Shares of financial-technology (fintech) company Shift4 Payments (FOUR 0.94%) were up 16.3% during May, according to data provided by S&P Global Market Intelligence. The company reported financial results for the first quarter of 2024 on May 9. And while it wasn't necessarily a perfect quarter, investors were still encouraged by the results.
In Q1, Shift4 generated gross revenue of over $700 million, which was up 29% year over year. This is a nice growth rate, but it was behind Wall Street's expectations. Then on the bottom line, the company had Q1 net income of $28.5 million, which is encouraging for a high-growth company -- many aren't profitable. But again, the analyst community had expected a little more.
NYSE: FOUR
Key Data Points
Normally, when Wall Street's expectations go unmet, stocks drop. But in this case, it seems investors looked past Q1 results because Shift4's management didn't make any major adjustments to its full-year financial guidance.
For 2024, Shift4 expects to generate gross revenue less network fees (this is a common adjustment) of at least $1.3 billion. If it hits this guidance, its top line will grow by 38% from 2023. And for its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), it thinks it will earn at least $640 million. That would be up by 39%.
These are good growth numbers, and it helped Shift4 stock rise in May.
The stock is cheap
There are multiple ways to assess whether a stock is a good deal or not. But from multiple angles, Shift4 stock looks cheap. One popular metric is comparing the stock price to the free cash flow of the business. This is called the price-to-free-cash-flow ratio. And another method compares a company's enterprise value to its EBITDA.
There's no one perfect number for these metrics. But at the risk of oversimplifying things, investors can expect to pay between 15 and 25 times a company's free cash flow or EBITDA for an average opportunity. By contrast, Shift4 trades more cheaply than many other stocks even though its growth rate is quite strong.
FOUR Price to Free Cash Flow data by YCharts.
Watch the margins
The fintech space is competitive, and many players in the space, struggling to maintain healthy profits, wind up lowering prices to compete better. This is why I think investors should always watch margins for fintech companies such as Shift4.
That said, Shift4's strategy is to win high-volume venues; it landed the stadium for the Kansas City Chiefs during May, as an example. These venues facilitate high-payment volume and naturally come with thinner profit margins. But in this case, this is the strategy so investors need to take some profit numbers with a grain of salt.
For now, I don't think there's any reason for concern here. Shift4's guidance implies that adjusted EBITDA will grow at a faster rate than revenue, and that's exactly what investors want to see.
