It’s not easy managing a public company. No wonder executives at Stripe want to put it off as long as possible. “With the IPO, we’re not in a rush,” co-founder and president John Collison told the Financial Times last week. He knows that once he lists, the nature of his job changes: He becomes subject to strict disclosure requirements, loses the right to choose his own shareholders, and must work under the glare of a ticker that delivers a (sometimes ill-calibrated) verdict on every decision he makes. Although a liquid, tradable stock can be a useful mechanism to retain talent and raise fresh capital, it’s not all bell-ringing and smiles.

It also opens the door to short-sellers. And few pastures have been as fertile for short-sellers in the recent past as payments. Over the last couple of years, short-focused firms have published negative research reports on Lightspeed, DLocal, Nuvei (twice), Block (formerly known as Square), and Shift4 Payments, all of them players in the payments industry.

The reasons vary:

• Three of these companies went public during the exuberant market conditions of 2020 and 2021. They came to the market on a growth trajectory they couldn’t sustain at valuations that were too high. When it listed on the Nasdaq in June 2021, emerging market payments intermediary DLocal was projected to earn $190 million of net income by 2023. When it released full-year numbers this week, it reported just $149 million of profit. Its stock price fell by 17% on the day and is now 77% below its peak.¹

• While they benefit from a growing market for electronic payments, the investment required to establish and maintain a foothold can be immense. DLocal’s preferred margin metric (Adjusted EBITDA as a % of gross profit) declined to 71% in the most recent quarter, down from 76% in 2022. The company maintained its medium-term target of 75% but warned that additional investment into its engineering team, back office capabilities and emerging markets license portfolio would keep its margin glued to 70% through 2024. 

Other companies hide investment behind share-based compensation. Lightspeed, a commerce platform with franchises in retail and hospitality, pays 10% of its revenues to employees as stock. It boasted in its recent results presentation that it achieved positive adjusted EBITDA for the second quarter in a row, with a goal “to continue to generate positive adjusted EBITDA.” But strip out share-based compensation and profitability remains firmly negative. Its stock was down 24% when it reported in February and is now down 89% from its peak.²

For others, investment comes in the form of capital expenditure. Shift4, a software and payment processing provider with a niche in the hospitality sector, spent 15% of its revenue on leased hardware, capitalized software development and other capital expenditure last year, after spending 52% the prior year. It meant that free cash flow conversion – a measure of how much adjusted EBITDA gets recycled into actual cash – was only 53%. At Nuvei, a Montreal-based payments company we’ll return to below, the conversion rate was 48%. These stocks are down 28% and 79% respectively from their all-time highs. 

• In an effort to establish scale, many of these companies have also been quite acquisitive. Nuvei has made eight acquisitions since 2018; Shift4 has made 11. The pace of activity makes it difficult for investors to keep up and to distinguish the trajectory of organic growth. Shift4 projects an organic growth rate of 25% in 2024 but that includes cross-selling its end-to-end payment processing offering into merchants onboarded via acquisition; without the benefit of acquisitions, the organic growth rate is likely lower. Nuvei estimates mid- to high-single digit organic growth in the first half of 2024, rising to 15-20% by year end. But the disclosure required to analytically untangle the contribution from acquisitions is lacking. Several of the short reports focused on the track record of acquisitions. 

The short reports highlight lots of other issues. They question accounting techniques, they dig into the personal history of founders and their associates, they look at the business practices of the companies’ customers, they examine insider buying and selling activity. All of these companies are founder-led, and that makes them especially ripe for criticism. As fellow Substacker Mike writes, “Founders aren’t afraid to aggressively drive the company forward and challenge convention.” Longs and shorts love such companies for the same reason. 

But after a career spent in private markets, it can come as a shock to some founders. In response to the short report issued on his company, Shift4 founder Jared Isaacman told shareholders that “we knew long before our first day at the New York Stock Exchange that operating a public company attracts critics, both fairly and unfairly.”

Compared to others, he did a good job of addressing the issues raised. But he’d still had enough. In his third-quarter 2023 shareholder letter, he bemoaned, “the crowd cheering for us to trip and fall is louder than those rooting for our success.” He proposed a way out: “We are actively exploring strategic opportunities and alternatives that will reduce distractions and serve our company, employees and shareholders best.” 

Unfortunately, Isaacman didn’t get the price he wanted for Shift4. According to news reports, he told staff last week that none of the offers received to take the company private adequately value the business. 

Nuvei may have been more fortunate. The subject of two short reports, it revealed this week that it has received expressions of interest to buy the company and that it has set up a special committee to evaluate offers. According to the Wall Street Journal, the buyer is private equity firm Advent International. Advent has a strong track record in payments. In 2009, it struck a 51-49 joint venture to carve out Fifth Third Bank’s processing solutions business, which it renamed Vantiv, and in 2010 it joined up with Bain Capital to buy Worldpay from Royal Bank of Scotland (now NatWest Group). The two went on to merge. 

Nuvei regards itself as a competitor to Worldpay. “The way I think about it is that Big Tech has FAANG, and in payments we have SWANC,” the company’s CFO told investors last year. “So there's Stripe, Worldpay, Adyen, Nuvei and Checkout.com.” (Sadly the acronym hasn’t caught on.)

We’ve discussed Stripe, Worldpay and Adyen here before. To find out what Advent sees in Nuvei, and whether these businesses really are better off in private hands than public, read on...