The Fiserv Story: A Clover Thesis

May 9, 2024
International Shares

During the March quarter, the Forager International Shares Fund invested in Fiserv (NYSE:FI). Fiserv is a global payments company offering an array of transaction processing solutions to various clients, from big global banks to your local coffee shop. It owns the third-largest debit network in the world, trailing only Visa (NYSE:V) and Mastercard (NYSE:MA). It also owns and operates Clover, a digital Point of Sale (POS) and payments system for small and medium businesses.

Clover is a key part of the thesis, having grown from nothing to more than US$270 billion of annualised Gross Payment Volume in a few years. Clover has been taking share from other merchant processors over recent quarters, including Square (ASX:SQ2) and Global Payments (NYSE:GPN), with Clover customers benefiting from a wide selection of value added services. Clover products don’t just facilitate payments but also allow merchants to track inventory, manage employees, process online sales and manage customer loyalty programs.

In 2023, Clover accounted for 10% of group revenues and the division is expected to grow 30% annually over the coming years. E-commerce growth has been an important source of growth in digital payments, with global transaction volumes rising significantly over recent years and likely to continue growing more than 10% annually over the remainder of this decade.

In addition, outsourcing amongst banks and credit unions has also contributed to the payments processing sector’s growth. The majority of Fiserv’s revenue comes from long-term, recurring contracts that generate predictable and strong free cash flow.

Fiserv Inc Share Price Premium (Discount) to S&P 500

Despite impressive earnings growth over the past few years, the company is trading near a 10-year low price-to-earnings ratio. For most of the past decade, Fiserv has traded at a 20-40% premium to the broader S&P 500 index. However, along with industry giants like Visa and Mastercard, Fiserv faced challenges during Covid, which persisted into 2022 and 2023 due to concerns regarding consumer spending, the US banking crisis and, more recently, competitive threats.

Even though the company has consistently surpassed market expectations, its valuation has struggled to catch up relative to its peers. Investors currently seem overly focused on threats, overlooking strong execution and valuation fundamentals. For a business with a footprint of over six million merchant locations, serving ten thousand financial institutional clients and overseeing 1.4 billion accounts, there seems to be a current disconnect between price and value. The company’s earnings per share should grow faster than 10% annually, and perhaps faster than 15% over the coming years.

This is an excerpt from the Forager International Shares Fund March Quarterly Report