Should You Buy Fair Isaac Stock Despite Its High Valuation?

Fair Isaac (NYSE:FICO) stock declined by nearly 17% over the past week, following a major regulatory development. The sell-off was triggered after the Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac will now accept VantageScore 4.0 alongside traditional FICO scores for mortgage underwriting. This breaks FICO’s long-standing monopoly, as the two government-sponsored enterprises back roughly half of all U.S. mortgages. The move is seen as a potential threat to FICO’s dominance and future pricing power in the credit scoring market.

So, is this truly a long-term risk for FICO stock, or is the sell-off overdone? Despite Vantage Score being approved, most lenders are expected to continue using FICO scores due to the long-standing trust, data models, and seamless integration into existing underwriting systems. Mortgage lending is very risk-sensitive, and lenders are likely to be cautious about making any immediate switch to a newer model. Moreover, the current use of tri-merge credit reports – which pull data from all three major credit bureaus: Experian, Equifax, and TransUnion – continues to rely on FICO scores. This should help to sustain demand for FICO’s scoring products. Separately, cryptocurrencies have started to move again. See Will The Rally In XRP Price Continue?

Image by Harry Strauss from Pixabay

Does The Sell Off Make FICO stock A Buy?

Going by what you pay per dollar of sales or profit, FICO stock looks still looks expensive compared to the broader market. Fair Isaac has a price-to-sales (P/S) ratio of 21.8x versus a figure of 3.1x for the S&P 500. And, it has a price-to-earnings (P/E) ratio of 71x vs. the benchmark’s 26.9x. However, our analysis of Fair Isaac along key parameters of Growth, Profitability, Financial Stability, and Downturn Resilience shows that the company has a very strong operating performance and financial condition, as detailed below. That said, if you seek upside with lower volatility than individual stocks, the Trefis High Quality portfolio presents an alternative – having outperformed the S&P 500 and generated returns exceeding 91% since its inception.

Fair Isaac’s Revenues have seen notable growth over recent years with its top line growing at an average rate of 10.3% over the last 3 years compared to an increase of 5.5% for the S&P 500.  Also, its quarterly revenues expanded 15.2% to $440 million in the most recent quarter, up from $382 million a year ago compared to a 4.8% improvement for the S&P 500.  Fair Isaac’s profitability is also exceptional. Over the last four quarters, Fair Isaac’s Net Income was $544 million, resulting in a net income margin of 30.7%, which is well above the S&P 500 average of 11.6%. This highlights the operating efficiency and pricing power of its Scores segment. Fair Isaac’s balance sheet looks strong, with the company holding a Debt-to-Equity Ratio of 6.3% (vs. 19.4% for the S&P 500). Cash and cash equivalents account for $184 million of the $1.7 billion in Total Assets for Fair Isaac.  This yields a strong Cash-to-Assets Ratio of 10.8%. FICO stock has seen an impact that was slightly better than the benchmark S&P 500 index during some of the recent downturns.

Not too happy about the still rich valuation of FICO stock? The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.