Fiserv: A Good Price For A Growing Fintech Company

Fiserv is the largest integrated Fintech service provider in the United States and worldwide. The company provides services for payment processing, digital banking, acquiring, various cloud solutions and more than 1000 additional services to banks, financial institutions and merchants (both small and large international holdings). Fiserv is included in the S&P 500 Index and is one of the most respected companies in the world according to FORTUNE 500. With clients in more than 100 countries and serving more than 10,000 companies in the financial industry Fiserv is a world’s leading provider of fintech services.

After First Data acquisition Fiserv’s (NASDAQ:FISV) revenue mix has become much more attractive due to increased share of merchant acceptance revenue (~35%) having a perception of one of the key shareholder value drivers and in terms of geographical expansion with further focus on emerging markets (Europe, Asia and LatAm), where financial technology is gaining momentum given an important uncarded opportunity and yet low penetration of digital services into both online and offline trade and banking.

Fiserv’s P&L and Balance sheet statements look healthy. Historical high revenue growth coupled with attractive estimated CAGR of 8-12% in upcoming years and given right company positioning skewed towards e-commerce/omni-commerce/payments in emerging markets makes FISV an attractive stock from fundamental point of view. Company’s high EBITDA margin and FCF yield of >5% are looking sustainable enough to assure further deleverage from historical >6x Net/Debt (since First Data acquisition) and current ~3,5x Net Debt/EBITDA to target 2,8x ratio in FY21-22 which will enable Fiserv to resume its share repurchases yielding >3,5% and its M&A activity.
FISV trades at P/E ~22x, below its own 3-year annual average P/E of 23x and in line with the S&P 500 average (over the past 3 years, it has traded at a 5% premium to the index). Compared to its competitors, FISV has the most attractive PEG ratio of ~ 1.1x given company’s increased presence in the fastest growing market segments both in terms of product category and geography.

Fiserv M&A activity is also worth considering, while analyzing the stock, as its recent acquisition of First Data was a right strategic move positioning company in right market segments and yielding one of the highest cost and revenue synergies in the industry realizable in upcoming years. Its “crown diamond” asset acquired in the deal - the cloud-based POS solution Clover® may be underestimated by the market, while offering seamless acceptance services of the highest quality, comparable to those of Square and other “next-gen” fintech companies. Clover generates only 5-10% of company’s revenue, but demonstrates very high GPV growth and creates large cross-selling/extensive growth opportunities which is sure to bring more shareholder value with its further integration into the Group’s business.
On the other hand, the company has a sizable $500M innovation investment fund, enabling it to develop new technologies in-house. Considerable R&D and innovations could energize growth above market estimates.

COVID-19 crisis has been pressuring company’s performance in FY20, but the vaccine adoption, economic recovery, people’s returning back to normal, consuming more in the traditional “offline” manner would benefit Fiserv’s traditional brick-and-mortar merchant acceptance business. Such environment makes buying FISV stock a recovery trade.
Though it is important to note, that FISV’s large, fragmented organizational structure and high diversification with many separate teams working on different products poses an execution risk, which also remains uncertain due to a recent CEO change, who has yet to prove his track-record within the company.

Regulatory environment across countries of presence could raise concerns about Fiserv’s prospects due to potential pressure on the remuneration for all payment/fintech companies.
There is also an overhang on the stock due to KKR having a large ownership share in the company after the FirstData deal. KKR investment has already been vested for a long time, after the deal the fund received ~16% ownership in the merged company and has already cut its holding to ~13%. Even though fundamentally KKR is positive with regards to FISV’s bright future it shouldn’t be a surprise that another successful quarterly report could be followed by a secondary non-dilutive offering.

See our full article on Seeking Alpha: Fiserv: A Good Price For A Growing Fintech Company (NASDAQ:FISV) | Seeking Alpha