Now of course I'm itching to get back in FOUR.
Wasn't even thinking this way until now.-
Chris Hill:Shift4 Payments is not exactly a household name. The company went public in the summer of 2020 and while the stock is up 50 percent since its first day of trading, Shift4 has largely flown under Wall Street's radar. For more on a business that investors might want to take a closer look at, here's Matt Frankel and Jason Moser.
Jason Moser:Matt, longtime listeners, though that you and I always enjoy talking stocks, particularly in the financial space. I mean, that's what we've done for so long. This week we're going to take a closer look at a company. It's still relatively new to the public markets. The company is Shift4 Payments, and before we get to what you like about this business, what is it that Shift4 Payments actually does?
Matt Frankel:They are a payment processor at heart, but there's so much more than that. They're also a software-as-a-service company and they target specific industries. Their bread and butter is the restaurant business right now. They are a big competitor of Toast, if you know that company.
Jason Moser:Yeah.
Matt Frankel:They process payments. They have a point-of-sale system. It's actually like a whole restaurant operating system, that a lot of listeners don't know this about me. I came from the restaurant business. That was my first career another lifetime ago.
Jason Moser:[laughs].
Matt Frankel:I took a look at what Shift4 offers to restaurants and we had nothing like it. When I was in the business way back in the day, it really just automates the whole thing. It provides technology like if you've ever gone to a restaurant where you could scan a QR code and then pay your bill.
Jason Moser:Yeah.
Matt Frankel:That's most likely Shift4 was the company behind that. They power these for some of the biggest brands in the business. Applebee's, IHOP, KFC, Denny's are all Shift4 customers. They're also big in the hospitality business, IHOP is a big customer of theirs. They try to be very specialized, which is what makes them a lot different from other payment processors. Square's a competitor, but they're not just all-in on restaurants if that makes sense.
Jason Moser:Well, that does make sense, and I'm glad you said that because that was what I was reading about Shift4, it reminded me of huge user set atToast. Really it is that exposure to the restaurant industry. I think one of the things that you like about the business and one of the things I like about it too, it really feels like this is a one-stop shop. I mean, I think you said the key phrase there, operating system. For a restaurant to be able to have an operating system they can rely on, I mean, this is a system that does a number of different things for the restaurants, for the business itself, right?
Matt Frankel:Right. It's a land and expand model which will provide one service such as the restaurant software system. One of the big things that differentiates them from Toast is that Toast doesn't have an in-house payment processing option. Them they'll cross-sell them that payment processing option, and they are expanding into new verticals like Gaming is a big focus of theirs right now, where they're building out things for Game. ThatMGMwas their first big get in that space where they're the payment or the infrastructure behind that. What they do is they provide a host of services for these specific industries like restaurants, where there are other competitors, but no one provides a comprehensive solution that they do. That's the secret sauce behind the model.
Jason Moser:Yeah. You have a comprehensive solution coupled with a large and growing market opportunity, and then you have a recipe for tremendous potential success. I mean, let's talk a little bit about that market opportunity because, all-in, this is a massive market opportunity.
Matt Frankel:Yeah, and I mean, it's tough to quantify and companies throw these trillion-dollar subs around, but they're never actually going to get. Shift4, they think their current market opportunity between all the companies they could go after is about $1.1 trillion in annualized payment volume. Pretty big market so far, they're planning on adding more verticals over time. Just to name a few non-profits are one of the newest things they want to get into. The healthcare business doing the healthcare payments in software solutions, and then technology as SpaceX, StarLink is actually one of their newest clients that has very high long-term potential for obvious reasons. As they build these verticals, they say their market opportunity is going to grow to about $3.7 trillion in payment volume. They're currently at about 50 billion, a very, very small fraction of where they think they could be. I don't see them ever getting into the trillions, at least not anytime soon but the point is that there is room to Ten-X this business and still be at a pretty small market share.
Jason Moser:It feels like the leadership story here is one that investors should feel really good about. Is that right?
Matt Frankel:For sure? I mean, I'm a big fan of their leadership team. I'd honestly dug into them about a year ago, so I can't remember the names off the top of my head right now but I remember their leaderships highly invested, great compensation structure that really aligns our interest with shareholders. Very shareholder-friendly management is the feel I get from.
Jason Moser:Right. Just to be clear, we're talking about Founder CEO Jared Isaac and I think referring to you. I mean, still a young buck, I think in the CEO world.
Matt Frankel:I have a whole sheet of stats in front of me, but that name wasn't on there.
Jason Moser:Hey, listen, none of us is perfect Matt. None of us is perfect. Listen, that's something we always focus on, at least with leadership. I mean, it's never really these solid reason to invest, but it's always nice to know that you have founders involved there with skin in the game really with the passion to take that business as far as they can. We talk a lot about things we love about this business. Maybe clearly there are things to keep an eye on there. One thing that I go back to, I started thinking, I like the idea that they focus on such specific markets but are you concerned that in time maybe they pursue ancillary markets where they don't necessarily have an edge? I mean, I'm thinking something like a healthcare for example, where regulatory considerations could be a lot higher than something like the restaurant business. Do you feel like there's that opportunity for diversification? I guess, for lack of a better term.
Matt Frankel:Yeah, there's a ton of execution risks when you're going into new verticals like that.
Jason Moser:Yeah.
Matt Frankel:There's a ton of risk involved with just being a specialist, by the way, in say, restaurants.
Jason Moser:Sure.
Matt Frankel:I mean, Shift4's business was much more affected by the pandemic than saySquareorPayPal. Because what happened to restaurants when the pandemic started. There's risk both ways. I like Shift4 for their core competencies, which are restaurants, hospitality, the things they do really well. I think there's enough room to grow just in those markets as it is. I guess that I mentioned, their current addressable markets about a little over a trillion dollars in annual payment volume. There at about 50. There's a lot of room to grow into their markets that they've already proven they can do. Yes, there is a lot of execution risk there, which is why I alluded to take that $3.7 trillion figure with a big grain of salt.
Jason Moser:Yeah.
Matt Frankel:Because the healthcare market might not work out for them. StarLink might not be a $100 billion annual revenue stream like they think it's going to be. Things like that but as far as their core business goes, you really can't argue with the success they've had so far.
Jason Moser:No. I am glad you said success because I feel like there is a growing gap between the business itself and how the market is treating this company today. Because I mean, the stocks had a tough last 12 months down around 30 percent as we're speaking but generally speaking, I mean, when you look at the business, it's growing. That top line is growing. You've got this opportunity for plenty of other markets to reach there. How do you view this as an investment opportunity for investors? I mean, is this just some other FinTech name where you really got to wait for them to prove their use case or do you feel like there really is the opportunity, the differentiation that makes this an idea that investors should consider?
Matt Frankel:Well, Greg, you just mentioned top-line because that answers the question right there. Shift4 has grown its top-line, its total payment volume, which is where it drives most of its revenue at a 37 percent annualized rate over the past five-years. That's higher than Square, PayPal,VisaorMastercard. That's a better five-year growth rate than any of those companies. The growth rate is even higher when you look at that core restaurant business, 52 percent growth in payment volume through their network annualized since 2017. I do think that the use cases being proven out. I mentioned some of the brands that used them. T-mobile Arena is one of their new entertainment brands that picked them up. If you go to that stadium in Las Vegas, you're going to be using Shift4.Caesars is a customer of theirs now.Hilton is a customer of theirs. I think just like this run. I don't like to just sit here and drop names [laughs] but this list of names.
Jason Moser:We'd like names.
Matt Frankel:Oh yeah, but this list of names really shows what the use case is. The fact that these big companies are picking them up over say, Square or over Toast. It shows that there is a big use case for these platform.
Jason Moser:I agree. I think there is a lot to be said for that. Those big customers, they can lead you down a road of picking up a lot of new customers, both small and large. So that's good to hear and Matt it was really great catching back up with you this week. Thanks so much for digging into what really looks like a compelling name in the FinTech space.
