Does The Hype Around Fair Isaac Corporation's (NYSE:FICO) Growth Justify Its March Share Price?

Fair Isaac Corporation (NYSE:FICO) is considered a high-growth stock, but its last closing price of $263.38 left some investors wondering if this high future earnings potential can be rationalized by its current price tag. Let’s look into this by assessing FICO's expected growth over the next few years.

Check out our latest analysis for Fair Isaac

What can we expect from Fair Isaac in the future?

According to the analysts covering the company, the following few years should bring about good growth prospects for Fair Isaac. The consensus forecast from 2 analysts is certainly positive with earnings forecasted to rise significantly from today's level of $5.081 to $6.782 over the next three years. On average, this leads to a growth rate of 12% each year, which signals a market-beating outlook in the upcoming years.

Can FICO's share price be justified by its earnings growth?

FICO is trading at quite a high price-to-earnings (PE) ratio of 51.84x. This tells us that Fair Isaac is overvalued compared to the US market average ratio of 17.61x , and undervalued based on its latest annual earnings update compared to the Software average of 52.96x .

Fair Isaac's price-to-earnings ratio stands at 51.84x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. However, to properly examine the value of a high-growth stock such as Fair Isaac, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 51.84x and expected year-on-year earnings growth of 12% give Fair Isaac a quite high PEG ratio of 4.22x. Based on this growth, Fair Isaac's stock can be considered overvalued , based on fundamental analysis.

What this means for you:

FICO's current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you're a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

1. Financial Health: Are FICO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has FICO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of FICO's historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.