The world is becoming increasingly less reliant on cash and is transitioning towards a paperless society.

Today, payment systems have become digitized, with consumers being able to pay for purchases with a single tap of a card or a smartphone. Once a transaction is completed, the receipt is sent automatically via email and the business can immediately process the details.

With millions of Americans relying on paperless payments daily, the total transaction value in digital payments is forecasted to reach $3.1 trillion this year. Moreover, the number of users is expected to balloon to over 560 million by 2030.

Even though Visa and Mastercard enjoy a dominant position in the payment processing space, there are still opportunities for other players to thrive.

There are still other segments that are crucial in the digital payments space, such as point of sale (“POS”) software.

POS systems are the end interfaces customers interact with, acting as a simple way of accepting payment and are utilized by businesses and establishments to accept cards.

Shift4 Payments (FOUR) has carved a place for itself in the payments market and is well-positioned to become a leading player in the POS market for a variety of high-value sectors.

The company primarily caters to businesses in the hospitality, restaurants, and sports and entertainment sectors.

By dedicating its focus to these sectors, Shift4 has given itself a leadership position in its end markets, which collectively generate around $2 trillion in transaction value annually in the U.S.

The company is also leveraging its industry experience to expand internationally and gain a larger share of the POS market across lodging and restaurants.

In 2021, Shift4 ramped up its gateway migration, as roughly 85% of the payment volume it handled was for gateway customers, making around 4 cents per transaction.

This rate is among the cheapest in the industry, which has helped Shift4 secure a leadership position across end markets. However this low rate serves as an entry point for higher-margin services for the company.

Restaurants and hotels need a lot more than a POS system to operate and make digital payments available to customers. Alongside a POS system, there needs to be software applications for managing inventories, ordering, payroll, accounting, and other related functions.

Since these software come from different providers, integration isn’t as seamless, burdening businesses with added complexity.

To make its customers’ lives easier, Shift4 has been building a comprehensive end-to-end platform that encompasses business intelligence, CRM tools, and industry-specific functionality.

By capturing customers with its lower gateway prices and offering these services as add-ons, Shift4 makes its solutions more appealing to customers while simultaneously pushing its rivals out of the picture.

This strategy has enabled the payments processor to generate more cash and recover from a pandemic slowdown.

Gateway fees only generated 18% of Shift4’s revenues in 2021. The rest was made through its fast growing end-to-end business, making up 15% of volumes and 82% of revenue.

From 2021 to 2024, the company scaled end-to-end volume from $47 billion to nearly $165 billion, representing a more than 50% annual growth rate. Gross profit rose alongside this growth, climbing from about $280 million in 2021 to $970 million in 2024.

Shift4 is expecting its top-line revenue to keep growing by 45%-50% this year, driven in part by the gains in its core businesses.

The company is expanding its offerings to end markets such as retail, casinos, and sports and entertainment facilities while simultaneously seeing momentum in both its international expansion efforts and push towards servicing bigger merchants.

Despite these positive trends, the Uniform accounting shows that the market may be underestimating Shift4 as it only trades at a Uniform P/E of 18.6x, below corporate averages.

At these valuations, the market is expecting that the company’s Uniform ROA will stay flat at just 30% levels by 2029.

If Shift4 can continue to make progress in its expansion efforts and push to serve larger merchants, it can provide significant upside to investors looking for exposure in the highly concentrated payments market.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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