Tech Giants, Blockchain And Fee Pressures Will Erode Profitability

Key Takeaways

• Disruptive technologies and stronger tech competitors threaten Fiserv's transaction volumes, pricing power, and long-term relevance in core payment processing markets.
  
• Regulatory pressure, industry consolidation, and acquisition-driven growth expose Fiserv to integration risks, margin compression, and reduced future profitability.
  
• Expansion in digital payments, platform growth, acquisitions, and fintech trends strengthen Fiserv's market position, revenue stability, and ability to generate recurring, high-margin earnings.

Catalysts

Provides payments and financial services technology solutions in the United States, Europe, the Middle East and Africa, Latin America, the Asia-Pacific, and internationally.

• The rapid evolution and adoption of decentralized finance and blockchain technologies threaten to bypass traditional payment processors, which could lead to gradual erosion of Fiserv's transaction volumes and undermine the relevance of its core platforms, ultimately reducing long-term revenue growth.
  
• Intensifying competition from technology giants such as Apple, Google, and Amazon expanding aggressively into payments and fintech services, as well as the proliferation of low-cost and alternative real-time payment networks, could significantly erode Fiserv's market share and pricing power, putting sustained downward pressure on both revenue and net margins.
  
• Increased and unpredictable regulatory scrutiny on payments, data privacy, and financial services especially on a global basis will likely force Fiserv to accelerate compliance-related investments, diverting capital from innovation and constraining operating leverage, resulting in margin compression and reduced profitability.
  
• Fiserv's heavy reliance on a series of large-scale acquisitions rather than organic innovation increases the risk of integration challenges and operational inefficiencies; legacy technology stack issues and underinvestment in modernization may further cause loss of competitive edge, damaging client retention and limiting future earnings growth.
  
• Persistent fee compression across the payments industry, combined with the consolidation of large banking and merchant clients, is likely to result in fewer but more powerful clients with increased bargaining power, further restricting Fiserv's pricing flexibility and depressing earnings potential over the long term.

Fiserv Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Fiserv compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Fiserv's revenue will grow by 5.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 15.7% today to 23.7% in 3 years time.
• The bearish analysts expect earnings to reach $5.7 billion (and earnings per share of $9.97) by about July 2028, up from $3.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, down from 24.4x today. This future PE is lower than the current PE for the US Diversified Financial industry at 17.5x.
• Analysts expect the number of shares outstanding to decline by 3.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Fiserv Future Earnings Per Share Growth

Risks

• The acceleration of digital payments and global shift to cashless societies continues to expand Fiserv's total addressable market, positioning the company for sustained growth in transaction volumes, which can drive higher revenues and earnings over time.
  
• Fiserv's rapid expansion of the Clover platform-through new products, new partnerships (such as TD Bank in Canada), and international markets-creates highly recurring, high-margin software and services revenues that bolster net margins and profit predictability.
  
• The company's ability to cross-sell and integrate offerings after major acquisitions, such as First Data and CCV, enables deeper client relationships, improves retention, and creates revenue synergies, helping to counteract competitive pressures and maintain revenue stability.
  
• Industry consolidation in payment processing favors scalable leaders like Fiserv, granting them increased pricing power, greater market share, and opportunities for further inorganic growth, which can elevate both revenues and long-term earnings.
  
• Growing adoption of fintech, embedded finance, and demand for advanced risk management and compliance solutions puts Fiserv in a strong place to benefit from secular trends in digital banking, enhancing client stickiness and supporting resilient, long-term cash flow and margins.

Valuation

• The assumed bearish price target for Fiserv is $141.4, which represents two standard deviations below the consensus price target of $201.63. This valuation is based on what can be assumed as the expectations of Fiserv's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $266.0, and the most bearish reporting a price target of just $125.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $24.2 billion, earnings will come to $5.7 billion, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $143.0, the bearish analyst price target of $141.4 is 1.1% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.