thus be a big year for the small-payments company as it digests these two payments providers and begins converting their revenue streams to FCF.
Data by YCharts.
This is a big part of why this small fintech has begun to outperform the Nasdaq Composite Index in the last 12-month stretch. The current valuation of about 18 times trailing-12-month FCF looks mighty cheap to me, assuming Shift4 doesn't falter.
Of note, though, Shift4 does have elevated debt of $1.75 billion as of the end of September 2023, and cash and short-term investments of just $692 million. Shift4's big competitors are also a risk. Life can be tough for small-cap stocks like this one. Customers often switch digital-payment providers in a constant endeavor to cut costs. But Shift4 has proven resilient over the years, building out an affordable option for its price-sensitive users while building a lean and profitable operation itself.
I recently added to my position in Shift4. It's a small position for me, but the company's progress and seemingly cheap valuation have my interest.
