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Key Takeaways
- Strategic shifts toward higher-margin, recurring revenue models via FICO Platform Software as a Service (SaaS) bookings may enhance net margins and earnings growth.
- Partnerships for financial education initiatives with prominent organizations could foster long-term customer loyalty and sustain revenue growth.
- Heavy reliance on mortgage originations and ARR growth, amidst operating expense increases and B2C segment challenges, could risk revenue and margins if market conditions falter.
Catalysts
About Fair Isaac- Develops analytic, software, and digital decisioning technologies and services that enable businesses to automate, enhance, and connect decisions in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.
- Impressive growth in Annual Contract Value (ACV) bookings could lead to an expansion of the customer base and an increase in recurring revenue, positively impacting future revenue growth.
- The successful adoption of FICO Score 10 T, especially in non-GSE mortgages, indicates an expanding market share and customer base, likely to boost Scores segment revenues.
- Expansion of FICO Platform Software as a Service (SaaS) bookings aligns with strategic company goals and indicates a shift towards higher-margin, recurring revenue models, which may positively impact net margins and earnings growth.
- The significant increases in free cash flow demonstrate operational efficiency and financial health, providing a solid foundation for future investments and shareholder returns, potentially enhancing earnings per share through buybacks.
- Partnerships with organizations like Chelsea Football Club and the U.S. Soccer Foundation for financial education initiatives indicate investment in brand value and customer engagement, potentially leading to long-term customer loyalty and sustained revenue growth.
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Fair Isaac's revenue will grow by 13.9% annually over the next 3 years.
- Analysts assume that profit margins will increase from 28.9% today to 35.4% in 3 years time.
- Analysts expect earnings to reach $867.0 million (and earnings per share of $35.84) by about August 2027, up from $478.5 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 50.4x on those 2027 earnings, down from 85.5x today. This future PE is greater than the current PE for the US Software industry at 37.9x.
- Analysts expect the number of shares outstanding to decline by 1.36% per year for the next 3 years.
- To value all of this in today's dollars, we will use a discount rate of 6.69%, as per the Simply Wall St company report.
Risks
What could happen that would invalidate this narrative?- The heavy reliance on mortgage originations revenue, particularly in the B2B sector, could be a risk if there's a downturn in the housing market, potentially affecting revenue growth.
- Dependence on platform and non-platform ARR growth to maintain software segment momentum could be at risk if economic conditions deteriorate or competition intensifies, affecting both revenue and net margins.
- A significant increase in operating expenses, notably from events like FICO World and incentive rewards, could pressure operating margins if revenue growth slows or does not meet expectations.
- Challenges in the B2C segment, as evidenced by the decline in revenues, could indicate a broader market trend or increased competition, potentially impacting the overall profitability of the Scores business.
- Fluctuations in interest rates and their impact on loan origination volumes could pose a risk to the forecasts and guidance provided, potentially affecting earnings and cash flow expectations if the market conditions shift unfavorably.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $1563.81 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 $1900.0, and the most bearish reporting a price target of just $1010.0.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.4 billion, earnings will come to $867.0 million, and it would be trading on a PE ratio of 50.4x, assuming you use a discount rate of 6.7%.
- Given the current share price of $1668.63, the analyst's price target of $1563.81 is 6.7% lower. 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.
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Disclaimer
Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.