Mortgage Simulator And Global Partnerships Will Expand International Markets

Key Takeaways

• Expansion into international markets and diversifying with tailored solutions in various industries suggests potential for strong revenue growth outside traditional finance.
  
• Continued share repurchases reflect an expectation of EPS growth as capital is returned to shareholders, reducing outstanding shares.
  
• The company's revenue growth is vulnerable to macroeconomic challenges, with significant risks tied to mortgage origination dependence and economic conditions in the Americas.

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's strategy to drive growth in revenue includes introducing products like the FICO Score Mortgage Simulator, which aims to enhance lender decisions and potentially increase mortgage origination rates.
  
• The expansion of the FICO Score across international markets, such as their collaboration with TransUnion in Kenya, indicates a potential increase in revenue by tapping into previously underserved geographical regions.
  
• The introduction of FICO Score 10 T and its adoption by institutions managing significant mortgage portfolios suggests an expected uplift in future revenues and earnings from enhanced credit scoring offerings.
  
• The expansion in the Software segment with partnerships, like those with Fujitsu and dacadoo, for tailored industry solutions, suggests potential revenue growth from diversified sectors outside traditional finance.
  
• Continued share repurchase indicates expected growth in EPS as the company returns capital to shareholders, which reduces the number of outstanding shares over time.

Fair Isaac Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fair Isaac's revenue will grow by 16.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 30.7% today to 37.0% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $41.51) 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 57.5x on those 2028 earnings, down from 88.0x today. This future PE is greater than the current PE for the US Software industry at 31.6x.
• 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 7.78%, as per the Simply Wall St company report.

Fair Isaac Future Earnings Per Share Growth

Risks

• The company's reliance on mortgage origination revenues, which accounted for a significant portion of total Scores revenue, poses a risk if there is a downturn in the housing market, potentially impacting future revenues and earnings.
  
• The Software segment encountered headwinds in customer communications services usage due to macroeconomic volatility, suggesting a potential risk to future revenue growth if such conditions persist.
  
• The growth in Software segment ARR has decelerated, partially attributed to macroeconomic factors, which could hamper the segment's revenue growth if the economic uncertainty continues.
  
• A significant portion of revenues are derived from the Americas, which could pose a risk if there is an economic downturn in this region, affecting overall revenues and net margins.
  
• The decision to maintain guidance is a reflection of uncertainty and caution regarding future macroeconomic conditions, which could materially impact revenue and earnings if these conditions do not improve.

Valuation

• The analysts have a consensus price target of $2055.064 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 57.5x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $1961.5, the analyst price target of $2055.06 is 4.6% 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.