FICO: What the $#!& is Happening?
An Look at One of the Highest Quality Companies in The World
Fair Isaac Corporation, or FICO as it’s better known, the company whose very name is synonymous with credit scores in the States, has been on a bit of a rollercoaster ride of late. If you’ve been keeping an eye on the markets, you’ll have noticed its share price taking a rather sharp tumble recently. This wasn't just a case of market jitters; a few pointed comments from a top U.S. housing official seemed to send a chill down investors' spines.
So what has happened? It revolves around the Federal Housing Finance Agency (FHFA) director raising eyebrows at FICO's pricing model. More than that, there's talk of potentially shifting how mortgage lenders assess creditworthiness. For years, the "tri-merge" system, which pulls data from all three major credit bureaus using FICO's analytics, has been the standard. The suggestion of moving to a "bi-merge" system, or even welcoming more competition into the credit evaluation space, understandably made some FICO shareholders a tad nervous. After all, a significant chunk of FICO's bread and butter comes from these scores. The stock took an 8% tumble on the day of the news, a stark reminder of how regulatory winds can buffet even established giants.
But don’t write FICO off just yet. While the share price wobbled, the company’s recent financial performance paints a rather different picture. Their second-quarter fiscal 2025 earnings, announced towards the end of April, were robust, to say the least. We're talking a 15% year-on-year jump in revenue to nearly $500 million, and an even healthier surge in net income. The Scores division, the engine room of the company, saw revenues climb by a formidable 25%, with business-to-business revenue particularly strong, up 31%. This suggests that while Uncle Sam might be grumbling about costs, businesses are still very much reliant on FICO’s analytics.
What’s more, FICO isn't just sitting back and counting on its legacy. They recently unveiled something called the FICO Marketplace. The aim, it seems, is to create a broader "enterprise intelligence ecosystem." While the jargon might be a bit corporate-speak, the underlying strategy appears to be about leveraging their data analytics prowess into new areas and offering more comprehensive solutions to businesses. This is a sensible move, diversifying their offerings and showing they’re not a one-trick pony.
The company's leadership certainly sounds confident, reiterating their guidance for double-digit percentage growth for both revenue and earnings for the full fiscal year 2025. That’s a bold statement given the recent regulatory noise.
So, what's an investor to make of all this? On one hand, the concerns raised by the FHFA are not to be sniffed at. Any significant change to the U.S. mortgage market's reliance on FICO scores could indeed impact their bottom line. Competition is always a looming threat, and the digital landscape is ever-evolving. The stock has had a phenomenal run over the past few years, and its valuation has been a topic of debate among City analysts, with some deeming it rather pricey.
On the other hand, FICO is deeply entrenched in the financial system. Its scores are the lingua franca of credit. Shifting an entire industry away from such an established standard is no small feat and would likely be a slow, drawn-out process if it happens at all. Their core business continues to churn out impressive numbers, and they are making moves to innovate and expand.
In my eyes the recent dip is a buying opportunity for those with a long-term view, a chance to pick up a quality compounding company at a slightly less eye-watering price. You could also argue that maybe it’s a sign that the unquestioned dominance FICO has enjoyed for decades is facing its most significant challenge yet.
As ever in the world of investment, the devil will be in the detail, and I would keep a close eye on regulatory developments and FICO’s ability to keep delivering those strong earnings. It’s a fascinating one to watch, that’s for sure.
Thank you for reading, and have an amazing day!