Expanding Global Footprint And Diverse Offerings Set To Elevate Earnings And Market Position

Key Takeaways

• Expansion into stadiums, hotels, and international markets, coupled with acquisitions like Revel and Vectron, aims to boost future revenue and EBITDA.
  
• Strategic diversification into sports, entertainment, and online gaming, with a focus on technological advancements, indicates potential for scalable growth and increased earnings.
  
• Shift4 Payments' growth strategies and sector focus introduce risks including integration challenges, regulatory environment navigation, and potential for increased operational costs impacting margins and earnings.

Catalysts

Provides software and payment processing solutions solutions in the United States and internationally.

• Shift4's continued and accelerated growth in end-to-end payment volume, particularly through additional stadiums, hotels, and international expansion, suggests a positive impact on future revenue growth.
  
• The acquisition of Revel and Vectron provides Shift4 with new opportunities for cross-selling and synergies, expected to contribute to EBITDA and enable further market penetration, especially in the hospitality and European markets, impacting net margins and earnings positively.
  
• Ongoing investments in product development, such as enhancements to the SkyTab product, and aggressive market expansion efforts, including into international markets and sectors like nonprofits and gaming, are believed to drive both top-line growth and margin expansion.
  
• The establishment of a differentiated value proposition in the payment processing domain for fundraising platforms, coupled with the transition into a comprehensive commerce experience provider, is expected to cement Shift4's market position and fortify revenue streams.
  
• Shift4's strategic focus on diversifying its merchant base, particularly with the push into sports and entertainment venues, nonprofits, and online gaming, alongside leveraging AI and other technological advancements, suggests potential for scalable growth and an uplift in earnings through expanding service offerings and entering new markets.

Assumptions

• Analysts are assuming Shift4 Payments's revenue will grow by 25.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 7.4% in 3 years time.
• Analysts expect earnings to reach $433.8 million (and earnings per share of $4.24) by about October 2027, up from $106.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $506 million in earnings, and the most bearish expecting $184.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.0x on those 2027 earnings, down from 57.1x today. This future PE is greater than the current PE for the US Diversified Financial industry at 15.4x.
• Analysts expect the number of shares outstanding to grow by 4.94% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Risks

• The company's significant reliance on acquisitions for growth, like Revel and Vectron, introduces risks associated with integration and achieving expected synergies, which could impact future earnings and margins.
  
• Shift4 Payments' expansion into new markets, including international markets, carries execution risk due to differences in regulatory environments, competition, and consumer behavior, potentially affecting revenue growth and margins.
  
• The company's aggressive growth strategy in the highly competitive payment processing and POS market segments may lead to increased spending on sales and marketing, impacting net margins.
  
• Ongoing investments in internal systems and technology projects, such as Project Phoenix and AI initiatives, while necessary for long-term efficiency, could lead to short-term margin pressures due to upfront costs.
  
• Shift4's increasing focus on sectors like Sports & Entertainment and online gaming introduces concentration risks. Any downturns or regulatory changes in these sectors could disproportionately impact revenues and earnings.

Valuation

• The analysts have a consensus price target of $97.34 for Shift4 Payments based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $48.91.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.8 billion, earnings will come to $433.8 million, and it would be trading on a PE ratio of 28.0x, assuming you use a discount rate of 7.0%.
• Given the current share price of $90.66, the analyst's price target of $97.34 is 6.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.