As interest rates are expected to fall throughout 2024 and 2025, fintech companies are poised to benefit from the resulting economic growth and increased market liquidity. This environment seems favorable for fintech stocks with innovative solutions and strong business models.
Shift4 Payments, Inc. (FOUR) is a payment processing company offering end-to-end payment solutions and business analytics tools. Its software is used by major companies like eBay Inc. (EBAY) and the Marriott hotel chain, and it focuses heavily on the hospitality, lodging, and sporting events sectors.
In the fiscal first quarter, FOUR generated gross revenue of over $700 million, which was up 29% year over year. While this growth rate is impressive, it fell short of Wall Street's expectations of $751 million. Moreover, the company has not been able to beat consensus revenue estimates over the last trailing three quarters. Then, on the bottom line, it reported quarterly earnings of $0.54 per share, missing the analysts’ estimate of $0.61 per share.
Typically, missing Wall Street's expectations would cause a stock to drop. However, the stock remained resilient as investors focused on the company's steady full-year financial guidance. FOUR shares have gained 8.3% over the past month but have lost 2% year-to-date to close the last trading session at $73.55.
Here’s what could influence FOUR’s performance in the upcoming months:
Mixed Financial Performance
For the first quarter that ended March 31, 2024, FOUR’s gross revenues increased 29.3% year-over-year to $707.40 million, while its gross profit grew 27.3% from the year-ago value to $175.90 million. FOUR’s income from operations improved by 143.2% from the previous year’s quarter to $21.40 million.
However, the company’s comprehensive income declined 40.8% year-over-year to $10 million. Moreover, FOUR recorded an adjusted EBITDA of $121.70 million, down by 10.5% from the last quarter. Also, its net cash flow from operating activities decreased 28.6% year-over-year to $56.70 million. As of March 31, 2024, Shift4’s long-term debt stood at $1.75 million, with total liabilities worth $2.51 billion.
Elevated Valuation
In terms of forward non-GAAP P/E, FOUR is trading at 20.10x, which is 87.5% higher than the industry average of 10.72x. Similarly, its forward Price/Book multiple of 7.99 compares unfavorably with the industry average of 1.07. Also, the stock’s forward EV/EBIT ratio of 21.96x is 101.5% higher than the industry average of 10.90x.
Weak Profitability
FOUR’s trailing-12-month gross profit margin of 26.79% is 55.3% lower than the industry average of 59.92%. Likewise, its trailing-12-month EBIT and net income margins of 6.90% and 3.38% compares to the industry averages of 23.13% and 23.18%, respectively. In addition, the stock’s 10.74% trailing-12-month levered FCF margin is 38.6% lower than the 17.49% industry average.
POWR Ratings Reflect a Weak Outlook
FOUR’s poor prospects are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. FOUR has a D grade for Value and Quality, which is consistent with its extremely elevated valuation and lower profit margins. Also, it has a D grade for Stability. FOUR’s 24-month beta of 1.70 justifies the Stability grade.
Within the Technology - Services industry, FOUR is ranked #68 out of 79 stocks.
Beyond what I have stated above, we have also given FOUR grades for Growth, Momentum, and Sentiment. Get all FOUR’s ratings here.
Bottom Line
The fintech industry is fiercely competitive, often leading companies to lower prices to maintain market share and profitability. For Shift4 Payments, this competitive environment could pose challenges, particularly in maintaining healthy profit margins.
While the current U.S. economy and labor markets appear robust, defying earlier expectations, any downturn could significantly affect consumer spending in sectors where Shift4 operates prominently, such as travel, hospitality, and entertainment.
Given FOUR’s recent financial performance falling short of expectations, stretched valuation, weak profitability, and dim growth prospects, it could be wise to avoid investing in this stock.
Stocks to Consider Instead of Shift4 Payments, Inc. (FOUR)
Given its uncertain short-term prospects, the odds of FOUR outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Technology - Services industry instead: Leidos Holdings, Inc. (LDOS), RADCOM Ltd. (RDCM), and Crexendo, Inc. (CXDO).
To explore more A and B-rated technology service stocks, click here.
What To Do Next?
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FOUR shares were trading at $72.85 per share on Wednesday afternoon, down $0.70 (-0.95%). Year-to-date, FOUR has declined -2.00%, versus a 16.76% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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