Key Takeaways:
- The 2-Minute Valuation Model values Shift4 Payments stock at $165 per share in 2 years.
- That’s a potential 42% upside today for $FOUR.
- Get accurate financial data on over 100,000 global stocks for free on TIKR >>>
Investors have their eyes on Shift4 Payments stock ($FOUR), which is currently Michael Burry’s third-largest holding in his hedge fund, Scion Asset Management. The stock has already climbed over 50% in the past year.
Shift4 Payments is a fast-growing payment processing company that helps businesses in hospitality, retail, e-commerce, and other industries handle transactions.
Despite heavy competition in fintech, analysts still expect strong revenue and profit growth ahead. If they’re right, the stock could rise another 42% over the next 2 years.
What is the 2-Minute Valuation Model?
There are 3 core factors that drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
Our 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Is Shift4 Payments Undervalued?
Forecast
On $FOUR’s Analyst Estimates tab shown below, you can see analysts expect the company to grow revenue and normalized earnings per share (EPS) at a 21% compound annual growth rate over the next 3 years. This is strong growth:
View $FOUR’s full analyst estimates >>>
For context, FOUR’s revenue has grown by about 37% per year over the past 5 years.
Growth has slowed a bit, but 20% expected annual revenue and earnings growth is still impressive.
Valuation Multiple
The stock currently trades at around $116/share, which means the stock trades at about 27 times next year’s expected earnings.
Over the past 3 years, the stock has averaged a 27x forward P/E multiple, meaning the stock is trading right in line with its historical valuation.
At first glance, that suggests the stock is fairly valued today.
However, the stock still looks undervalued.
We’ll use a 25x forward P/E multiple in our valuation to stay conservative.
In today’s market, many wide-moat, blue-chip companies are trading at P/E multiples that are double their expected earnings growth (or even higher).
Put simply, investors are paying a premium for high-quality American companies.
A 25x P/E ratio would be reasonable for $FOUR because the stock is expected to see 20% annual revenue and earnings growth.
It’s entirely possible that the stock could eventually trade closer to 30 or 40 times earnings, as it has in the past.
Fair Value
3 years from now, analysts estimate that Shift4 Payments could reach about $6.59 in normalized EPS. At a 25x NTM P/E multiple, that values $FOUR stock in 2 years at $165/share.
(The NTM P/E multiple uses the expected earnings for the next twelve months, so a 2-year valuation uses 3-year EPS forecast figures.)
With the stock trading at about $116 today, this implies that the stock could rise about 19% per year over the next 2 years, or 42% in total:
For reference, the stock market has averaged 10% annual returns over the long term.
So 19% annual returns with $FOUR would be great!
Over time, stock prices generally follow a company’s earnings growth.
So, if earnings per share are expected to increase by 20% per year and the stock is trading at a reasonable valuation, it’s logical to expect that the stock could grow at a similar 20% annual rate!
Analysts don’t see as much upside for $FOUR stock, but most analysts are bullish on the company.
Analysts’ Price Target
The consensus price target for Shift4 Payments stock is currently $119 per share, based on estimates from 21 analysts.
This suggests the stock is just about fairly valued today. However, 18 out of 24 analysts rate the stock as a Buy or Outperform, which means most of them believe in the stock’s potential, even if they collectively have low target prices.
Over the past 4 years, when analysts thought that $FOUR stock had upside, the stock tended to perform well.
The blue line below shows analysts’ estimated upside for $FOUR since the company went public.
When the blue line was high, analysts thought the stock was undervalued. When the blue line was low, analysts thought the stock was overvalued.
The black line simply tracks $FOUR’s stock price.
You can see analysts think the stock has about 0% upside today. They think the stock’s upside has gone down substantially as the share price rose:
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TIKR Takeaway
Using the 2-Minute Valuation Model, it looks like Shift4 Payments stock could deliver 19% annual returns over the next 2 years.
Of course, this is just a valuation exercise. No one knows where a stock is headed in the short term, and few can predict where a stock is heading in the long term.
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
