FICO: New Mortgage Direct License Program Will Drive Market Leadership

Key Takeaways

• Cloud-based SaaS transition, AI innovation, and platform partnerships are boosting recurring revenues, margin expansion, and strengthening FICO's competitive differentiation.
  
• Growing international adoption, enhanced credit scoring products, and regulatory-driven analytics demand are expanding FICO's addressable markets and supporting durable growth.
  
• Regulatory shifts and rising competition, along with cost pressures and slower software growth, threaten FICO's dominant position and its long-term profitability.

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.

• The expanding adoption of FICO Score 10 T and the recent launch of BNPL-enhanced credit scoring products are set to increase the relevance, predictive power, and broader utility of FICO's solutions for lenders, driving future revenue growth as digitization and data-driven decisioning accelerate in lending markets.
  
• Momentum in international expansion-combined with new partnerships (e.g., AWS) and growing platform adoption-positions FICO to benefit from global financial services digitization, opening up significant new addressable markets that should fuel multi-year top-line growth.
  
• The ongoing transition to SaaS and cloud-based delivery, evidenced by double-digit growth in FICO Platform ARR and emphasis on conversion to next-generation AI-driven decisioning solutions, is increasing recurring revenues, supporting margin expansion and greater earnings predictability.
  
• Sustained investment in explainable AI and machine learning, as showcased by new FICO-focused foundation models and decisioning innovations, is enhancing competitive differentiation and supporting premium product offerings, increasing average selling prices and net margins.
  
• Industry-wide demand for robust, third-party analytics driven by regulatory scrutiny and risk management requirements (especially in mortgage, auto, and card origination) reinforces FICO's entrenched market position and pricing power, supporting both revenue growth and durable high margins despite competitive pressures.

Fair Isaac Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fair Isaac's revenue will grow by 14.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 32.8% today to 36.8% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $44.97) by about September 2028, up from $632.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 49.9x on those 2028 earnings, down from 58.7x today. This future PE is greater than the current PE for the US Software industry at 36.2x.
• Analysts expect the number of shares outstanding to decline by 1.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.62%, as per the Simply Wall St company report.

Fair Isaac Future Earnings Per Share Growth

Risks

• Regulatory changes, especially the FHFA's move toward lender choice and the potential approval and adoption of VantageScore for GSE mortgage originations, could increase competition and erode FICO's long-standing market dominance, leading to reduced pricing power and market share, therefore negatively impacting future revenues and profit margins.
  
• The secular shift toward alternative data and open banking, along with increased focus on algorithmic fairness and explainability, may challenge the continued relevance and adoption of traditional FICO scoring models and require higher compliance and R&D expenditures, potentially compressing net margins.
  
• FICO remains heavily reliant on its flagship FICO Score product, particularly in the mortgage segment-where regulatory or competitive disruption (e.g., lenders choosing VantageScore or another alternative) could result in meaningful revenue and net earnings concentration risk.
  
• Growth in the software segment, especially platform ARR and ACV bookings, has recently slowed (up only 3% in Q3), suggesting challenges in achieving broader SaaS/platform adoption or facing increased competition and customer hesitancy in IT spending, which could hinder long-term revenue expansion and margin improvement.
  
• Increased operating expenses, including higher marketing spend, incremental headcount, and potentially rising interest expenses due to the company's sizable fixed-rate debt, may increase cost pressures moving forward, limiting future net income and reducing free cash flow available for share repurchases or debt paydown.

Valuation

• The analysts have a consensus price target of $1874.704 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 $2300.0, and the most bearish reporting a price target of just $1230.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.9 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 49.9x, assuming you use a discount rate of 8.6%.
• Given the current share price of $1546.56, the analyst price target of $1874.7 is 17.5% higher.
• 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.