Expanding Platform Capabilities And Customer Adoption Will Positively Influence Future Performance

Key Takeaways

• Strong growth in the Scores and Software segments, driven by mortgage originations, SaaS offerings, and the new FICO Score 10T, boost revenues.
  
• Share repurchases and new strategies like incorporating Buy Now Pay Later data aim to enhance market position and earnings per share.
  
• Uncertainty in credit score implementation and challenges in platform and software revenues may affect growth, coupled with potential margin pressures from rising operating expenses.

Catalysts

Develops software with analytics and digital decisioning technologies that enable businesses to automate, enhance, and connect decisions in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.

• FICO is experiencing strong growth in its Scores segment, particularly through mortgage originations, which saw revenues up by 110% year-over-year. This is expected to continue impacting revenue positively, driven by both pricing and volume increases.
  
• The introduction and growing adoption of FICO Score 10T could drive additional revenue growth in the Scores segment. The use of FICO Score 10T for non-GSE mortgages is gaining traction, evident from new partnerships and adoptions with significant financial institutions.
  
• The Software segment is expected to see revenue increases through its SaaS offerings and platform growth, with the ARR (Annual Recurring Revenue) for platform products growing by 20% over the prior year. The focus on expanding platform capabilities and customer adoption is likely to impact revenue and earnings positively.
  
• FICO continues to engage in share buybacks, which may lead to EPS (earnings per share) growth. The company repurchased 126,000 shares recently, indicating a proactive approach to returning capital to shareholders.
  
• The strategic initiative to incorporate Buy Now Pay Later data into FICO Scores is anticipated to enhance the predictive performance of their credit scoring model, potentially increasing its adoption and subsequently impacting both future revenue and market share positively.

Fair Isaac Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fair Isaac's revenue will grow by 15.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 30.7% today to 37.5% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $41.54) by about April 2028, up from $544.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $920.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 57.1x on those 2028 earnings, down from 85.2x today. This future PE is greater than the current PE for the US Software industry at 29.6x.
• Analysts expect the number of shares outstanding to decline by 1.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.72%, as per the Simply Wall St company report.

Fair Isaac Future Earnings Per Share Growth

Risks

• The delay by the FHFA in rolling out a new credit score system implementation suggests uncertainty, which could affect projections and revenue growth in the mortgage segment.
  
• Foreign exchange rate fluctuations have negatively impacted platform ARR, indicating potential volatility in international earnings.
  
• Reduced software ACV bookings in the past may impact future ARR growth, signaling potential revenue challenges in the software segment.
  
• The decline in revenues from credit card, personal loan, and other originations suggests possible challenges in diversifying revenue within the Scores segment.
  
• Increased operating expenses are anticipated, which could pressure net margins if they grow faster than revenue.

Valuation

• The analysts have a consensus price target of $2047.169 for Fair Isaac based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $2800.0, and the most bearish reporting a price target of just $1257.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 57.1x, assuming you use a discount rate of 7.7%.
• Given the current share price of $1899.78, the analyst price target of $2047.17 is 7.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.