Shift4 (FOUR): Still an Opportunity at 8x FCF

I’ve written about Shift4 a lot since I first opened the position last September.

The original thesis was pretty straightforward: a payments business growing around 30% a year, showing real operating leverage, with a roadmap to roughly $1 billion in free cash flow by 2027 and a valuation that looked way too cheap if management could get anywhere close.

A lot has happened since then.

Global Blue has become a much bigger part of the story, the stock has gotten smoked, the old $1 billion FCF target disappeared, management has had some pretty obvious issues communicating guidance, and the company has since started shrinking the share count pretty aggressively.

If you’re new to the name, my original writeup is probably still the best place to start.

[New Position] Shift4 Payments (FOUR)

Anyway, Q2 gave us another pretty good example of why I’m still here.

The actual quarter was strong. Really strong, honestly.

Volume came in at $61 billion, up 22%. Gross revenue less network fees was $624 million, up 51%, or 11% organically. Payments-based GRLNF grew 27%. Adjusted EBITDA was $284 million, up 39%, with margins improving to 46%. Non-GAAP EPS came in at $1.32.

And they beat the quarterly guide they gave us in May.

Management had been looking for roughly $615 million of GRLNF, $278 million of adjusted EBITDA and only about $10 million of adjusted free cash flow. They finished at $624 million, $284 million and $21 million respectively.

So operationally, I really don’t have much to bitch about.

The international payments business continues to fly. Payments-based GRLNF outside the Americas is up 52% YTD versus the high-20s growth management expected coming into the year. The Americas business is up 17%, basically right where it should be, and Shift4 One is now live in 12 European countries with management still targeting at least 15 by year-end.

The Global Blue integration also looks fine from what I can tell.

Remember, this was one of the big concerns when I wrote about FOUR earlier this year. Global Blue was going to temporarily hurt EBITDA margins and free cash flow conversion while Shift4 integrated the business and started pushing payments through the network.

That was expected.

What I wanted to see was the underlying payments business continue growing while the integration worked its way through the numbers.

So far, that’s pretty much what is happening.

What’s Up With the Guide?

Shift4 lowered full-year GRLNF guidance from $2.50-$2.60 billion to $2.48-$2.53 billion.

Adjusted EBITDA moved from $1.165-$1.215 billion to $1.15-$1.18 billion.

Adjusted free cash flow went from $490-$510 million to $465-$475 million, and EPS moved from $5.50-$5.70 to $5.15-$5.35. Volume guidance was unchanged.

Obviously, cutting guidance isn’t good.

But I think the reason behind the cut is worth thinking through.

Management said roughly $25 million of the GRLNF reduction comes from assuming continued Middle East-related travel disruption in Q3, with another $20 million from FX translation. The updated FCF and EPS numbers also include the impact from the company’s recent financing.

The strange part is that the Middle East headwind was actually a little better than expected in Q2.

Those aren’t my words either. Taylor Lauber specifically said international performance was better than they originally anticipated during the quarter, while simultaneously lowering the full-year outlook because they are assuming the travel disruption continues into Q3.

“The Middle East conflict remained a headwind and weighed on inbound travel to Europe and across several Gulf countries. However, the overall impact on our Q2 results was slightly better than we had forecast.”

That’s where I’m struggling a little.

If Q2 was better than expected and the worst of the travel disruption appears to have been during the quarter, why assume a fairly meaningful hit in Q3?

Maybe they know something I don’t.

Or maybe management finally learned how to guide.

Back in March, I spent a good chunk of my last Shift4 post complaining about exactly this.