A Growth Stock Worth the Risk

When Mr. Market is plagued by uncertainty, it's typically not the time to jump into volatile growth stocks. However, worthwhile ones with low to moderate risk do exist and can offer investors promising returns. Let's look at one such stock -- Fiserv (NAS: FISV) -- and examine why its recurring revenue stream makes it a safer bet, despite the ailing economy.

Predictable revenue
The IT financial-services company helps more than 16,000 clients worldwide with challenges ranging from simply retaining customers to handling fraud allegations and regulatory compliance. Given that about 83% of Fiserv's revenue comes from processing and services, most of which is generated from account and transaction-based fees under multiyear contracts, the company enjoys highly predictable income. The processing solutions Fiserv provides to banks, credit unions, and other companies are critical to how those corporations conduct business.

These core systems include payment tracking, check posting, and account management. Since it offers contracts that typically last three to five years and carry early termination fees, it's both costly and time-intensive for clients to switch from Fiserv to a new provider.

Fiserv's overall customer-retention rate is well over 90%, and even during the height of the financial crisis, when banks were cutting costs at every turn, Fiserv continued to produce strong earnings. Looking to the future, the company should enjoy considerable growth from its electronic-payments segment.

Online bill-pay
A study Fiserv conducted found that four of five U.S. households with Internet access use online banking services. This trend should continue as online payment systems become more widely adopted. Fiserv took the lead in online bill pay in 2007, when it acquired CheckFree Holdings for $4.4 billion.

CheckFree, a world leader in electronic bill pay and Internet banking, enabled Fiserv to expand its digital offerings. At the time of the merger, CheckFree commanded the top online banking platform used by financial institutions. In addition, the company's investment-services business handled portfolios with combined assets totaling more than $1.8 trillion.

Today, that investment enables Fiserv to process more than 17 billion digital bank payments and 9 billion ATM transactions each year. The segment is responsible for more than half of Fiserv's sales.

Opportunities from other acquisitions should contribute to revenues down the road, including MobileMoney and ZashPay.

With MobileMoney, Fiserv launched Mobiliti, which enables financial institutions to offer mobile-banking functions to customers using SMS (text messaging), a mobile browser and downloadable applications for Google's Android, Apple's iPhone, and Research In Motion's (NAS: RIMM) BlackBerry devices.

Mobile-banking adoption in the U.S. has more than doubled since 2009, and according to a recent report by Forrester Research, mobile payments will grow by an average of 20% per year over the next five years.

The competition
Although Fiserv's competitive moat is wide, the company is not without competition. Payments provider Fidelity National Information Services (NYS: FIS) also benefits from a loyal customer base, as do other names in the bill-payments industry. Fidelity competes with Fiserv most directly in the full-service banking arena, while MasterCard (NYS: MA) and Visa (NYS: V) are competitors on the electronic-billing and payment-transactions front.

In terms of per-share earnings growth, Fiserv falls well short of explosive results at MasterCard and Visa. On an adjusted EPS basis, however, the company has enjoyed double-digit percentage growth for the past 25 years -- and with online banking on the rise, Fiserv is poised to increase profitability through its recurring fee-based revenue model and should therefore continue to enjoy strong growth.

No growing pains here
Fiserv is on track to provide worthy returns in the years ahead. The combination of its strong financials, strategic acquisitions, recurring revenue model, and steady profits in the company's core business make it a winning bet in my book.

In this economy, there are plenty of reasons to be fearful of growth stocks. But investors wanting a less risky stock with attractive long-term growth appreciation should consider Fiserv. Track the stocks I've discussed here using The Motley Fool's free My Watchlist tool.

At the time thisarticle was published Fool contributor Tamara Rutter owns no shares of any stocks mentioned in this column. Connect with her on Twitter, where she goes by @TamaraRutter. The Motley Fool owns shares of Google, MasterCard, Fiserv, and Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple, Visa, and Google, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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