Fair Isaac: A compelling long-term growth story (NYSE: FICO)

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Fair Isaac (NYSE: FICO) future revenue will grow at a mid-single-digit CAGR over the next five years, driven by its state-of-the-art portfolio of software and scoring products. Its scoring products and software enjoy strong demand in the market. I believe that the company will perform well in the competitive environment and capture the market share of competitors in the long term through its differentiated products. As a result, the company’s share price will rise significantly over the next five years. Long-term investors can buy the company’s stock during pullbacks.

FICO is a predictive analytics and decision management software company that provides solutions and services to its customers to automate and improve the decision-making process. Its scoring solutions help finance companies win new customers and increase customer value. To predict customer behavior, the company integrates big data and mathematical algorithms into its predictive analytics and decision management systems.

Growth engines

Rating solutions and services

FICO’s scoring solutions and services are one of its key growth drivers. The Company’s business-to-business (“B2B”) scoring solutions provide customers with access to predictive credit and other scores. These scores can be integrated into the transaction flows and decision-making processes of the company’s customers, which are large banks, credit card issuers, mortgage lenders and auto loan originators. As a result, they benefit immensely in terms of customer retention and winning new customers. FICO’s business-to-consumer (“B2C”) scoring solutions, including the FICO score, the standard measure of consumer credit risk in the United States, are sold directly to consumers through its myFICO website and other direct-to-consumer channels. I believe that FICO’s rating solutions will lead to impressive long-term revenue growth due to sustained strong demand for financial products in the United States once the current macroeconomic crisis in terms of inflation passes. .

Software Solutions

FICO’s software solutions are its other growth driver. The Company’s software solutions provide customers with digital analytics and decision-making technology. As a result, its customers can grow their business by automating and improving decisions across their enterprise. In addition, FICO also helps clients make decisions on supply chain optimization, schedule management, and policy-related issues with its software. These are the reasons why the company’s software solutions work well in a competitive environment. I expect the company’s software solutions to drive its revenue growth significantly in the years to come.

Competition

The financial software and decision management space is very competitive. FICO competes with companies like Intuit (INTU), Pegasystems (PEGA), Equifax (EFX), Experian (OTCQX:EXPGF), and Salesforce (CRM). FICO competes with these companies on the basis of rating product expertise, advanced financial analysis offerings, and price.

FICO’s main competitive advantage is that it develops software that can address challenges such as customer engagement in terms of customer acquisition and pricing. The company’s software is also capable of meeting challenges related to integration, service and management, as well as fraud protection. The company’s other competitive advantage is that it offers an excellent combination of predictive analytics software and related services, as well as advanced integration of predictive analytics with decision management software. As a result, the company’s software market share continues to grow. Both competitive advantages will help the company drive long-term revenue growth.

Results for the second quarter of fiscal 2022

FICO reported revenue of $357.2 million in the second quarter of fiscal 2022, up 8% year-over-year. Non-GAAP EPS for the quarter was $4.68, up 53% year-over-year. Net cash for the quarter from operating activities at $122.6 million, down 20% year-over-year.

The company reported mixed results for the second quarter of fiscal 2022. Revenue increased on unit price increases and growth in the B2B segment and myFICO. Profits increased thanks to the company’s focus on efficiency. The company’s ARR (annual recurring revenue) software grew 11%, contributing to overall revenue growth. I expect revenue to continue to grow over the next five years, driven by growing B2B and B2C businesses, which will also lead to a steady increase in net income. Net cash for the quarter grew at a negative rate due to inflated operating expenses (which is a short-term phenomenon), which was a little disappointing but not a major cause for concern.

I expect the company’s revenue from credit card and personal loan issuance to grow in coming years, albeit at a slower pace, due to inflationary pressure. In a weaker economy, credit card and personal loan businesses generally perform well due to an increased need for cash. However, FICO revenue growth from the auto and mortgage segment is expected to remain weak in the coming years due to macroeconomic weakness. Overall, the company’s revenue is expected to grow at a mid-single digit CAGR over the next five years.

Evaluation

FICO’s competitors are Intuit, Pegasystems, Equifax, Experian and Salesforce.

FICO

INTU

PEGA

EFX

EXPGF

RCMP

Non-GAAP P/E (FY1)

27.11x

34.36x

63.30x

24.85x

36.56x

TTM price at sales

8.96x

8.71x

3.06x

4.83x

4.85x

6.05x

TTM price to cash flow

25.97x

27.84x

119.90x

24.77x

16.94x

26.82x

(Data Source: Alpha Research)

FICO is attractively valued relative to its competitors. Its balance sheet consists of $174.2 million in cash and cash equivalents and $1,842 million in debt. FICO is available at an attractive valuation because it is leveraged. However, its revenue will grow at a mid-single-digit CAGR over the next five years, which will drive its share price higher. FICO’s scoring solutions enjoy significant demand in the US financial market, and its software solutions also have a significant and growing market share. I expect the company to be able to drive demand for its financial products over the next five years through its differentiated product portfolio. Long-term investors can buy the company’s stock during pullbacks.

Assuming FICO’s revenue grows at a CAGR of 5% over the next five years, I’ll find out the company’s long-term share price. The company’s last 12 months revenue is $1,352.3 million and, at a CAGR of 5%, the company’s revenue by mid-2027 will be $1,726.00 million, or $66.56 per share. Over the past five years, the company’s shares have traded between price and sell multiples of 5x and 12x. I expect that over the next five years, the company’s price to sales multiple will peak about 10x, due to market share growth. Applying a price-to-sales multiple of 10x on FICO’s revenue per share in mid-2027, I get $665.60 as the company’s stock price in mid-2027.

Risks

FICO generates a significant portion of its revenue from a smaller number of products. Its product portfolio includes scoring solutions, fraud protection solutions, marketing solutions, customer management solutions and decision management solutions. If the market does not accept one or more of FICO’s solutions, the company’s revenue growth and profitability could be affected.

FICO’s future growth depends on the continued development of new products and solutions. Since the company has a product portfolio consisting of a smaller number of solutions, the development of new products is seriously needed compared to its competitors. If the company fails to develop new products on a regular basis, its revenue growth and profitability could be adversely affected.

Conclusion

FICO is a debt-ridden company. If the company fails to gradually reduce its debt over the next three to five years, its net income growth could be affected. I expect the company to be able to reduce its debt burden over the next few years through continued revenue growth. As a result, its net income will increase, which will have a positive impact on its share price. Long-term investors can buy the company’s stock in withdrawals to maximize their gain.

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