Ian Bezek
Investor/Writer, Latin American Equities, Former Analyst at Kerrisdale
Fair Isaac at 40x GAAP earnings and 30x EBITDA is no value stock. Much of the gap between GAAP and adjusted earnings is stock-based compensation, $160 million over the past 12 months against net income of $658 million last year, a chunky share of profits even though buybacks exceed issuance. If FICO counts as consensus value, it is time to retire the idea of value investing. x.com x.com x.com x.comÂ
Fair Isaac still looks far too expensive at 90x free cash flow, even after a 75% fall in a monopoly. Even if FCF doubled, the price would equal 45 years of cash flow, and doubling at FICO's size is much less plausible after it raised prices 17 times and angered customers. The test is whether the company can earn the price paid within an investor's lifetime under generous growth assumptions. x.com x.com x.com x.comÂ
FICO's moat is starting to get disrupted, and the premium multiple holders once defended has not held up. Two years ago the stock traded at 80x EPS on the argument that a high-quality compounder with a moat deserved it; that multiple has since compressed by about 80%. FICO would need to rise 280% to regain its all-time high, and there is a good chance it never does. x.com x.com x.comÂ
FICO is trading at its lowest valuation of the decade, about 13x forward earnings for what is essentially a duopoly, which is attractive. @thejmkane counters that it is no longer really a monopoly, but a duopoly at 13x is not so bad. x.com x.comÂ
Fair Isaac is still overpriced at 19x earnings even after falling 60% this year. Never overpay. x.comÂ
FICO's management may think the stock is undervalued, but it needs to rein in its debt soon. x.comÂ
Fair Isaac's selloff looks technically overdone and will probably push the company to double down on buybacks, making it a short-term bounce trade. The longer-term case is less compelling. x.com x.com x.comÂ
FICO no longer merits ownership because its business model, once arguably the best in the world, has made too many enemies and may have gotten too greedy with pricing. x.comÂ
Fair Isaac looks more reasonable after a price reset but is now a slower compounder, still not a buy. FHFA has opened the door to VantageScore, which will chip away some share and end easy 10-15% annual price hikes, cutting earnings growth to the mid-teens from the twenties. The main concern remains management funding buybacks with debt at record multiples, reducing flexibility. If it slows the leverage, shareholders could still do fine, though more grinding than explosive. x.comÂ
Fair Isaac's risk/reward is starting to look enticing at current levels. If it reaches about $75 of EPS by 2029 and trades at 20x earnings, that implies a stock price of about $1,500. x.comÂ
Fair Isaac's scoring moat is eroding after the FHFA said Fannie Mae and Freddie Mac will move to a unified mortgage pricing grid that places VantageScore alongside Classic FICO. VantageScore borrowers will reach the top pricing tier at 780+, the same threshold as FICO, eliminating their previous 20-point disadvantage. As @oguzerkan notes, even after a 60% drop this year the stock still trades at 19x earnings, a reminder never to overpay for quality. x.com x.com x.com x.comÂ
