Shift4 Payments is the IBD Stock of the Day as shares in the digital payment processor consolidate into a bottoming base about 14% below an entry point.
Shift4 holds an entry point of 51.52. But investors should watch for a strong move by FOUR stock above its 50-day or 200-day moving averages for an earlier, more aggressive buy point. Shares were up fractionally to close at 45.37 Friday.
Shift4 is set to report third-quarter earnings on Nov. 7. Investors may want to be cautious ahead of the earnings report. One strategy around earnings would use call options.
In the June quarter, Shift4's earnings rose 30% to 30 cents a share while revenue climbed 44% to $506.7 million.
Shift4 Stock IPO
Shift4 launched its initial public offering in June 2020 with shares priced at 23.
Thus far this year, FOUR stock has retreated 17% amid the bear stock market. Shift4 stock holds a Relative Strength Rating of 77 out of a best-possible 99, according to IBD Stock Checkup. The best stocks tend to have an 80 or better RS Rating.
But the relative strength line of Shift4 stock remains stable.
The RS line, drawn in blue on every IBD daily stock chart and weekly chart at Investors.com, compares a stock's price performance with the S&P 500. If the line slopes higher, it means the stock is outperforming the S&P 500, a market benchmark. When it moves sideways, it's more or less in line with the S&P 500 and when it's sloping downward, it's underperforming.
In addition, Shift4 stock has an Accumulation/Distribution Rating of B-minus. The rating analyzes price and volume changes in a stock over the past 13 weeks of trading. The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of the C grade as neutral.
FOUR Stock: Acquisition Strategy
Shift4 gets most of its revenue from customers in the hotel and restaurant industries as well as casinos. It has expanded into sports stadiums, airlines and charitable giving as well as food and beverage companies. One new customer is Elon Musk's satellite broadband service Starlink. It operates in 20 countries.
Acquisitions have played a part in Shift4's strategy. To help drive international expansion, Shift4 in early 2022 announced the acquisition of Finaro for $575 million. Finaro is a pan-European cross-border e-commerce platform with banking licenses in Europe, Japan and Hong Kong.
The Finaro purchase is expected to close by year-end.
Also, Shift4 acquired software maker VenueNext for $72 million in March 2021 as it targets sports stadiums.
Another part of Shift4's strategy involves growth in "gateway" services. Gateway software connects a merchant's business operations with Shift4's payment platform, said Eugene Simuni, analyst at MoffettNathanson.
"Shift4 provides gateway services to a large share of the U.S. lodging industry, but is the payment processor for a much smaller share of lodging customers," Simuni told IBD in an email. "So, Shift4's strategy is to convince its gateway-only customers to switch to using Shift4 as the end-to-end (payments) processor."
Gateway processing accounts for 10% of Shift4's revenue. Overall, the company garners 70% of its revenue from end-to-end payment processing and the rest from subscription software.
Shift4 To Turn Free Cash Flow Positive
Bullish analysts point to Shift4's profitability. It has adjusted EBITDA margin — earnings before interest, taxes, depreciation and amortization — of about 35%. In addition, Shift4 is expected to turn free cash flow positive in 2022.
However, Goldman Sachs has a neutral rating on FOUR stock amid concerns that the U.S. economy could fall into a recession. If that happens, Shift4's exposure to the hotel industry could be a problem, Goldman Sachs analyst Will Nance said in a recent note to clients. Nance recently met with Shift4 management.
"Overall, the message was positive as the company was highly confident in its ability to grow end-to-end volumes through a potential downturn," Nance said. "In addition, we walked away incrementally positive on the company's ability to deliver on the gross margin expansion and (free cash flow) conversion."
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
