Fiserv

Reuters reports that activist investor Jana Partners has sent another letter to Fiserv, pushing for more cost cuts.

Why it matters: Jana previously pressured the company to take a more comprehensive approach to asset sales and called for changes to the board. While the company has already laid out a cost-reduction plan, Jana thinks it isn't aggressive enough and that the company should aim higher. Jana apparently has also recommended tapping Palantir to update the company's technology.

The bottom line: We will maintain our $106 fair value estimate for the narrow-moat company and see shares as deeply undervalued. We're skeptical of Jana's proposal to cut costs more deeply, as we think an overemphasis on maximizing near-term margins under previous management was a leading cause of the company's issues today. We see stabilizing the top line and returning to modest growth as the more critical consideration in the company's turnaround, given the importance of scale to the company's business. That said, Fiserv should obviously pursue greater efficiency if it doesn't impact growth. The current stock price, however, equates to only 6.4 times expected 2026 adjusted earnings. As such, we don't see margin improvement as necessary to believe the stock is undervalued.

For more details on our views on Fiserv and its peers, please see our presentation "The Leading Payment Names Are Down but Not Out," published on Sept. 21.

Our fair value estimate for Fiserv is $106 per share, which equates to 14.7 times our 2026 adjusted EPS projection.

We assume that top-line weakness will persist through 2026, leading to a modest revenue decline in 2026. Thereafter, we expect overall revenue growth to recover to about 4.5% over time. We expect growth in the merchant segment to recover to about 6%, and the financial segment to bounce back to 3% growth. In both cases, our long-term growth assumptions are below the company's performance in recent years. The net impact of these assumptions is a 3% adjusted revenue compound annual growth rate over the next five years.

We expect operating margin to decline materially in 2026/ as management increases investment to maintain growth. Our projections assume adjusted operating margin (excluding amortization and one-time charges) falls about 7 percentage points from 2024 to 2026. Thereafter, we expect it to improve slightly, with adjusted margin coming in at 32% by the end of our projections. Fiserv saw substantial margin improvement in 2023 and 2024. Our projections assume margins reset at a level a bit below the margins the company enjoyed before this improvement. While management expects to see 350 basis points of margin improvement from 2026 to 2029 due to AI-related efficiencies and the scalability of the business, we think a more cautious approach to long-term margins is appropriate given Fiserv's history on this front.

We use a cost of equity of 8.9% and a weighted average cost of capital of 7.8% in our valuation.

While we believe certain aspects of Fiserv’s business benefit from a wide moat, the company’s operations have expanded to a point where we believe a Narrow Morningstar Economic Moat Rating is appropriate for the business as a whole.

Fiserv’s roots lie in core processing systems, the most basic and mission-critical system for banks. This business is contained in the company’s financial solutions segment, which makes up almost half of revenue. 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 to a new system 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. Fiserv’s leading market share also provides an edge in this scalable business. Fiserv's sticky customer relationships and cost advantages add up to a wide economic moat for this portion of the business, in our opinion.

Fiserv’s bank offerings have widened significantly over the years, and services related to payment processing, which are also contained in the financial solutions segment, now outstrip core processing and ancillary services in terms of revenue. We believe that this area of the business also enjoys meaningful switching costs, but that the switching costs are not nearly as high as for core processing. In our opinion, cost advantage is the more meaningful factor in this area. Payment processing of any type tends to be highly scalable, and Fiserv enjoys a leading position in processing debit and credit payments for issuers. However, it does not appear to have a dominant edge in terms of volume, and we believe only a narrow moat surrounds this segment of the business.

With its merger with First Data in 2019, Fiserv expanded into merchant acquiring, which makes up about half of revenue. Switching costs are relatively low in this area, and the scale and the resulting cost advantage are the primary factors influencing competitive positioning. As a result, a handful of acquirers have come to dominate the industry over time, and mergers and acquisitions in recent years have further consolidated the space. If we include its bank joint ventures, Fiserv has historically been the clear volume leader; however, we believe these joint ventures have been a potential source of weakness from a moat perspective, as the company’s scale advantage depends on its bank partners. The joint venture with Chase dissolved over a decade ago, and the joint ventures between Bank of America and Wells Fargo recently dissolved. Excluding bank joint ventures, the volume is on par with that of the other leading players. Overall, we think a narrow moat is appropriate for this part of the business.

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

The ongoing shift toward electronic payments creates room for acquirers to see solid growth without stealing share from each other.

First Data’s growth had accelerated before the merger as it worked past its financial issues, and the business now has access to greater resources under Fiserv’s roof.

Since it was built through acquisitions, Fiserv has to maintain multiple core processing platforms, which could limit margins and hamper the quality of its offerings.

Fiserv’s bank technology operations are tied to a mature industry and are almost entirely domestic, which limits its growth prospects.

Due to the First Data merger, Fiserv is now more exposed to macroeconomic conditions.