Brett Horn: Fiserv and Jack Henry are two wide-moat bank technology companies. The foundation of their businesses is what's called core processing. This is the most basic day-to-day system the banks use to operate their business. As a result, these customers are incredibly sticky.
The average bank retains this core processing system for about 30 years on average. These companies then leverage these essentially captive relationships to cross-sell a bunch of ancillary services such as electronic bill payment or online banking. As a result, you have a very stable business model, with about 85% revenue recurring under long-term contracts.
This served them very well during the crisis. Even during the depths of the crisis, Fiserv and Jack Henry were able to maintain basically flat revenue. In the years since, we've seen a gradual improvement in growth. And recently, I think we've seen a bit of an uptick and a bit of a momentum.
But I think, while these are very wide-moat, stable companies, I think investors looking at their stock today, would be facing a different type of risk, which is the valuation risk. I think the market price on these stocks implies a continued improvement in growth rates, which I'm not sure is necessarily realistic. I think both companies are operating, what I would consider, fairly close to kind of normalized rates, and these [implied rates] aren't the rates that I think the companies can sustain even in a favorable environment.
Ultimately, the growth rates that these companies can achieve are limited by the fact that they serve a very mature industry. As a result, both stocks look a little richly valued to me at this point, and investors might want to wait for a better opportunity.