On the money

On Wednesday, 29 October, Fiserv published its quarterly results – and the markets were not impressed. The payments company reported revenue growth well under consensus estimates and cut its full-year guidance, sending its shares tumbling by over 42% that day, with a further fall of almost 7% the following day. Whenever a ‘blue chip’ company with multiple decades of history and tens of billions of dollars in market capitalisation suffers such a large fall, the question is almost always asked – is this a moment of market panic and mispricing, or the beginning of a terminal decline?

This is hardly a first. The wreckage of the dot-com era was littered with companies that once looked untouchable before they imploded – and a few that, against all odds, clawed their way back. Netflix in 2011, down nearly 80 % after a disastrous pricing split, was dismissed as a cautionary tale of overreach only to now dominate the streaming market. Apple in the 1990s teetered on the edge of bankruptcy – a pivot into mobile technology and the invention of the smartphone fuelled a boom that saw it cemented as a $4 trillion company last week. Yet for every Apple or Netflix, there are firms like Blackberry – whose stock trades at just under the $5 mark today, well short of the $147 highs it reached when it was viewed as a leader in the smartphone market. There are also firms which truly have no chance of recovery – failures such as Lehman Bros, whose market capitalisation plummeted from $60 billion to nothing in less than a year in the run up to the Global Financial Crisis of 2008. So how can people on the outside figure out whether a company rebounds like Netflix’s did, regresses and settles into a rut like Blackberry, or faces ruin like Lehman Bros?

This next paragraph is a tangential exploration which ultimately bore little fruit

First, I tried to enlist AI to help me in this. I used a technique called Retrieval Augmented Generation, or RAG, through which a Large Language Model can retrieve specific articles from vast amounts of context in order to construct a response. I locally hosted an instance of Llama-3.1-8B (An 8 billion parameter version of the Llama 3.1 model built by Meta) to use as a model. I then hooked it up to multiple RSS feeds of news articles about Fiserv. My project retrieved the full articles of these news articles and attempted to answer user queries with them. Unfortunately, I ran into one major issue: rss feeds only display an extremely limited number of articles (typically the most recent 20 published) – in order to build up a large corpus of data, I would have had to have begun running a daily scraping of Fiserv-related articles from RSS feeds for several years by now. In the interest of transparency I have shared the project on my github, which you can find here. For those of you that think just analysing news articles without analysing company filings, reports and documents would be a little shallow regardless – there will be some upcoming projects in the works that will put those in the spotlight.

With my AI analyst out of action, I had to do some thinking for myself. However, when reading through articles, something stands out – what isn’t mentioned – debt, or rather access to cash. When companies see collapses in their share prices, this often stems from the perception that their business model is fundamentally unfit for purpose, whether it be Blackberry’s failure to keep a current smartphone lineup, or Netflix’s early pivot into streaming being punished by a fall in subscriber numbers back in 2011. To get out of these ‘ruts’, extra capital is usually needed, either to radically improve the quality of their current products – like Netflix aggressively buying streaming rights to dozens of franchises to lure back subscribers – or to completely rethink their entire business, as when Blackberry began to transition from mobile phones to software as a service in 2015. Therefore, two important factors that influence the chances of a company’s fortunes rebounding are: 1) borrowing costs, and 2) the size of the currently existing debt pile.

Take the story of Netflix, for example. In late 2011, Netflix’s share price had cratered by nearly 80% after losing 800,000 subscribers in an early (but premature) backlash against the shift to video streaming. Netflix’s response? A shift to aggressive debt issuance. From 2011 to 2021, Netflix took on over $15 billion of long-term debt, helping it to build up a library of over 3,500 original shows and films in 10 years. Similarly, when Apple found itself weeks away from bankruptcy in 1997, it secured capital via a $150 million investment from Microsoft to tide it over until it released the iMac – a new all in one computing system that acted as a growth engine, returning the company to profitability. Although Apple’s overall need for fresh cash may seem relatively small, it is important to note that the company burnt through over $2 billion of cash reserves in the years leading up to 1997 – this ready access to cash is what gave Apple the breathing room that made a decline recoverable, rather than irretrievable.

In environments where companies suffer substantial share price shocks whilst they have substantial cash cushions or access to financing, ruin is rarely an option – at worst, a company may utilise their reserves as a ‘bridge’ to transition (or regress) into a less lucrative, if more stable business model, and at best, heavy investment may give a company a new lease on life.

Given this, where does Fiserv stand? The share price of the company has cratered, just as with other erstwhile ‘fallen angels’. The company also stands on a substantial debt pile – it holds a debt to equity ratio of 1.2, meaning that its total debt is 120% of the value of the book value of its shares held by shareholders. It’s also worth noting that a large portion of Fiserv’s debt has been issued at extremely competitive rates – a $2 billion tranche of Fiserv bonds coming due in 2026 was locked in at a rate of just 3.2% in 2019, which is substantially below the interest rates of even sovereign bonds in 2025. A $1 billion bond maturing in 2027 was even cheaper, at just 2.25% interest, whilst another $500 million 2027-dated bond has a rate of just 1.125%. With a total of over $10 billion of debt secured at interest rates of 3.5% or below, if current borrowing costs remain fairly stable then Fiserv’s debt servicing costs will increase to the tune of $250 million a year once these low-coupon bonds are refinanced. Last quarter, nearly a third of Fiserv’s gross income went to debt servicing. Whilst this may at first sound alarming, a company which issues no dividend payments (and owing to its’ position selling an established product, it has no R&D expenditures), is in a strong position to
absorb a higher interest burden, at least for a while. In other words, unless revenue truly falls off a cliff, Fiserv is not going to follow Lehman into outright collapse anytime soon.

Whilst Fiserv may have a looming debt headache, it hardly looks existential. Its existing debt has largely been raised at attractive rates, and although refinancing will almost certainly lift interest costs over time, the business generates enough cash, and pays no dividend, that higher coupons should be something it can gradually shrug off rather than a threat to its survival. The more interesting question is what happens on the revenue side. Here, the evidence so far suggests that the market is punishing Fiserv less for a broken business model and more for the shock of having to reassess the profitability and pricing of its newest offerings. If investors have anchored on overly optimistic expectations for growth in these lines, then a guidance cut feels like a betrayal, even if the underlying franchise remains solid.

Seen in that light, the current sell off looks far more about sentiment and perceived dishonesty as it does about fundamentals. Markets dislike surprises, and they particularly dislike the sense that management has been over selling a growth story. Yet those are, by their nature, short term issues. Over the next few years, what will matter far more is whether Fiserv can continue to win and retain clients, grow transaction volumes and nudge pricing back towards something closer to fair value as the initial outrage fades. The fact that the shares now trade on a trailing price to earnings multiple of under ten suggests that a great deal of pessimism is already in the price; if the business merely muddles through with modest growth, that valuation could start to look unduly harsh.

None of this is a recommendation to rush out and buy the stock, nor is it the verdict of an expert – I’m no professional analyst or payments industry insider, and I could well be absolutely wrong in my assessment. It is entirely possible that today’s low multiple is a fair reflection of risks that will only become obvious in hindsight. But on the numbers as they stand, and assuming that the controversy is more about communication and expectation management than about a fatal flaw in the core business, it seems more plausible that Fiserv is facing a period of slower, less glamorous growth than that it is heading for outright stagnation, let alone collapse.