#98 | How strong is Shift4's competitive advantage? w/ Niklas from Heavy Moat Investments

In this episode, Niklas and Bouke dive deep into Shift4's four segments. While the underlying business has performed remarkably well, Shift4's share price has declined by over 50%. What's going on here?

Shift4 is a fintech company operating in the payments space. It provides end-to-end payment processing solutions, combining software, hardware, and payment gateway services into one platform. The company serves merchants in industries such as restaurants, hospitality, retail, and entertainment, enabling them to accept transactions both in-store and online. 

To read our 30-page analysis on Shift4, become a TDI Member.

To follow more of Niklas's work, click here.

Transcript

SPEAKER_00 0:00

Hi again and welcome to a new episode. This is a bit of a special one. After analyzing shift four for our TDI members, I felt there was more to discuss with Nicholas, the writer behind heavy mode investments on ZubSec. Nicholas, for how long have you been a shareholder of Shift 4 now?

SPEAKER_01 0:17

I haven't been a shareholder for too long. I think it was uh uh like late 2025. But for the short amount of time I have been a holder, I have lost a considerable amount of money, so it has been moving fast.

SPEAKER_00 0:30

Yeah, yeah. And that's that's true, but the underlying business has performed remarkably well. Why has the stock declined then and could this be an opportunity? Let's begin.

SPEAKER_01 1:00

I think not percentage-wise, but in real uh Euro terms, has been my biggest loser so far in my investment journey. Um I think there are multiple reasons. So, of course, the peak was when they announced the um acquisition of Global Blue. The market hates it. I think it's yeah, certainly not a great deal they made. Um, if we look at the recent performance of the business, so definitely justify to have some sort of sell-off based on the global blue deal, but I think it's overdone. Then we also have the problem with financing. Um, they have a lot of debt and they are aggressively continuing to invest, while um Wall Street probably would prefer if they would um would instead service their debt and focus on deleveraging. Yeah, I think that's that's probably one of the biggest catalysts. Um, as we have seen in the in the last uh week actually, for the stock. Um, they need to get back to an investment grade balance sheet. Um because some people, I don't know how they get that idea, but some people are actually questioning their um yeah, if they can stay um stay away from bankruptcy, which which I don't understand. They don't really have a a problem with with liquidity and they shouldn't default on their debt. But but some people actually have made a point uh without substance behind it, but it's okay, it adds to the whole bear case that's going around of a business with a questionable mode, loaded up with debt, making expensive acquisitions, uh, and yeah, other players eating their lunch. That's that's basically the bear case, and yeah, there are a lot of lot of shorts around. I think before the recent uh uh rally, they had like 38% of short interest or something crazy like that. So yeah, yeah.

SPEAKER_00 3:02

The uh the argument of uh Shift 4 going bankrupt is highly unlikely, in my opinion, as well, because they are uh yeah, net profit, they're profitable, they are free cash flow, uh generative. Yeah, the only problem they have is of course their debt because they're quite leveraged, they have a net debt EBITDA of around three, and of course they have to pay the interest uh and the uh the loans eventually back. Uh, I think that's doable, and uh, I think so are you, Nicholas? Yeah. Um, yeah.

SPEAKER_01 3:31

So actually, last week they or this week, um, earlier this week, they have announced a new financing. They have a I think 750 million dollar term loan until 2032, which they use to um refinance their um debt coming coming uh uh soon. I think it was 2028. So the whole maturities are pushed out further. So yeah, they only need to care about the interest payments, and there aren't like huge um maturity walls they have to service. So that probably was the reason why um shares ran up a bit, um, shorts covering probably because they were betting on liquidity issues. And also what we need to remember for this year um is that they have done a lot of one-time um situations like uh resolving the uh agreement with with founder Jarekman Isaacman, the I think it's a called TRA um agreement liability. So that was a one-time cash outflow. So yeah. This this quarter or and the next quarter, um Q2 are probably like if we just look at the numbers, um the ugliest we will get.

SPEAKER_00 4:53

Yeah. Okay. Um so Nicholas, shift four grows both organically and through acquisitions. Do you have any idea how much of the company's growth comes from organic growth and what part of the growth comes from uh from acquisitions?

SPEAKER_01 5:06

Yeah, that's that's one of the let's say annoying parts about shift four is that even though they have improved it, their investor relations are still a little wonky. It's very hard to differentiate between like what is actually organic, what is um acquired growth, and then also trying to understand what they are saying. So the way shift four is is operating is that they are aggressively acquiring businesses. Um, oftentimes they acquire uh merchant acquirers with very large um payment volumes where they then rip out parts, make the business more lean. They oftentimes um cut out um subscription fees from software products and fully focus on the payment volume. They try to push that, they are using aggressive um aggressive terms often, and they are also very aggressively trying to um get customers to adopt their systems. Um, in order to do that, they um subsidize their um hardware. Um, so they basically in in in many cases give the hardware for free under the terms that they are doing the payment volume through Shift 4. So that has been very um successful because um a lot of these acquirers um are underpricing their product, and so shift four has been able to get a lot of upside there. But the problem is um how do you really differentiate then between is it still acquired growth or is it organic growth if one year after acquiring the merchant it's uh upselling um the business from there? So it's it's it's really really tough to get a number a number there. For last year they said it was 19% organic growth. Now I think they got it this year for 11%. Yeah, so yeah, maybe that's that's true for now, but what would happen if uh they stop acquiring? They probably would still grow with at least a mid-single digit, I would say. Maybe they can push it too high single digits to close to 10%. So yeah, in the past they they've always grown above 10%, but yeah, competition is there, there's a lot of competition in general in payments, and yeah, yeah, let's talk about that in a few minutes because there is a lot of competition, definitely.

SPEAKER_00 7:37

Um about their aggressive accounting. Yeah, there's just so much noise as well in their adjusted numbers, like the uh adjusted Avatan number uh contains, for instance, acquisition and integration costs. Yeah, in my opinion, if they are structural for uh for they are actually structured uh structural costs, yeah, then you have to yeah, not add them back to the to the to the numbers, and also the stock-based compensation. I just hate when companies uh yeah put that back uh in the numbers. So uh about competition, who do you believe their top two competitors are?

SPEAKER_01 8:15

Yeah, I would say the the biggest one is is toast, uh, especially in in restaurants, they are the leader there, and shift four is um the second place, but there have also been um some uh attempts of um toast going into hospitality as well because there is a an overlap. Um, because if you can service a restaurant, you can service the restaurant in a hotel, for example. Yeah, if toast, for example, would attempt to really push into that vertical, that could get a little tricky, but then again, it's a this different business, and they would have to adopt uh a lot of their business first.

SPEAKER_00 8:55

Yeah, we uh we will talk about these segments in a minute because shift four operates in three different segments. Uh, you have unified commerce, restaurants, and hospitality. Oh, wait, you also have tax-free shopping now as well, uh, because of their global blue acquisition. But let's start off with uh unified commerce. Uh, this basically means, besides in-store payment processing, also offering online payment services to uh to their merchants. Um, so a quick question: is this similar to the offering of the likes of Global Payments, Stripe, and Agen? Do they compete?

SPEAKER_01 9:30

Yeah, so the way I understand it, it's it's standard merchant acquiring. And yeah.

SPEAKER_00 9:36

I believe this is mostly like uh on the SB segment, so focused on restaurants, uh, hotels, but also sport venues. Uh so processing the uh the payment of the online ticket, for instance. Uh, is that how we can view this uh this for you?

SPEAKER_01 9:52

Yeah, the way I understand it, I would view it that way. Again, they're um they talk a lot, but it's not really um, yeah, you you don't really understand after they they talk for a while. That's one of the issues I have with management. Uh and yeah, it it's it's pretty evident. Um, if you listen to the new CEO talk, it's it's a lot of flowery words, uh which is unfortunate.

SPEAKER_00 10:18

So yeah, they could use simpler language, yeah, yeah, because it is quite a significant part of their uh payment volumes. Because when you look at their um investor day presentation 2025, it is like uh at least one-third of their process volume, so it's uh quite significant. But uh yeah, uh a good solid explanation lacks there, uh, in our opinion. Yeah, okay. So they uh have a net revenue retention rate uh basically volume based of 103% in this uh in this pillar in this segment. Uh that means without adding any new customers, existing customers grow payment volume by about 3% a year, and that is because they upsell and because of organic growth. Yeah, and when we compare that to uh to Agenis Tribe, that's well below the roughly 15% annual growth they uh yeah they uh perform. Does this mean that Shift 4 is losing ground in this space? What are your thoughts on that?

SPEAKER_01 11:14

Yeah, the qu the question is with net revenue retention, it's it's always also a function of churn. Um, in restaurants, they definitely have a higher churn because restaurants often go bust. Um in their unified commerce segment, it's it's tough to say because um when they acquire these merchants, um they are trying to push their contracts, and oftentimes it works, but they can't convert all of them. So they often also um also stop doing unprofitable business. So you have a lot of these dynamics which uh aren't really that well under uh explained. So I would say the difference probably isn't as high because you have these instances where they are giving up business which wasn't profitable, and they also um have a strategy which is called um I think it's called rip out the parts. Basically, what they do is they look at the business they acquired, they look at what they already have, and they um yeah, delete the parts, it's called, and then they stop doing the business which is inferior. So if they, for example, have a um uh a gift card option in their um existing business, um, and then they acquire the business which has a very good um gifting feature, they will then uh stop using their own feature but instead use the acquired one. So that adds a lot of noise as well because they will acquire a business and then stop doing some of what they did. So yeah, that probably drives the net revenue retention down as well. Um, but to the initial question, I I still think that they are um probably not really a share gainer. Maybe they have roughly uh a flat share, but I don't see them as an aggressive share taker like Adian and Stripe in the same way.

SPEAKER_00 13:13

Yeah, we must not forget that the uh unified commerce there are just so high switching costs because uh it's so sticky if you have your online payments infrastructure flow through one provider and your in-store, your terminal processed volume as well. It's just you have to replace so much of your existing business if you want to change a provider. So the sticky stickiness is extremely strong as well for uh unified commerce of shift 4 as well as for Agen and for Stripe. Um, so let's uh let's now move on to the second and to the second segment that is uh restaurants. Uh with yeah, this is their bread and butter, right? This is a significant part of Shift 4's business. So, what do they exactly offer restaurants?

SPEAKER_01 13:56

Yeah, on restaurants they have a um very diverse business offering. Um basically they attempt in in all of their businesses to find um complex customers and cater to all their needs, and that's basically how they see their competitive advantage. So if a customer um in a restaurant um wants to adopt shift 4, then they um don't just want the payment volume, they also want software, software on that for their back end, they want an option to dine the tables, and they want the whole infrastructure behind it. So it's not just um a little POS system which you exclusively use to do the payment, you get a lot of software um behind that.

SPEAKER_00 14:44

Yeah, it's like uh POS reservations, kitchen display systems, yeah, and of course payment processing all in one system, right? Yeah. So so why would a restaurant then choose shift four over a competitor like Toast or Square or Clover or Lightspeed? You have so many different players. Why would they specifically choose shift four?

SPEAKER_01 15:03

Yeah, I think we need to differentiate between um between niche players and between uh universal players. Um, if we look at that square, uh clover or lightspeed, um uh lightspeed are I'm not sure, but at least Square and Clover are uh very diversified businesses which offer POS for very uh big range of customers. So they don't have the same focus on exactly the restaurant vertical, they cater to all different customers. Uh also on Square in particular, I think they cater to very small businesses. Um, shift 4 is more in the middle, I would say. They look for chains. Um, and and then if we look to to Toast, which is the the other big player in the in the niche business, they have the the better business, uh the better um software, the better package, I would say. Um I think I read somewhere that um shift 4 has around 400 features in their software, and uh and toast has around 500 or so. So most of business needs can be done with shift four. If a um a restaurant wants um a few novel novelty features, then they will go to Toast. Um, what Shift 4 has going for them is that they have a lower total cost of ownership, so they um look to set up these businesses with cheap hardware, and especially in in restaurants, I think that's important because restaurants are notoriously hard businesses and a lot of them fail. So if you have a business with a let's say 50% uh likelihood that you will exist in three years out, you probably don't want to invest like 15k on a POS system. You will happily take um the pretty good solution of Shift 4 compared to the perfect solution from Toast if you can get it for basically free and then charge it, uh get charged by payment fees.

SPEAKER_00 17:12

Okay, so you basically say toast is the the leading provider in this space with the most advanced offering, uh and then square, clover, and also light speed, yeah, they have good solutions, but they aren't as advanced as toast, and shift four is basically in the middle, uh as well with pricing as well as uh the quality of their product. Do I understand that correctly?

SPEAKER_01 17:35

Yeah, so at least if we compare toast to to shift four um in particular, and the other ones, as I said, are more general.

SPEAKER_00 17:44

Yeah, toast is also like so focused on restaurants and and cafes and hospitality. When you compare that to Square, uh with their yeah, they are of course part of uh of Block, the listed company Block, Clover is part of uh Fisserve at Lightspeed. They also have a retail offering which uh is a key focus of them. But shift four as well is focused on unified commerce and hotels and uh uh a bit of retail as well. So you can't say like shift four is uh is uh solely focused, such as uh toast, right?

SPEAKER_01 18:18

Yeah, but but we we can definitely say that shift four's roots and the restaurant business. Yeah, so when they came public in in 2021, I think it was, they they only had the the restaurant business, actually, I think. And then they acquired a business to to get their um uh their their stadium business going, and then they also did the global blue acquisition. So they have diversified a lot, but their roots are restaurants.

SPEAKER_00 18:43

Yeah, yeah, it's a strong focus, but not their their sole focus, uh, as with toast. Uh, but uh definitely agree. Um in the in the US they have an offering called SkyTap POS, uh, that is uh their primarily focused, and then Europe. Yeah, they did an acquisition of Factron, that is uh a POS provider. Um why not just push the Skytap POS solution to Europe? Because they've already developed it. Of course, it's not it's not tailored to the European needs, but with small uh adjustments it can be. Uh I know Factron quite well, it is a it is a good offering, but quite expensive and not cloud-based, I believe. Uh, why just not tailor the SkyTap POS solution for the European needs?

SPEAKER_01 19:28

So I actually have seen the Vectron uh system as well. In in German bakeries, it's it's pretty uh pretty common actually. And I have also seen Vectron labeled ones, but also already have seen some with the Shift 4 labeling. So, what I think they are doing is that they are um not forcing them to upgrade because a small bakery they don't want to invest a lot of money into a new POS, they want to use what they already have, and it's it's working, it's it does what they need. They are already um giving the payment volume to shift four, so why bother? It's working. But if somebody wants to upgrade, they will get a shift for branded offering. So I think that's that's basically the way they they are looking to roll it up, and especially for these smaller merchants, uh, yeah, a bakery shop is probably not gonna do a like many millions in and volume, so yeah, no, more like uh like to 10k 20k a month or something like that.

SPEAKER_00 20:28

Agreed. Um is it is it so that uh shift four processes the payments then for for factron? I mean uh what I see here in the Netherlands is that the the the factron devices are uh the payments are processed for with example Worldline or uh CCV, um, that kind of players. Um yeah, could you give a bit of explanation why uh yeah, if that's the case in Germany, are the payments processed with Swift 4 or not? Do you know?

SPEAKER_01 20:58

I haven't checked that yet. Um, I would say it's probably depending on on the contract. Um not sure if they can uh can uh yeah if there's an already existing contract, they can overrule that with um with changing it. But um the new contracts are most likely gonna be um focused on the payment volume because that's that's what they always do. They look at the business they acquire, look if it already has a fit if they need to change it, and if it doesn't need to be changed, they will just um put their payment rails on it and yeah, take the take rate.

SPEAKER_00 21:36

Yeah, agree. And for clarity, just like uh just like Argen Stripe or Worldline uh will pay and uh all those players, uh Shift 4 is an BSP as well, so they have built their own payment systems and uh and they make a good margin on that. Um let's go standard margin, I think, is like sixty basis points. Okay, on average is their take rate is like sixty. BPS. Yeah, through the business. Yeah. Yeah. Yeah. Okay. Interesting. Let's go to the to the second segment, and that is hospitality. Uh, so they are serving besides restaurants, hotels, stadiums, and other entertainment venues. Uh, and from everything I have read, this seems to be the business with the strongest mode because switching is so incredibly difficult. Um, and this segment that we can also see that in the numbers also has um also has 115% uh volume-based net net retent net revenue retention rate. Um, so could you explain what makes this business so strong and sticky, Nicholas?

SPEAKER_01 22:40

Yeah, that's basically the business I bought um Shift 4 for because it is the best business in my opinion. Um, they have a monopoly almost with around 80% in the US, and they have recently also um announced some uh some expansion into I think Canada and also other countries, so they are expanding internationally as well. Um actually this business was um was acquired and they then managed to grow very rapidly, making it the basically industry standard in the US. Um so what they do is they serve very large um venues. Um basically all of the um all of the stadiums for the World Cup will be served by Shift 4. So that's a very interesting dynamic right now for 2026. And here again it's um they focus on very complex customers and doesn't get a lot more complex than um than having a large stadium with like 70,000 people in there that need um payment acquiring. And then again, there are a lot of different um different things that you can pay for. You can pay for the ticketing, for example, you then have the merch shop, you have um like a drink shop, you have some food vendors and all that kind of stuff. So the more complex some uh some systems get, like a large stadium or a hotel, the the company doesn't want to have like a dozen different providers. They they want one solution, one one person to talk to, something breaks, and yeah, that's that's what makes this a lot more sticky than a uh like let's say pop-up restaurant shop in in a high street that gets changed every few years a few years.

SPEAKER_00 24:30

Yeah, definitely uh switching is incredibly difficult. Do you know if they've raised prices uh significantly in the last few years or how that evolved? I'm not sure if they've talked about that, to be fair. If we look at their net revenue retention, then uh we can say yeah, the chances are quite high they did that or they attracted a lot of new customers because uh a 115% NRR is just best in class. Yeah. Who would you consider their biggest competitor in the hospitality segment?

SPEAKER_01 25:06

Yeah, I I think there aren't too many strong competitors there yet. Um, I think there was some some small um news that Toast is actually trying to compete there, at least in the hotel space, I think. Um because it's it's it's not far-fetched if Toast already does um restaurant um POS to then um go into a hotel and and do the restaurant there, for example. So that could be some some way where they expand, but um it's not not that big of a deal yet, at least. Um yeah, I I haven't come up across a too too strong competitor there.

SPEAKER_00 25:47

Uh and they are not really uh they are still not really focused on expanding their hospitality segment, their business there uh to Europe or Asia, right? It's in primarily in the North America.

SPEAKER_01 25:59

Yeah, so so far it's primarily there, but they I mean they have large customers, so um, if they have a large hotel chain in the US, um it's probably easier to to then go and into another country and and do processing there for them. So they have definitely the opportunity to expand that way, um, also. Yeah, but they have been at least some some stadium wins in in Canada if I recall correctly.

SPEAKER_00 26:25

Yeah, amazing, amazing. Yeah. Um they are not uh servicing the the merriots and the Hilton's of this world uh right. Um I think it's it's smaller ones. Um yeah, just smaller chains, I believe. Yeah, yeah.

SPEAKER_01 26:42

Uh but also what's what's pretty interesting is I I saw that American stadiums are very different to stadiums in in, let's say, Germany. Um, there are pools in in some VIP areas, for example, in a stadium. So so American uh stadiums probably have the the biggest opportunity given uh what kind of stuff they they put in there that's probably something Europeans would see as uh not necessary.

SPEAKER_00 27:11

No, no, yeah, super interesting though, but nice. Hey, uh finally, following the uh the acquisition of Global Blue in 2025, Shift 4 also entered the uh the tax-free shopping market. Uh, we've already briefly discussed your thoughts about your acquisition, but what is the rationale behind it? Was it made was is it mainly about cross-selling? But because I believe uh yeah, Global Blue services, for instance, Hermes uh and like dozens of other super high luxury brands, if they can process those payments as well and be their POS, it will be super beneficial. But what is the rationale behind it?

SPEAKER_01 27:52

Yeah, I think management thought that the standalone business was already uh an interesting deal, and that they could um justify the purchase price just with with that business alone, and then on top, they have the optionality of cross-setting their um all of the payment volume um they they could potentially get through their merchants that are already using global blue. Um, the question is if that will um will turn out true. Um, so far, what they have been guiding for um global blue has really been impressive, and probably that's a big reason why the stock is down so much. Um, if I remember correctly, in the initial pitch um after they announced the acquisition, they aimed for a double-digit organic growth rate for um global blue, and now for this year they are targeting mid-single digits. So yeah, it's it's it's kind of a tough market, I would say. It's a new vertical. Um maybe they have just um overestimated how they how much they can cross-sell, maybe it's coming. I don't know, it's it hasn't been too transparent. Uh and then also the global blue assets get some some new up um some new uh seasonality. There are some uh some changes in in cash flows because of it. I think the the first half is consuming cash and the second half is very cash flowing, um, probably because um a lot of the tourists um are traveling in the summer. So yeah, it it has just added a lot of complexity for not really um that great of a payoff so far. So I'm not really a huge fan of the deal. Took a lot of that to get it through, and yeah, it's it it just makes the business so much more complex. And and it also, in my opinion, removes the option of a buyout because now with another vertical and so much more complexity, uh, you you will struggle a lot more if you eventually would want to sell the business.

SPEAKER_00 30:06

Yeah, we should give them some time to show uh if they have uh yeah to to to take off their plan and see if they can uh meet their yeah, first initially targets. Um so far it doesn't seem to be a great acquisition. And one of the key risks, I believe, is they are getting so complex. Like it is something that investors worry about. It's something when you do 10 acquisitions, for instance, they have to manage 10 businesses and 10 cultures, 10 uh bookkeeping systems, and it's yeah, it's very difficult to keep your initial uh culture and the the right people on board if you uh if you do so many acquisitions, uh I believe.

SPEAKER_01 30:49

Yeah, I would say it has been their strength to actually handle that pretty well in the past because they have always well well, not always, they um they were a fully organic growing business for the first like 15 years, but once they started to to get investor money and to to start growing inorganically, they they have done a lot of deals and they always have been good at cutting out costs, and yeah. I mean they are the lead-the-part strategy focuses on um yeah, the leading software that is duplicated, and and yeah, they also aim to retain good people because they need to hire them anyway, so might as well keep the people that already know what they're doing. But but yeah, um, I think with Global Blue they they doubled their employee count, and that's definitely a lot harder than a small bold-on for 80 million or something like that.

SPEAKER_00 31:42

Yeah, yeah, it was definitely not a bold on, it was just so large, and given the uh the science and the knowledge that most large acquisitions actually feel this is just super risky, uh, in my uh in my belief. So I'm a bit of a skeptic in this sense, but uh yeah, let's see where this uh where this ends up in a few years. Um, and whose ID do you think this was? Was it Jared Isaacman's ID, who was the former CEO, and now Taylor Lauber is the CEO? Do you think they made the decision made the decision together, or was it largely Isaacman? Well, any thoughts on this?

SPEAKER_01 32:15

Yeah, well what we need to keep in mind is is that Jared is is still the largest shareholder. He has around, I think, 26% of the company. So he he definitely is uh is very much uh aware of what's happening and is uh also having his his voice heard. Um actually there was an issue for many investors because shift 4 was a uh dual-class share structure because of their uh the way they handled it before. All of this collapsed now that Gerald Isaacman uh moved to head of NASA. Um in order to do that, they he had to forego his um TRA liability, which is a tax receivable agreement. Um basically, through the time they were private and making losses, they had uh developed a tax shield, and when they went public, um there was an agreement that part of that um tax shield will be paid out to the former owners, which was Jared in that case. Um that was also tied, I think, to the different share classes, and and all of that collapsed, so that that declined the complexity of the business um in two ways. First, um the share classes um got collapsed to one class, and also the liability is gone. But yeah, but what I wanted to say is that Jared is on the board, um, he is important. He uh definitely was part of that um that deal. Tyler um has been there for a while, and um I'm I I don't think it was like his decision to to push it out and to to like have a monument for himself or something like that. I think uh it was definitely a decision between the the whole team.

SPEAKER_00 34:08

Yeah, I hope so because uh Taylor Lauber is now the one who uh yeah has to manage the uh the business uh and also get a lot of questions from investors and uh people like us. Yeah, and talking about our prior uh subject during the earnest calls, analysts almost seems like frustrated. Like you can almost hear them thinking, What kind of company are you actually trying to build with this global blue acquisition? Uh and Lauber keeps explaining that they are building a platform to power the experience economy. Given the uh market reaction, investors and analysts don't seem fully convinced, they're happy with that uh explanation. What are your thoughts on this?

SPEAKER_01 34:48

Yeah, I I hate listening to the earnings calls because it it's always so much talking and so little substance behind it. So it has been very rough to to transition here. And also, um a few months ago they released their the new um compensation structure, the new um package for for the management team. Uh, and I actually messaged Investor Relations for a question I had about it, and Tyler answered it um like super fast actually. But the way he answered, I was not much smarter afterwards because it was a lot of words and little substance explaining it, so yeah. Basically, what they did is they um they used a uh free cash flow per share target for the compensation package. Adjusted or not negligible? Uh I think it's adjusted, but what what makes it really really weird is that it's not a full-year target, it's I think Q328 target. So if you play Devil's Advocated, and I uh I did that also, I write that, I wrote that in the email. You could basically pull forward a lot of working capital payments and uh stop investing for that quarter just to juice up the free cash flow on that quarter alone. Uh so yeah, I don't know. Um it it it sounds really weird to put a quarterly free cash flow target um for a long-term strategy. Yeah, um, it makes a lot of sense to focus on free cash flow per share because they have done a lot of buybacks lately as the share price declines, but also here they have um not really communicated well because one quarter they were still talking about their um long-term target of getting to 1 billion in free cash flow, and then suddenly they they start talking only about free cash flow per share because they have uh spent a lot of um money on buybacks. Um I think buybacks make a lot of sense, but the way they communicate really is uh yeah almost infuriating as an investor trying to grasp what the hell they are trying to say.

SPEAKER_00 37:08

Uh just overall, what are your thoughts on on Taylor Lauber and Christopher Cruz as CEO and CFO? Because what I have heard, they are really acquisitions, yeah, mergers and acquisitions kind of guys who have worked at uh at banks before and uh just super focused on on MA. Um I don't yeah, if they are really good in that, of course, maybe that is uh value adding, but I yeah, I'm just not quite fond of people who do a bit of empire building because of large acquisitions. What are your thoughts on these guys?

SPEAKER_01 37:41

Yeah, so on on Taylor specifically, I think he was one of the earlier employees back when the business was really small, and then he uh went for other gigs, did other stuff, and came back. So he he's he knows what he's doing. Um, but yeah, the the focus on MA is uh ingrained in the business, so um will be really interesting to see how they handle it from here after they have done a lot of deals. Um they said they will continue to do small bolt-ons if they make sense, if they can get a lot of payment volume for cheap and then um put their strategy onto it. But yeah, it's it's it's tough. Um what's really good is that they are flexible and that they are focused on yeah, the the per share growth of the business, as we see in the buyback. But but yeah, um the jury is still out to see if um they can live up to the promises.

SPEAKER_00 38:39

Yeah, and and now Jared Isaacman has stepped away. Is he still heavily involved in the business as he's still one of the largest shell hoarders? Um, or do you think yeah, he just uh is fully focused on uh running NASA?

SPEAKER_01 38:53

Yeah, I mean he has been buying actively uh in the open market, so he's he's definitely increasing his holding from the 25% or so he already has. He probably is not running the day-to-day day-to-day business anymore, but for large strategic um decisions, he will definitely still be um yeah, at least consulted.

SPEAKER_00 39:14

Yeah, let's let's finish off with the uh with the valuation. This is how I valued uh shift 4, so I'm keen to hear your thoughts about this as well. So management is targeting roughly 30% revenue growth over the coming years with the global blue acquisition as well. Uh, growth will probably slow down after that. Uh also this is hot, yeah, this is super dependent on uh future acquisitions, and given the company's leverage, it seems unlikely they can pursue any major acquisitions or they must dilute shareholes uh more. So, assuming around 20% annual growth after that in the next decade, a 10% net margin, and a 15 times exit multiple, 2% annual dilution from acquisition from acquisitions. Uh, I estimate investors could earn around a 17% annualized return on shift four currently. How do you think about that valuation, Nicholas, and how did you value shift four?

SPEAKER_01 40:16

Yeah, I have two different models, and I get between a 16% and a 20% IRR. What I model differently is that I model a um a reduction in shares outstanding and other that not a dilution, because they probably will have a 2% um dilution, but they are actively um buying back shares. But if we assume a lot of buybacks, growth is probably a little lower than 20%. They also have a lot of business already they acquired, and they have a lot of things to cross-sell. So that's really the story you need to believe in that they can cross-sell, and they have said that without acquiring another business, they they should be um set to do like a 15% growth rate. So that's at least what they said in their investor day when they acquired Global Blue. Um if it turns out to be true, is it's to be seen. But I think um where they're trading now, and also with um with margins not really um where they they could be, they estimate that um that incremental or like they already say that incremental margins are um a lot higher, and eventually um all of the integration costs uh and so on from the global blue deal will go through, and that should lift up um the cash conversion as well. So what I question more is if I was initially wrong on the business, because I I bought shares at at twice current price. I think the the most expensive shares I bought were like 90 euros and 90 dollars. So yeah. If if I look back, I don't really see large mistakes. Um the the biggest mistake for me personally probably was um averaging down too aggressively because I have built a like over 10% position uh when shift 4 was trading at $75, I think.

SPEAKER_00 42:19

So you were just super convinced when you when you bought the stock. Uh I I if I believe uh if I hear that correctly, uh, and has your conviction come down since then?

SPEAKER_01 42:30

Yeah, since since I bought there was a lot of uh things that did not feel too good, especially the the communication and them switching targets a lot, and yeah. Initially, early on, there was a lot of positive things which are still there. Um, but I think I did not see the negative things too much, and I also was too convinced on just the growth story without acknowledging too much the debt they have, and uh yeah, that there is a lot of execution risk. I underwrote a lot of growth. It's probably not the best idea to to size up a position that much where you have a range of 15 to 30 percent revenue growth. So so yeah, that's that's probably the the biggest takeaways to to be more conservative on on high growth businesses. And yeah, also what's what I I have kept in mind is that uh screeners had for a while wrong multiples because you already uh had some of the or like you already had the costs of the business of the Global Blue acquisition. Uh you already had the costs and the decline in in cash there, but you did not have the revenue. So multiples on, for example, Koifin or Fiscal AI were were off, which made it harder to analyze as well. And yeah, just in general, um looking back, this is not the kind of business I I should make like a like 10 to 15 percent uh cost weight just because of the complexity and uh the amount of change. Um of the moving parts. It's a good lesson there. Yeah, definitely all of the moving parts going on there, and uh yeah, also the the competition in in payments is strong, so it's always hard, and the sentiment is it's is bad. So it's it's really one of the stories where you should probably um try to average in over a longer time. And I I think in over the span of like two months I made it the 10% position, and that was pretty quickly.

SPEAKER_00 44:44

Yeah, if we digest that down to just two learning points, what I heard from you, Nicholas, is that you have been too aggressively with uh with yeah, scaling down with um yeah, buying when it's getting when the stock went down, and secondly, just your assumptions were a bit too aggressive. So I think we can all uh learn from that. So thank you for sharing. What I hope for shareholders is that they just uh not do any acquisitions in the coming quarters or years, just focus on implementing the the acquired businesses and scaling because their business is super scalable, so margins should increase in the in the coming years. Uh, and that's that's what I hope for for you and other shareholders as well.

SPEAKER_01 45:25

Yeah, I would say they can continue to do small bot ons. There's not much much harm done there because those are actually pretty profitable. Um because they get a lot of volume and they uh historically have been uh able to upsell those a lot and make them a lot more profitable. But if I see another deal uh close toward uh global blue blue wars, I will probably run for the hills, I would say.

SPEAKER_00 45:51

That's honest. Nicholas, thank you for uh for joining us today. Uh and if listeners want to follow your work, uh where can they find you? Yeah, the best place to follow me is on on Substack at Heavy Mode Investment. Perfect. So if you would like to read our full 30-page write-up on shift 4, consider becoming a TDI member. Nicholas, thank you for uh for your time today. Thank you for sharing your knowledge. You have definitely uh yeah, you have contributing a lot, so thank you for that. And uh hope to see you, uh hope to see you another time. Any less words from you?

SPEAKER_01 46:27

Uh well as always has been fun making a podcast with you guys, so I'll probably probably be back uh sometime in the future.

SPEAKER_00 46:35

Perfect. Thank you, Nicholas. Thank you, listeners. Bye.