Fiserv: An Undervalued Fintech Investment (NYSE:FI) (2024)

Fiserv (FISV) has long been a darling for their shareholders. It serves as a way to invest in the financial technology industry, as well as grant exposure to the banking sector. Over the past several years, Fiserv has consistently beat the Dow and S&P 500, while also having 32 consecutive years of double-digit adjusted EPS growth.

But, Fiserv is not a “trending” company in the financial industry. Square (SQ) and PayPal (PYPL) see all the headlines, and are where investors go when they want to invest in fintech. Below, I will outline why I believe bank IT spending will continue to grow, how Fiserv is expanding while protecting their market share and revenue, and how these factors lead to Fiserv still being undervalued despite share prices rising 25% YoY.

Source: Fiserv IR (Presentation)

Banks Adapting to Fintech

The fintech industry is growing. Adoption rates are rising globally, and investments are flowing into fintech start-ups (for more information in why I think the overall fintech industry will grow, please see my PayPal article).

Banks are feeling the pressure from fintech companies in areas such as payments, lending, investing etc. and must change with the new environment. Banks are unlikely to be replaced by fintech companies, but will still need to understand and improve their technological capabilities. JP Morgan (JPM) alone spent $9.5 billion in technology in 2016, and across the whole industry, IT spending is projected to grow yearly.

Source: Celent (Report)

The company posed to benefit the most from this? Fiserv, who supports over one-third of U.S. financial institutions.

Innovation Through Acquisition

Banks will need to increase their IT capabilities to survive. The industry conditions present a welcoming future for Fiserv, but they will now face more risk, as pressure to provide the latest advancements in fintech will allow competitors an opportunity to steal market share if Fiserv falls behind.

To counteract this, Fiserv will embrace a strategy that other fintech companies have seen success with: innovation through acquisition. Within the last year, Fiserv has made two notable acquisitions: Dovetail and Monetize. Dovetail increased capabilities in the payments area, while Monetize improved their IT architecture. Since 2016, Fiserv has made six major acquisitions to improve their technological capabilities.

Fiserv has yet to see these acquisitions and other innovations expand beyond the financial IT industry. With the trend of customers skipping banks by using mobile wallets, it is surprising Fiserv hasn’t made a successful push to enter this industry themselves, with mobile wallet solutions only offered as a product to their financial institution customers. Unless this happens, Fiserv will still rely on financial institutions as their customer base.

Revenue Stability and Market Share Protection

Fiserv enjoys some of the market share protection that enterprise software companies benefit from. This includes high-switching costs, which creates a barrier of entry for other companies to steal market share from Fiserv. Not only will these companies need to offer better solutions or a lower price than Fiserv, they also have to create an offer that will outweigh the extra costs associated with leaving Fiserv.

Fiserv also operates on a subscription basis, locking in financial institutions into a multi-year contract, providing Fiserv with a stable revenue source from these deals. As Fiserv becomes ingrained into a bank's operations from these multi-year deals, customers will be less likely to leave Fiserv, as it will cause a disruption to switch vendors.

These two benefits of Fiserv lead us to the final benefit, vendor lock-in. As I discussed in my last article, “Vendor lock-in is where a customer uses one company as their main cloud provider, and the cloud infrastructure becomes so ingrained into the customer’s business that a customer is “locked in” with this software. This gives the vendor pricing power, and leads to an overall shift of power as the customer is a victim to whatever terms the vendor gives.”

This means that Fiserv can create a moat around their existing customer base. When a customer begins to enter a vendor contract with Fiserv, Fiserv is able to push more products and services. The continued expansion of services to their current customers allow Fiserv to become a critical component of the bank’s operations, allowing Fiserv to push more services, while also giving Fiserv leverage in negotiations of long-term contracts and pricing power.

As discussed, financial institutions will need to embrace fintech in order to compete and survive. With 12,000 customers, Fiserv serves several institutions that don’t have the technological or monetary resources to create fintech solutions in-house. And as bank IT spending grows across the industry, more banks will look to Fiserv, and current customers will expand to use more of Fiserv’s services.

Risks

Fiserv is not alone in pursing the innovation through acquisition strategy. Banks, PayPal, Square and Fidelity (FIS) are all going to be paying close attention to the growing fintech landscape. With the possibility of bidding wars for in-demand start-ups a growing risk, there is a risk of short-term hits to Fiserv's bottom line if there are situations of over-paying.

Also, this strategy isn’t unique to Fiserv. If a competitor of Fiserv makes a couple of acquisitions that create a better product than what Fiserv can offer, Fiserv’s market share will suffer. This risk should not be overlooked, as the fintech industry is constantly changing, and companies such as PayPal are beginning to create a financial operating system, which could present future risks if PayPal expands to becoming a vendor for financial institutions.

It should also be said that Fiserv’s consumer base is still financial institutions. This means any changes to banking regulations can affect Fiserv, along with anything that happens to the industry as a whole. If consumers begin to adopt mobile wallets and move away from banks, this will also present a risk to Fiserv.

Relative Valuation

Fiserv isn’t talked about as much as Square and PayPal. This may lead to Fiserv presenting an undervalued investment for investors seeking exposure to fintech. Below, I compare Fiserv to similar companies in PayPal and Fidelity, and competitors Jack Henry & Associates (JKHY) and ACI Worldwide (ACIW).

Source: Data from Yahoo Finance, Organized by Author. Market Cap and EV are in billions.

Although Fidelity is long considered to be Fiserv’s direct competitor, I believe PayPal will be who Fiserv will be competing against most directly in the future, especially in acquiring fintech start-ups. Fiserv should also see less competition from Jack Henry and ACI in terms of spending on acquisitions, based off of the size differences. We see Fiserv have favorable metrics in terms of EV/EBITDA, Forward P/E, and P/S to PayPal, while having similar metrics to Fidelity in everything but PEG, P/S and P/B. As an average, Fiserv’s ratios suggest a slight undervaluation possibility.

The PEG is concerning, as that is one of my favored metrics. Ignoring PEG for the moment, we see Fiserv lineup favorably compared to PayPal. Fiserv and PayPal are both more aggressive in offering better fintech solutions, so I believe overall, Fiserv is undervalued compared to their competitors. More importantly, if Fiserv continues to see success with their fintech acquisitions and eventually challenges PayPal, Fiserv then presents an even greater undervalued investment.

However, going back to the PEG ratio, we will look at revenue growth, which is the more concerning metric I have seen with Fiserv. In the last quarter, we saw revenue growth increase 2% YoY, which comes from a 7% growth in payments and -5% growth in financial segments, However, the -5% was influenced by the sale of a stake in their Lending Solutions business, which will contaminate our ratios. Fiserv gives us a 6% revenue growth labeled as Internal Revenue Growth. As this trickles down, the company's adjusted EPS growth has hit 27% YTD, compared to 2017 YTD. This changes the PEG ratio to be between 21.66 (P/E) / 27 = .8 PEG and 21.66 (P/E) / 22 = .98 PEG based on guidance (22% - 27% EPS growth), which now gives an excellent mark for investors.

With favorable ratios compared to their competitors, and an estimated PEG ratio hovering below 1, I believe Fiserv is an undervalued investment in fintech.

Note: Internal Revenue is a Non-GAAP financial measure and is subject to an amount of interpretation by Fiserv. Please read the press release for more information.

Investor Takeaway

Fintech has several trending names making big news, which has lead to Fiserv seeing limited press coverage, and limited analyst coverage. But Fiserv has been making moves to increase their profit margins, and set up future growth through acquisitions. A key for Fiserv will be their ability to provide their customers with the most up-to-date innovations in a fast growing industry.

Investors looking for a good value in fintech should strongly consider Fiserv over other trending names. Fiserv’s excellent history of EPS growth and wide customer base provide a higher floor than the other names, but Fiserv will need to make several changes (such as the turnkey Zelle solution monetization/expansion) to match the growth potential of other fintech stocks. I believe Fiserv has an excellent future growth path while providing an undervalued investment for investors. Current investors should feel confident that Fiserv can continue their performance in years to come.

Disclaimer: The above references an opinion and is for information purposes only. This information is general in nature and has not taken into account your personal financial position or objectives. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. Past performance is not an indicator of future performance.

Ryan Zentko