Fiserv, Inc.

Moat: 4/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global provider of payments and financial technology solutions, Fiserv operates in the highly regulated and competitive industry of financial services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Fiserv is a leading global provider of payment and financial technology solutions, serving a diverse clientele including banks, credit unions, and other financial institutions. Their solutions range from merchant payment processing to core banking systems, digital banking, and financial risk management. The company operates through three primary segments: Acceptance, Fintech, and Payments.

  • Acceptance: This segment offers merchant payment processing solutions, including point-of-sale (POS) systems, e-commerce, and mobile payment acceptance. This enables businesses to accept credit, debit, and alternative payment methods from customers.

Revenue in this segment is primarily generated from processing transaction fees.

  • Fintech: This segment provides core account processing solutions, digital channels, and a range of other solutions used by financial institutions in their day-to-day operations.

Revenue here is primarily generated through contracts for ongoing access and maintenance of software.

  • Payments: This segment offers a wide array of services including card processing, billing, and payment network access. These offerings allow financial institutions and other businesses to provide payment solutions to their customers.

Revenue in this segment is more variable due to its dependence on the number of transactions processed, although contracts are a major component.

Industry Trends:

  • The financial services industry is constantly evolving due to new technologies and consumer expectations, which requires companies like Fiserv to continually innovate.
  • The shift towards digital and mobile payments has become a persistent trend, which has made solutions in that area more important for financial players.
  • The rising focus on security and fraud prevention is increasing demand for solutions that provide security.
  • The consolidation in the banking sector is also a significant driver for the industry since it creates demand for integrated banking solutions.
  • There is increased adoption of cloud-based solutions in financial industries that leads to efficiency and scalability.
  • Competition has increased significantly with the growth of fintech startups in the payments and banking spaces.
  • Globalization has brought new opportunities and also new risks of expanding overseas into diverse markets.
  • Consumers are expecting more options for their digital banking. Financial institutions must now keep up with this demand.
  • Regulation in the financial industry is also increasing the need for tech solutions that provide compliance.

Competitive Landscape:

  • Fiserv faces competition from established technology providers like FIS and Global Payments and many other smaller competitors.
  • The digital payments space is highly competitive as well and dominated by large players.
  • The highly regulated nature of financial industries means there are many high barriers to entry, and these barriers can provide some protection to established players like Fiserv, but do not prevent it.

What Makes Fiserv Different:

  • Fiserv’s history of offering core banking services combined with its payment-processing capabilities creates a one-stop-shop for many of its clients.
  • The company serves a wide variety of clients, unlike some competitors that have a narrow specialization, making it less dependent on a specific niche.
  • Fiserv invests significantly in research and development and in acquisitions, which means it has access to some of the cutting-edge tech in its sector.
  • Fiserv’s international scale is also a key differentiator that provides for potential for global growth.
  • The company has a large number of clients which, allows for significant returns from minor changes in efficiency.

Financial Analysis

Fiscal Year Ended December 31, 2023 Results: In 2023, Fiserv achieved a revenue growth of 7%, reaching $17.73 billion, with adjusted operating income increasing to $6.08 billion (a 9% increase YoY) and adjusted earnings per share was $7.08. This growth can largely be attributed to a continued strong revenue growth across the Acceptances and Fintech segment.

  • Revenue:
    • 2023: $17.73B, a 7% increase year over year
    • 2022: $16.56B, a 10.2% increase year over year *2021: $15.03B, a 9.9% increase year over year

  • Operating Income: * 2023: $3.2B , a 9% increase year over year * 2022: $2.94B , a 10% increase year over year *2021: $2.67B a 14% increase year over year

  • Net Income: * 2023: $2.59B, a 33% increase year over year * 2022: $1.94B, a 187% increase year over year *2021: $677m, a -30% increase year over year
  • Adjusted EPS: * 2023: $7.08, a 12.4% increase year over year * 2022: $6.29, a 13% increase year over year *2021: $5.57, a 20.3% increase year over year
  • Free Cash Flow:
  • 2023: $4.16B , 5.3% increase year over year
  • 2022: $3.95B, a 16% increase year over year
  • 2021: $3.41B, a 11.8% increase year over year

It’s clear from these numbers that Fiserv has shown high growth in the past few years. Especially notable is the jump in profitability in 2022 and 2023. The fact the cash flows from operations are also increasing, shows the business is not only growing but also able to improve margins and overall profitability.

  • Margins: Both gross margins (which represent the profitability of the product or service) and net profit margins (which accounts for all the costs of the business) have increased significantly YoY in the latest results. This shows the underlying profitability of the business is improving.
  • Net Margin:
    • 2023: 14.6%
    • 2022: 11.7%
    • 2021: 4.5%
  • Gross Profit Margin:
    • 2023: 45.1%
    • 2022: 44.5%
    • 2021: 42.3%
  • Debt: As a side note from looking at the financial statements, Fiserv has relatively high amounts of long term debt to support the business, and it may be prudent to explore more data from rating agencies, like S&P, Fitch, or Moody’s to understand the credit rating of the company.

Moat Analysis

Fiserv demonstrates a narrow but strong moat.

  • Intangible assets (4/5): Fiserv benefits from its brand recognition and its long track record of service delivery, particularly in the Fintech and Payments segments. Additionally, they have several patents.
  • Switching Costs (5/5): Their established network and integration into their client’s operations make switching to a competitor costly and time-consuming.
  • Banks and other financial institutions are extremely dependent on Fiserv’s core banking and processing technology, which would mean a complete disruption of day-to-day operations if switching.
  • Clients also would need to retrain all their staff, retrain their clients, and replace all current infrastructure.
  • Network Effects (2/5): While the company benefits from their large network to connect buyers and sellers, the network effect isn’t as pronounced as in other sectors, such as social media or internet marketplaces.
  • Cost Advantages (2/5): Fiserv is not a low-cost player, but it is a large company, which benefits from economies of scale, and has access to cheap capital. This gives it a marginal, but not large, cost advantage.

While the above factors are present, the recent earnings and news seem to indicate that the moat is not as strong as it appears. The stock has struggled greatly with the stock down nearly 20% in the past year, and the company has struggled to improve some areas. It is clear that the company has a moat, which may get stronger over time, but it faces stiff headwinds. Therefore, the moat rating is a 4/5.

Risks to the Moat and Business Resilience

  • Technological Disruption: Rapid technological change may render their current offerings obsolete as new tech such as open banking or blockchain become more mainstream and adopted more quickly by customers.
  • Competition: Fintech startups have continued to enter the payment and banking solution area at a rapid pace with lower rates, which may erode the company’s market share and margins, especially as they seek out novel and innovative solutions.
  • Regulation: Any changes in regulations regarding the financial services industry, cybersecurity, payment processing, or data protection could require large investments by the company to implement these changes, or force some changes in their business model.
  • Security and Fraud: Security breaches and data loss can undermine the trust and faith that customers have with a payment processing company like Fiserv. This might lead to the loss of business, clients, or even large financial penalties.
  • Cybersecurity: As financial services are becoming increasingly integrated into technology and the world becomes more reliant on digital financial transactions, cyber attacks become a major source of risk. This risk may lead to significant losses and also loss of consumer trust.
  • Macroeconomic Conditions: High inflation, high interest rates, and a general economic downturn could result in lower consumer spending, which in turn results in lower transaction volume. It can also reduce demand for financial instruments.
  • Acquisition Risk: As a growth-through-acquisition company, their large and frequent acquisitions may fail to produce the necessary profits, leading to financial problems and also creating goodwill losses.

Business Resilience: Despite the risks, Fiserv shows a fair amount of business resilience. The company is a well-established player in an industry with high switching costs, and has a large client base, which is unlikely to leave them quickly. Additionally, they benefit from long-term contracts, which provides a base level of revenue even in downturns. The company has also shown that it is willing to innovate to stay ahead of the competition, with some success in digital and mobile banking. In times of trouble, the company has reduced its work force and taken a hard look at its expenses in order to increase profitability.

Understandability:

The business of Fiserv is relatively complicated because of its various segments and many different services that it offers. While some segments, like Payment solutions and Merchant processing, are relatively simple to understand, others like Fintech and the various software solutions the company provides are hard for a layman to fully comprehend. It would be important for an investor to do their due diligence into the company’s operations and how they derive income. For these reasons, the understandability of Fiserv’s operations is a 3/5.

Balance Sheet Health

Looking at Fiserv’s financials, the company carries a good amount of debt to capitalize its operations. But the company also has a lot of cash flow, and good profit margins, which mean it is able to handle these debt obligations well. The company also has a positive trend in growth, which should indicate that its fundamentals are in good condition. For these reasons, the balance sheet health gets a score of 4/5.