Diversifying And Innovating Drives Merchant Services Leader To New Heights

Key Takeaways

• Strong Clover revenue growth and diversification into new markets highlight expanding market share and broader revenue sources in merchant services.
  
• Investments in digital payments and cloud technology, alongside significant shareholder returns, underscore a robust financial position and focus on innovation.
  
• Reliance on new markets and product launches for growth, amidst inflation normalization and transaction slowdown, poses risks to revenue projections in merchant services.

Catalysts

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

• Strong Clover revenue growth of 28% indicates a growing demand for Fiserv's merchant services, pointing towards an increase in both revenue and market share in the merchant acquiring space.
  
• Expansion into new markets and verticals, including significant partnerships (e.g., Verizon, Apple) and new client acquisition in sectors like petro, gaming, government, and healthcare, suggest diversification and broader revenue sources.
  
• Increment in free cash flow to $1 billion for the quarter and a substantial return of $1.5 billion to shareholders via share repurchases hint at a strong financial position and commitment to shareholder value, possibly impacting net margins positively.
  
• Investment in technology innovation, particularly in digital payments and cloud technology, presents opportunities for future growth in revenues and efficiency enhancements that could improve operating margins.
  
• Focus on integration and synergy realization post-merger with First Data, coupled with leveraging global reach and scale, outlines a strategic advantage that could drive both top and bottom-line growth.

Assumptions

• Analysts are assuming Fiserv's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.4% today to 23.0% in 3 years time.
• Analysts expect earnings to reach $5.4 billion (and earnings per share of $9.95) by about September 2027, up from $3.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $4.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.8x on those 2027 earnings, down from 29.8x today. This future PE is greater than the current PE for the US Diversified Financial industry at 16.0x.
• Analysts expect the number of shares outstanding to decline by 5.56% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.03%, as per the Simply Wall St company report.

Risks

• The rapid normalization of excess inflation and interest in Argentina, leading to a reduced extra revenue contribution, could affect revenue projections, particularly in the Merchant Solutions segment.
  
• The potential impact of the anticipated end of dólar turista revenue in Argentina could create headwinds for adjusted revenue growth, affecting overall financial performance.
  
• A slowdown in small business volume growth and enterprise transaction growth observed in Q2, if sustained, could challenge future revenue growth expectations, possibly impacting revenue and earnings projections.
  
• Declines in volumes and revenues in the processing business line for some large processing clients could indicate pressure in the back-end processing services, potentially affecting revenue in the Merchant Solutions segment.
  
• The reliance on new product rollouts and international expansion (e.g., Brazil, Mexico, and Australia) for growth entails execution and market penetration risks, which could impact expected revenue contributions from these strategic initiatives.

Valuation

• The analysts have a consensus price target of $180.65 for Fiserv based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $200.0, and the most bearish reporting a price target of just $130.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $23.5 billion, earnings will come to $5.4 billion, and it would be trading on a PE ratio of 19.8x, assuming you use a discount rate of 7.0%.
• Given the current share price of $178.38, the analyst's price target of $180.65 is 1.3% higher. The relatively low difference between the current share price and the analyst consensus 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.