Fidelity National Information Services

Fidelity National Information Services' growth was a little weak in the second quarter, leading management to modestly lower its full-year guidance. The market reacted negatively, with the stock falling 5% in Aug. 4 intraday trading.

Why it matters: Overall year-over-year organic revenue growth came in at 5%, with FIS showing solid margin improvement. A strong showing in the banking segment (6% year-over-year organic growth) was partially offset by weak performance in the capital markets segment (3% year-over-year organic growth). Management lowered full-year expectations for the capital markets business due to unexpected headwinds and announced that the company may look to divest certain product lines. Adjusted EBITDA margin improved 190 basis points year over year, or 110 basis points on a pro forma basis. We expect margins to reset at a slightly higher level after adding the TSYS operations, but believe that after 2026 they will hold basically flat, given limited growth.

The bottom line: We expect to reduce our $85 fair value estimate for narrow-moat FIS by about 10% after reassessing some of our assumptions. However, we continue to see the shares as undervalued. Management lowered both its full-year pro forma revenue and adjusted EBITDA growth guidance by about 1 percentage point, but at the same time it also modestly raised its free cash flow guidance. While weaker-than-expected growth is a disappointment, we find it difficult to justify the current market price (which equates to a little less than 7 times expected 2026 adjusted earnings per share) from a long-term perspective. We think that long-term growth will be modest, but that the company will remain solidly profitable and the capital-light nature of this business should result in strong free cash flow.

We are reducing our fair value estimate for FIS to $77 from $85 per share, after reassessing some of our growth assumptions. Our fair value estimate equates to 12.5 times our 2026 adjusted earnings per share projection.

While FIS’ legacy business bank technology held up relatively well, the acquiring side of the business growth saw a material negative impact from the coronavirus pandemic. The acquirers then saw a strong bounceback starting in 2021. However, Worldpay lagged its peers during this recovery, which we attribute in part to its relatively heavy reliance on large merchants and its exposure to the UK market. More importantly, the company's performance within the small merchant space appeared to deteriorate. This poor performance prompted the sale of a majority stake in Worldpay in 2024, and then a sale of its remaining stake in 2025.

With the company now more focused on its more mature bank tech operations, we expect only modest revenue growth over time. We expect slightly higher growth from the capital markets segment, but we still project only a 4% revenue CAGR over the next five years for the company as a whole on a pro forma basis.

The acquisition of Worldpay involved substantial cost synergies that have now been undone. Management initiated a sizable cost-reduction plan in 2024 that offset this. Management does expect some cost synergies from the Global Payments deal, but they are modest. We think the substantial cost reductions achieved previously and limited long-term growth will make it difficult to achieve material margin improvement. We expect adjusted EBITDA margins to hold at 42% through our projection period.

We use a cost of equity of 8.0% and a weighted average cost of capital of 7.4% in our valuation.

While we believe certain segments of FIS’ business benefit from a wide moat, we believe a narrow Morningstar Economic Moat Rating is appropriate for the business as a whole.

FIS’ roots lie in core processing systems, the most basic and mission-critical system for banks, and this business is contained in the company’s banking segment. Core processing is the nuts-and-bolts system that banks need to maintain their deposit and loan accounts and to post daily transactions. Given the integral nature of core processing to their operations, banks very rarely switch systems. Besides the potential for interruptions, converting systems would require the banks to retrain employees. Customers typically sign multiyear contracts, and customer retention approaches 99% annually, excluding customers lost because of acquisitions by another bank. Its leading market share also gives FIS an edge in this scalable business. We think a wide moat surrounds core processing.

But the bank technology industry has expanded significantly over time, with providers now providing services in areas such as loan origination, electronic bill payments, debit card processing, and online banking. While we believe many of these products enjoy switching costs, and areas such as payment processing have built economies of scale that lead to a cost advantage, switching costs for these services are not as immense as for core processing. Further, compared with peers, FIS’ customer base skews toward larger banks, which have more leverage. Overall, we believe only a narrow moat surrounds this segment of the business.

The capital markets segment offers services to investment firms and enjoys some similar dynamics to the banking segment. Its services center around largely back-office, day-to-day activities, and customers typically sign three- to five-year contracts. We believe this business benefits from meaningful switching costs, but that the magnitude of the switching costs is significantly lower than for core processing for banks. We believe this segment merits a narrow moat rating.

We think the issuer processing business FIS recently acquired from Global Payments also benefits from a narrow moat. We see this business as complementary to FIS' existing debit processing business and think the basis of its moat also lies in a scale-based cost advantage. We think that, by consolidating volumes from its issuer clients, FIS can provide this service at a price that is lower than clients could achieve internally, and can realize pricing that allows for attractive returns.

The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts.

FIS's core processing relationships are incredibly sticky.

With healthy operating margins and limited reinvestment needs, FIS throws off a good amount of free cash flow and actively returns it to shareholders.

Compared with its peers, FIS' customer base skews more heavily to large banks, which have greater bargaining leverage.

FIS’ bank technology operations are tied to a mature industry, which limits its growth prospects.

The sale of the Worldpay business has been unnecessarily complicated.