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FIS's Fintech Gamble: Is It a High-Stakes Bet or a Calculated Risk?
Fidelity National Information Services (FIS) is making headlines again, and not just for incremental product updates. The company's strategic moves—selling its Worldpay stake while simultaneously acquiring Global Payments' Issuer Solutions business for a cool $13.5 billion—are causing ripples. The question is, are these the moves of a company positioning itself for a comeback, or a desperate shuffle in a rapidly evolving fintech landscape?
Recent reports paint a mixed picture. Optimistic narratives value FIS at a premium, citing margin improvements and operational leverage. One analysis suggests a fair value of $81.05 per share against a recent closing price of $65.77. Another, using a discounted cash flow (DCF) model, goes even further, pegging the value at $113.92. But before we uncork the champagne, let's inject a dose of reality.
The Devil in the Discounted Cash Flow
DCF models, while theoretically sound, are notoriously sensitive to input assumptions. A slight tweak in the discount rate or projected growth rate can drastically alter the outcome. The $113.92 valuation hinges on a cash flow narrative that, in today's fintech sector, feels more like a fairy tale. Can FIS really sustain the kind of growth needed to justify that price?
And this is the part of the report that I find genuinely puzzling. The aggressive profit forecasts that underpin these valuations are, to put it mildly, optimistic. Analysts are betting on higher recurring revenues, efficiency moves, and outsized margin assumptions. But what if those assumptions don't materialize? What if the integration of Issuer Solutions proves more challenging than anticipated? (Integration is almost always more challenging than anticipated.)
The sale of the Worldpay stake is presented as a positive—monetizing a non-cash-generating asset. True enough. But it also means FIS is betting big on its ability to generate higher returns from Issuer Solutions. They’re essentially swapping a piece of the payments pie for a larger slice of the credit processing cake. It's a calculated risk, but a risk nonetheless. The sale of 45% of Worldpay for $6.6 billion represents a multiple of approximately 10.5x expected 2025 EBITDA. FIS Announces Sale of Worldpay Stake and Strategic Acquisition of Global Payments’ Issuer Solutions Business
The Fintech Squeeze
One of the biggest threats to FIS is the relentless competition from fintech disruptors. These nimble startups are eating away at the margins of established players, forcing them to innovate or become irrelevant. FIS is trying to innovate, but innovation costs money, and it takes time.
Smaller financial institutions (FIs), those with under $100 billion in assets, can't hope to compete directly with the quality of digital user experience (UX) on offer at the largest US banks due to their smaller tech budgets. Per 2020 eMarketer data, the nine largest US banks accounted for 60% of total banking IT/tech expenses as of May 2020. Innovation Strategies at Small and Midsize FIs: How US Banks with Assets Below $100 Billion Are Punching Outside Their Weight Class on Digital User Experience
The acquisition of Issuer Solutions is expected to deliver $45 million in incremental revenue synergies within three years, with over $125 million of revenue synergies longer-term, and more than $150 million in net EBITDA synergies within three years.
The question is, are these synergies achievable in a market where everyone is fighting for the same scraps?
Weighing the Odds
A Swing for the Fences or a Strikeout Waiting to Happen?
FIS is making a bold move, no doubt about it. They're betting that Issuer Solutions will be a game-changer, that they can successfully integrate it into their existing operations, and that they can fend off the fintech hordes nipping at their heels.
The market seems hesitant to fully buy into this narrative. The stock price, while showing some signs of recovery, still lags behind analyst targets. Investors are waiting to see if FIS can deliver on its promises.
And that's the crux of it. The numbers tell a story of potential upside, but also of significant risk. Whether FIS's fintech gamble pays off remains to be seen. But one thing is certain: the next few years will be a wild ride.
Time Will Tell
The numbers are optimistic, but the market isn’t convinced. FIS's future hinges on flawless execution and a hefty dose of luck. The question isn't whether they can succeed, but whether they will.
