Fiserv: A Legacy Financials Player With An Embedded Growth Business

Summary

FISV is valued by the market as a legacy financial player.

Embedded in FISV are Carat and Clover, two fast-growing merchant acceptance platforms.

Based on historical performance and management’s guidance, FISV appears to be undervalued.

MoMo Productions/DigitalVision via Getty Images Thesis

Fiserv (NASDAQ: FISV ) is valued as a legacy financial player by the market, with modest growth and steady margins seemingly implied in its current price. However, embedded in this financial conglomerate is a faster-growing business unit. Carat and Clover , these merchant acceptance platforms have experienced rapid growth. The market not properly valuing Carat and Clover presents a chance to buy FISV at a discount. The Clover Platform

Two things separate Clover from legacy merchant acceptance options in my mind. First Clover is an open ecosystem with an app store , like the iOS or Android app stores. In fact, the Clover operating system is built on top of Android. This means third-party developers can create additional functionality that increases the utility of Clover to FISV’s customers. Somewhat related Clover is positioned as a business operating system. Even though merchant acceptance is the primary selling point of the Clover ecosystem it offers additional functionality such as scheduling, hiring, and inventory management.

You can see Clover deepening its relationship with merchants by the number of “modules” each merchant uses increasing over time. A module is a software as a service functionality the Clover merchant pays for. Clover modules per cohort (FISV investor relations) What separates Clover from its competitors

Many competitors have a product similar to Clover. Block ( SQ ), Toast ( TOST ), PayPal ( PYPL ), and Shopify ( SHOP ) all offer their versions of next-generation merchant acceptance solutions. A big differentiator for FISV is its distribution channels. Clover has several different distribution channels: bank partners, individual software vendors, and direct distribution. Other competitors only offer direct distribution. The partnership with banks is especially interesting. Banks can sell Clover devices to maintain the valuable relationships they have with a merchant. If a merchant chooses a provider like SQ, the bank may end up losing that business relationship. This strongly aligns FISV’s interests with the banks it partners with to distribute Clover.

FISV has leveraged this unique distribution strategy to grow its number of merchants at a 22% CAGR over the past five years. Number of Clover merchants over time (FISV investor relations) Comparing FISV merchant acceptance to competitors

Let’s take a look at how FISV’s acceptance segment compares to SQ’s seller ecosystem and TOST’s ecosystem .

*Calculated based on PRO FORMA First Data and FISV combined removing 1-time gains.

FISV’s acceptance segment is slightly larger than Square’s ecosystem but growing slower. SQ has two main drivers of profit the Square seller ecosystem and Cash app. Square made slightly more than Cash app, but Cash app was growing slightly faster in 2021. For some quick back-of-the-envelope math let’s assume that SQ’s value is broken down in the following way, 47.5% Cash app, 47.5% Square, 5% everything else. This would value FISV’s acceptance unit at about $30B based on a comparison to SQ. Payments and fintech

FISV’s other two segments are fintech and payments.

Fintech is ambiguously named. The fintech segment provides an operating system for banks. The primary customers are smaller banks who leverage the platform to build out their technology stack on top of FISV. This is a mature but sticky product, both past performance and management guidance show it growing 4-6% a year.

Payments contain a wide variety of businesses centered around digital payments. This includes debit card networks, bill pay, credit card processing, and gift card issuing. Once again this is a mature business with management and past results forecasting it to grow in the 5-7% range. Who else has been buying FISV?

FISV originally got on my radar when looking at “super investor” purchases after 2021 Q4. Three names I follow and respect bought FISV , Bill Nygren, Seth Klarman, and Value Act investing. In addition, several insiders including the CEO bought shares on the open market in Q4. FISV’s lowest closing price in Q4 was $95.55. If you buy the shares for less than $95.55 you are buying at a price lower than all three of the above “super investors” and all insiders.

I don’t believe in buying a stock solely because someone I respect bought it. But I have no shame in watching what they do and listening to their reasoning. Both Bill Nygren and Value Act’s thesis revolve around the market not respecting the […]

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