Fiserv: A Deep Dive into a Fintech Giant
Welcome to美股咖啡館! Today, we're diving into a company that might be under your radar but boasts a wide moat and high quality: Fiserv (FI). This company is not a small player, with a market cap around $92 billion, although it has exceeded $100 billion in the past. It's a company that operates largely behind the scenes, making it less visible to the average consumer.
Why Fiserv?
The recent drop in Fiserv's stock price, nearly 20%, piqued our interest. We tend to be more drawn to companies that have fallen, especially those with strong fundamentals and wide moats. This episode will explore why Fiserv fits that description. Remember to follow our IG because there will be new Reels update soon.
What Does Fiserv Do?
Fiserv's official website states its mission as "to move money and information in a way that moves the world." This is not an exaggeration. The company is a payment processing giant, handling significant volumes of financial transactions.
Serving Banks and Financial Institutions
Fiserv's core business lies in providing services to banks and financial institutions. These services encompass a wide range of functionalities:
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Fund Transfers
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Credit Card Processing
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Online Banking Platforms
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Mobile Banking Apps
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Wire Transfers
Essentially, Fiserv powers the backend infrastructure for these institutions.
The Moat: High Switching Costs
The company's wide moat stems from the high switching costs associated with its services. Once a bank integrates Fiserv's systems for transfers and payments, changing to a different provider is extremely difficult and expensive. This translates to a high retention rate for Fiserv, approaching nearly 100%. Replacing an entire bank's app and payment infrastructure is a massive undertaking.
Expanding Beyond Banks: Business and Merchants
While serving banks remains a significant part of Fiserv's business (approximately 50% of revenue), the company has expanded into the business and merchant services sector. This segment is more comparable to companies like Square or Shift4 Payments.
Serving Small Businesses
Fiserv now caters to smaller businesses, offering solutions such as credit card processing terminals and related backend support. This expansion was largely driven by a significant acquisition in 2019.
Global Reach
Fiserv's reach extends beyond US borders, with potential involvement in powering banking systems in Taiwan and ATM transactions, demonstrating the company's global presence.
Financial Performance
Fiserv has demonstrated strong and consistent financial performance over the long term, as evidenced by its EPS growth since its IPO in 1988. The only significant dip occurred around 2019-2020, which was partly related to the COVID-19 pandemic's impact on payment processing.
Moat Rating: Narrowing Focus?
Morningstar, a rating agency, classifies Fiserv's economic moat as "narrow." This is due to increased competition in the merchant services segment, where switching costs are lower than in the core banking services. Prior to the 2019 acquisition, Fiserv's moat rating was "wide." While the switching cost for payment processing is not as difficult, but still, we cannot deny it is one of the big player in Fintech.
Balance Sheet Concerns: Debt from Acquisition
Fiserv's balance sheet is the primary area of concern. While its P/E ratio is reasonable (below 30), the long-term debt has significantly increased since 2018-2019.
The First Data Acquisition
This surge in debt is attributable to the 2019 acquisition of First Data, a $22 billion deal. First Data brought significant debt onto Fiserv's balance sheet. The deal was an all-stock one, it was because Fiserv took First Data's high debts after acquiring it.
Strategic Rationale
Despite the debt, the acquisition was deemed worthwhile due to the synergies between the two companies. It expanded Fiserv's capabilities in the merchant services sector and led to cost reductions. Fiserv saw the potential for positive revenue impact, which made it attractive for them to acquired First Data. The competition was strong, and this was regarded as a steal back then.
Recent Performance and Outlook
In the most recent quarter, Fiserv reported a strong organic revenue growth of 17% and EPS growth of 14%. The management has reaffirmed its guidance for 2025, projecting:
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Revenue growth of 10-12%
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EPS growth of 15-17%
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Margin expansion of over 1%
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Free cash flow growth exceeding 10%, reaching $5.5 billion
Valuation
Fiserv's valuation appears reasonable, with a GAAP P/E ratio around 29 and a non-GAAP P/E ratio below 20. Key valuation metrics, such as price to cash flow and price to sales, are at relatively low levels compared to recent history.
Discounted Cash Flow Analysis
A discounted cash flow (DCF) analysis, even with conservative growth assumptions (15% for the next 5 years and 8% for the following 6-10 years), suggests that Fiserv is currently undervalued by about 20%. Based on the assumptions, the fair value of Fiserv is about $200 compare to its current price of $167.
Summary
Fiserv is a fintech company with a wide moat, rivaling Visa and Mastercard. The main concern revolves around its high debt levels resulting from the First Data acquisition.
Fiserv presents itself as a balanced investment, possessing both defensive characteristics and growth potential. For investors seeking such a profile, Fiserv merits further investigation.
Final Thoughts
Fiserv is a high-quality defensive stock with a good growth prospect. It is worth further researching to see if it is a good fit for your portfolio.
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