Fiserv: A market leader in bank technology and merchant acquiring
Yesterday's sell-off creates a reasonable entry point
Disclosure: I am long Fiserv, starting a position on April 24, 2025. I hold no position in other stocks mentioned in this article.
Thoughts on the Quarter and Why I Bought the Stock
Yesterday, shares of Fiserv declined more than 18% following the company’s first quarter results. Although revenue fell only modestly below expectations, EPS exceeded estimates, and guidance was unchanged, investors were surprised by the magnitude of the slowdown in Clover’s volume growth, falling from 14% in the prior quarter to 8% in the current. Fiserv attributed this to the leap year comparison, timing of the Easter holiday, and weakness in Canadian travel. Additionally, Fiserv is relying on acceleration to achieve full year guidance for organic revenue growth, which assumes stable consumer spending.
This was the first misstep for Fiserv in some time, catching investors, who have come to expect more, off guard. We need more data to determine if the March quarter slowing was more pronounced at Fiserv. There may be additional downside if investors believe Clover’s market share gains are slowing, or worse, reversing. Data from Toast and Block’s Square will give us the first clues.
Despite the uncertainty introduced by the quarter, I believe Fiserv is a high-quality company, that now trades at a notable discount to the S&P 500, a rare occurrence in today’s market. While Clover’s volume performance was disappointing, revenue still grew 27% and additional opportunities for Clover to grow remain, including international expansion, vertical-specific product introductions, and the continued penetration of value-added services, which represent less than one-quarter of Clover’s revenue.
Company Overview
Fiserv separates itself into two roughly equal segments: Merchant Solutions and Financial Solutions. In the Merchant Solutions segment, Fiserv’s solutions help companies run their business and securely accept card-based payments in-store and online. Fiserv reaches millions of small, medium, and large businesses through diverse distribution channels. In the Financial Solutions segment, Fiserv delivers a range of technology solutions to banks, including account processing, digital banking, fraud and risk management, issuer processing, network services, bill pay, and person-to-person payments.
A Brief Company History
The present-day Fiserv is the result of a merger between Fiserv and First Data in 2019. Prior to the transaction, Fiserv focused primarily on providing technology solutions to banks, including account processing, digital banking, and bill pay. The combination with First Data brought additional capabilities, including merchant acquiring, issuer processing, and network services.
How Fiserv Makes Money
Fiserv’s primary source of revenue is transaction and account-based fees. In the Merchant Solutions segment, Fiserv earns a fee that equals a percentage of the transaction dollar value, a fee per transaction, or a combination of both. In the Financial Solutions segment, Fiserv earns a fee per account, a fee per transaction, or a fee that moves with the asset size of the bank.
Fiserv generates additional revenue from hardware sales, software licenses and maintenance fees, card and statement production, termination fees, and other professional service fees.
Investment Thesis
I believe Fiserv possesses market leading franchises with appealing characteristics that will support attractive operating performance, including organic revenue growth up to the high-single digits and annual margin expansion. This, coupled with responsible capital allocation, should sustain EPS growth of at least 10% over time.
Bank Technology. Fiserv’s modern platform and comprehensive solutions attract customers. The company benefits from long-term contracts and the mission-critical nature of account processing. As a result, retention is high, and customer switching is low. Fiserv’s account-based fees create a recurring revenue stream.
Merchant Acquiring. Fiserv possesses the most important features for Payments companies: scale, diverse distribution, and software integration.
Scale. According to The Nilson Report, Fiserv was the second largest merchant acquirer in the U.S. during 2024, processing almost 41 billion transactions. Spreading fixed costs over a large volume base creates a cost advantage over smaller competitors and supports investments to promote growth
Diverse Distribution. Fiserv reaches merchants through direct sales, in partnership with financial institutions (over 650 as of November 2023), selling organizations (over 3,000 as of November 2023), and third-party software companies (over 1,300 as of November 2023), and its Clover operating system for small business and Carat operating system for enterprises.
Software Integration. Fiserv distributes its processing solutions through partnerships with software companies and its Clover operating system for small business. Integrating processing into software improves customer retention and revenue yield. In 2025, Fiserv expects Clover to generate $3.5 billion in revenue, up from $1.3 billion during 2021.
Valuation
As of Thursday’s close, Fiserv trades at 17.3x $10.20, the mid-point of its 2025 EPS guidance. This represents a 17% discount to the S&P 500. Given an anticipated financial profile of up to high-single digit organic revenue growth and greater than 10% EPS growth, I believe a premium, not a discount, is warranted.
On a free cash flow basis, Fiserv trades at approximately 18x its 2025 guidance of $5.5 billion, also a reasonable level, in my view.
Risks
Fiserv faces primarily the following risks:
a recession that reduces consumer spending and technology spending by banks
consolidation among banks that results in customer losses for its Financial Solutions segment
intensifying competition in merchant acquiring
Fiserv faces a wide range of competitors, including banks, other processors, payment facilitators, selling organizations, and software companies. Clover has generally been regarded as a market share winner based on the quality and breadth of its features. If key competitors close the gap, and Fiserv’s market share gains slow, or worse, reserve, it could result in additional downside for the stock.
Investment Checklist
Below is an evaluation of Fiserv using my Investing Checklist.
Disclosure. Fiserv discloses revenue by type (processing and services and product) and segment. The company began offering more disclosure around segment revenue last year, a plus. Additionally, Fiserv consistently offers volume and revenue for its key product, Clover. Additional disclosure around total merchant volume and card accounts on file would align with industry best practices. Fiserv only has one operating expense line, selling, general and administrative expense. More detailed expenses are preferable.
Growth. Since its combination with First Data, Fiserv’s adjusted revenue growth has averaged about 8.5%, including 13% for Merchant Solutions and 5% for Financial Solutions. Prior to the merger, Fiserv’s organic revenue growth averaged mid-single digits. The company serves millions of merchants and thousands of financial institutions. No single customer accounts for a significant percentage of the company’s revenue.
Profitability. Fiserv’s normalized operating margin1 was 38% during 2024, up from 24% during 2020, which was impacted by significant merger, integration, and restructuring costs. Fiserv does not add back stock-based compensation to its definition of adjusted operating profit, but does add back merger, integration, and restructuring costs, which is not the best practice. In the two years following the First Data merger, Fiserv recorded almost $1.8 billion in merger, integration, and restructuring costs.
Free Cash Flow. Fiserv’s free cash flow has equaled 98% of the company’s net profit2 over the last five years, demonstrating high earnings quality. Stock-based compensation represents less than 2% of revenue.
Financial Health. Fiserv’s debt-to-EBITDA ratio was 3.1x as of March 31, 2025, moderately high. Variable rate debt is less than 10% of total debt.
Returns. Fiserv’s return on average tangible assets averaged 24% since the merger with First Data but reached 30% over the trailing twelve months.
Capital Allocation. Fiserv’s capital allocation is focused primarily on share repurchases. In the last five years, Fiserv repurchased almost $18 billion of its own shares, reducing its average diluted share count by 18%. Fiserv makes small acquisitions on occasion.
Here is how I defined normalized operating profit:
GAAP operating profit + amortization of acquired intangible assets
I do not add back:
Stock-based compensation
Restructuring or
Acquisition-related expenses
Net profit does not add back merger, integration, and restructuring costs