Fiserv: Its Aggressive Moves Are Giving It Advantages Over Competitors (NYSE:FI)

I rate Fiserv, Inc. (NYSE:FI) as a buy with room for its stock price to appreciate, given the aggressive moves made by the management in the last 5 years that enabled the company to secure a solid position within the payment processor industry. This is an industry where the only way to gain strong competitive advantages is by building an ecosystem based on different verticals and services integrated faster than competitors while offering added value services to its customers globally, particularly in regions that can offer long-term growth. I am not a fan of this industry since companies part of it should invest significant amounts of money in innovation each year to offer more and more added value services to be more attractive to their users, and competitors are doing the same, so the room for differentiation is very limited. I explained this situation when I wrote about PayPal in March 2024. Nevertheless, Fiserv acquired First Data in 2019 for roughly $22 billion, which might have positioned the company ahead of its main competitors, given the size of that acquisition, the enormous possibilities to grow in the small and middle-sized business (SMB) sector, and the possibilities to reinforce a strong ecosystem of verticals. If an investor is looking to add a stock to his portfolio within this industry, he should think of Fiserv as one of his main targets from this industry.

Context

In the last results for H1 2024, Fiserv’s revenues grew 7.4% YoY, driven mainly by the merchant segment, which grew 11% YoY, from which the SMB segment was that boosted the entire merchant segment, growing 14% YoY.

In the last decade, Fiserv’s revenues grew at 12.5% CAGR, supported by organic growth and strategic acquisitions. With more than 150 acquisitions made since its IPO in 1984, Fiserv was aggressive in its acquisitions, understanding the importance of expanding to underdeveloped spaces before other competitors.

The First Data Acquisition in 2019: A New Era for the Company

Fiserv acquired First Data in 2019 paying $22 billion through more equity, which was financed with debt. That acquisition was huge since the market cap of the company was around $61 billion and the acquisition represented 1/3 of the total market cap. I do not like to see a company making acquisitions of this size, as there are lots of risks associated with goodwill, more long-term debt, and lower returns of capital.

In the table above, we can see how the total debt of the company jumped from $5.9 billion in 2018 to $21.8 billion in 2019; in addition, the ROE and ROIC declined substantially in the same period as the equity, which is part of the denominator in both metrics, experienced a significant increase. Indeed, before the First Data acquisition in 2018, the ROE and ROIC were 51.7% and 15.6%, respectively, and then, after the acquisition of First Data, both metrics declined substantially to 2.58% and 2.03%, respectively.

However, I understand that in the payment processor industry, the competitive advantages are more associated with the size and the global presence in developed and underdeveloped markets, so this huge acquisition was a really aggressive step to reinforce Fiserv’s value proposition.

If the management makes a proper execution with a huge acquisition like that, it might work like a strong platform for more consistent growth in the future. Of course, a huge acquisition like that could have been very risky for Fiserv since if there were no proper synergies and integrations, this could have destroyed value, which would have been reflected through consistently poor metrics.

In this sense, in the table above, I see an important increase in the total debt but a growing free cash flow and returns of capital after the First Data acquisition in 2019; for instance, the ROE and ROIC started with a very low performance, 2.58%, and 2.03%, respectively, in 2019, and then both metrics were growing gradually since then, reaching 10.06% and 6.7%, respectively, in 2023. This is very positive, as the evolution of those metrics shows that the merger is working.

Another interesting factor is the evolution of the repurchases, as most of the free cash flow is used for that purpose, which means that the business does not require much additional capital to keep delivering growth. Of course, after the acquisition of First Data in 2019, there were more acquisitions in the last years but way smaller in size that I will mention later.

The strong repurchases end up favoring the returns of capital, ROE, and ROIC, after First Data’s acquisition, as the repurchases are included as negative within the equity, which contributes to reducing it. As such, the future recovery of both metrics would be driven by a consistent growth of revenues and operating earnings coupled with a reduction of the equity thanks to the consistent share buyback program.

In my view, a company that operates in a highly competitive industry should use most of its free cash flow to reinvest into the business organically and through acquisitions to reinforce its competitive advantages, given the strong competition. According to this vision, Fiserv would not be doing a proper capital allocation, since the payment processor industry is very competitive.

However, I think that Fiserv has made a significant acquisition with First Data, which, once completed, the new subsidiary would not require significant additional capital to deliver more growth. That’s precisely what happened with First Data once acquired by Fiserv, as Fiserv’s revenue growth was, on average, 8% per year after that acquisition from 2021 to 2023, whereas the revenue growth ranged between 2.2% and 4.8% per year before that acquisition in the last decade, keeping the FCF margins stable before and after the acquisition.

Long-term drivers

With the acquisition of First Data in 2019, Fiserv incorporated Clover as part of its portfolio, which is a well-consolidated point-of-sale (POS) provider in the payment acceptance in serving the growing SMB sector. This POS system can be used by restaurants, e-commerce, service businesses, retail, etc., to manage daily tasks from accepting payments to managing inventories.

Clover has reinforced Fiserv’s Small Business segment, which not only contributed the most, with the total revenues representing 30% of the total revenues as of H1 2024, but it was also the segment with the highest growth, with 14% YoY in the same period.

As such, the importance of the POS is critical for Fiserv’s growth prospects; in this sense, we can see in the chart above that the POS system in the US is expected to grow 8.92% CAGR until 2029. The US is a critical market since it represents 85% of the total Fiserv’s revenues.

In the chart above, we can see that Clover is part of the sub-segment of Small Business, which, in turn, is also part of the Merchant Solutions segment, representing 46% of the total revenues as of H1 2024, but there are other segments with interesting growth prospects, such as Carat within the Merchant Solutions segment.

Carat is Fiserv’s global commerce operating system that is focused on offering digital services to large merchants and other businesses, such as managing data, omnichannel commerce services, payment optimization, etc. There are other segments beyond the merchant solutions, such as the financial solutions oriented to banks and credit unions, card issuers, and lenders.

Also, in the chart above, we can see the strategy for long-term growth in each of the segments as Fiserv sells operating systems through long-term contracts, which enables more recurrent revenue and more scale efficiencies. The goal is capturing new clients in different geographies and developing new added value services for each client; for instance, offering new vertical-specific software, further development in security and authorization, etc.

There are also huge opportunities in the Financial Solutions segment, particularly in underdeveloped markets like Latin America, given the low penetration of digitization in those markets.

Latin America: another source for long-term growth

Fiserv is taking advantage of the fast-growing Latin American market through acquisitions; for instance, in October 2023, Fiserv bought Skytef from Brazil, which offers payment tools such as electronic funds transfer solutions and point-of-sale machines. Another acquisition in the Brazilian market was Sled, which is a payments software company based in Curitiba.

Fiserv acquired both companies, paying an aggregate price of $17 million for both; in addition, Fiserv acquired the wallet Yacare, founded in 2016 in Argentina, being one of the first digital wallets in the domestic ecosystem and a pioneer in QR payments in that market.

Of course, Fiserv acquired other companies in the last years, such as Merchant One in 2022, based in Miami. The company markets to merchants in the restaurant, retail, and e-commerce arenas. The company enhances Fiserv’s direct merchant acquisition capabilities while extending the reach of the Clover product line and creating cost synergies.

Fiserv not only plans to make acquisitions in these growing markets but also to introduce Fiserv’s current operating systems, like Clover in Brazil. CEO Bisignano said in February 2024:

Fiserv will roll out Clover, its point-of-sale hardware and software for small and medium-sized merchants, in Brazil in April, a move the company expects will further its growth in the country

In the last call for the Q2 2024 results, the management said:

Moving to Latin America, in Brazil the extension of our Caixa relationship to their bill pay locations has begun to ramp with sequential volume growth of over 20% in Q2. In addition, we went live with our pilot for our Pix platform to act as a payment service provider to over 30 merchants. This capability came through the acquisition of Sled in November of 2023 and will open up new growth opportunities from instant payment activity in Brazil. Overall, we continue to grow our instant payment transactions in Brazil and Argentina. In Brazil, we reached more than 400 million transactions in Q2, up 21% from Q1 levels, and we doubled our number of transactions in Argentina.

As such, it’s clear that Fiserv is moving aggressively to the Latin American markets through new acquisitions and introducing its current products in those new markets.

Fiserv seems to break the pattern in the industry

I should point out that I do not like this industry unless a company is Visa Inc. (V), Mastercard Incorporated (MA), or American Express Company (AXP), as all of them have the size, but most importantly, the brand, as key factors that reinforce their respective competitive advantages.

In this sense, companies like PayPal or Block, Fiserv’s direct competitors, need to move to other adjacent markets since the payment processor industry is very competitive and their respective brands are not strong enough to build a moat that confers those businesses a strong pricing power. That’s the main risk that I mentioned when I wrote about PayPal since a company with not-so-strong competitive advantages needs to make more and more innovations to deliver more growth while sustaining the margins; as a result, the long-term value generated is limited for investors as competitors are doing the same to offer more innovative services.

If the competition is turning more aggressive over time in the industry, a company would have to reinvest more money in more acquisitions and innovations just to keep its market share. A company with a moat would not need to reinvest more money, so it might hold more cash to pay dividends or make more repurchases, which would benefit long-term investors more directly.

What I discovered about Fiserv is that it might be in a more privileged position after the First Data acquisition. The size is very critical in this industry, and as we’ve seen previously, Fiserv made a huge acquisition in 2019 that could have been a risky step given the size of that transaction. However, after the acquisition, and although the capital used for that purchase impacted some metrics such as ROE and ROIC and the debt levels, Fiserv has demonstrated a stable progression in terms of more consistent revenue growth and free cash flows.

In the table above, we can see some important metrics of Fiserv compared to those of its main competitors. The acquisition of First Data helped Fiserv substantially achieve a current market cap of $90 billion, which put it ahead of its main competitors combined with its aggressive moves, increasing its presence in growing markets through more new acquisitions and introducing its current products in those markets.

Thus, in my view, I would rely more on Fiserv’s EPS growth FWD of 13.3% per year in column 7 of the table above, as I know there is huge support for that growth in the next years, as I explained in this article. In the same table, we can see that Block offers 39.28% of EPS FWD growth per year, which is very high but not as reliable as that of Fiserv given the Block’s less consistency and stability in its performance compared to Fiserv.

Valuation

According to the valuation table offered by Seeking Alpha, Fiserv stock seems a bit expensive given its overall “D”; there are other multiples showing C, C+, or C-, which indicate that the stock price is fair:

I want to use a DCF approach to complement the valuation system given by Seeking Alpha, so I will start with the assumptions.

Assumptions

• Outstanding shares: 616,064,257.
• FCF margins: 19.48% (the average of the last 5 years since the acquisition of First Data in 2019).
• Revenue growth: 6.7% for 2024, 8.5% for 2025, and 8.4% for 2026 (consensus).
• Cash as of March 2024: $1,214 million.
• Debt as of March 2024: $23,754 million.
• Discount rate: 9.5%.
• FCF growth in perpetuity: 7% annual (FCF growth from 2019 to 2023: 12.7% CAGR).

To find the perpetuity, we used the formula:

Perpetuity = FCF 2026/(discounted rate – g).

where g = FCF growth in perpetuity, which was assumed to be 7% annually.

With perpetuity, we calculate the present value of all the FCFs beyond 2026. Then, we calculate the enterprise value using the following:

Enterprise Value = Present Value of FCF (from 2024 to 2026) + Perpetuity + Cash – Total Debt.

Finally, the intrinsic value is calculated by taking the enterprise value and dividing it by the outstanding number of shares. In this way, we could get $189 per share under the assumptions presented.

The DCF approach implies that the investor will hold the stock for the next few years; in the short term, the stock price could move up or down according to different catalysts that might come from the industry, the company itself, the macroeconomy, news, etc., so if the investor is oriented to the long haul, he could buy gradually as the stock price declines eventually.

On one hand, we’ve got an intrinsic value that seems to indicate a buy, and on the other, SA’s table of multiples indicates that the stock is not cheap. Here, the investor needs to decide if he wants to hold the stock for some years, maybe more than 3 years at least, or if he does not want to hold it for a long period. Given the fact that I am a long-term investor, I would say it’s a buy, but it would be even better if we invested gradually in the stock, taking advantage of some declines given by the market.

Risks

One risk of my thesis is that the company does not perform as expected in the next few years, so the revenue growth is lower than that expected by the consensus. However, I think that Fiserv is aggressively expanding its operations in different markets, particularly in Latin America, through more acquisitions and the introduction of its current product portfolio.

Another risk is the fact that Fiserv is gradually expanding to the SMB sector, which is a more sensitive segment during a recession. Nevertheless, there is a factor that could mitigate this risk; indeed, the management is developing more and more verticals through its different operating systems offered to each target segment. This means more added value services per client, which contribute to generating more stable and predictable free cash flow.

On the other hand, clients, for example, merchants with more added value services, have the possibility to offer more available options for their own clients that would enable them to get a differentiation that is imperative in difficult times. This strategy would be particularly important for Fiserv in times when it’s more difficult to get new clients.

Final Thoughts

Fiserv is a very interesting company, particularly for those investors who like the payment processor industry; I find the stock a way better choice than companies like PayPal or Block as a long-term investment. Fiserv took a high risk buying First Data in 2019 since a very large acquisition used to increase substantially the debt levels, the goodwill on the balance sheet, and risks associated with integration and synergies.

Nevertheless, after that acquisition, Fiserv was able to integrate very interesting operating systems like Clover to be part of Fiserv’s portfolio of products, and the company’s performance in the last years through different metrics shown in this article seems to indicate that Fiserv passed the exam. Fiserv did what needed to be done with that acquisition to secure long-term growth not only in the US, which represents 85% of its total revenues, but also in fast-growing markets like Latin America, considering its global presence in more than 100 countries.

Fiserv keeps purchasing more subsidiaries, though apparently way smaller acquisitions than First Data, with lots of opportunities for synergies and growth in different markets. As such, in my own view, companies like PayPal or Block would need to do something similar at some point in the future—make a very big acquisition—if they want to reinforce their respective market positions in a highly competitive industry where the first company to conquer new spaces through more verticals or geographies is the company that holds the upper hand.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.