We came across a bullish thesis on Fair Isaac Corporation (FICO) on Substack by Ryan Reeves. In this article, we will summarize the bulls’ thesis on FICO. Fair Isaac Corporation (FICO)’s share was trading at $2088.22 as of May 9th. FICO’s trailing and forward P/E were 89.93 and 72.46 respectively according to Yahoo Finance.
A senior banker signing a loan document, emphasizing the company’s ability to finance mortgages.
FICO, founded in 1956, is a data science company renowned for its role in helping lenders assess risk, primarily through its proprietary FICO score. The company has built a business that serves over 100 of the largest banks globally by providing not just credit scores but also decision management software, consulting services, and platform-as-a-service offerings tailored to the needs of lenders. At the heart of its operations is the FICO score, which banks and financial institutions rely on to determine the creditworthiness of individuals applying for loans, mortgages, or credit cards. The company’s core service of credit scoring, often bundled with reports from the three major credit bureaus (Experian, Equifax, and TransUnion), continues to hold a dominant position in the market.
FICO’s moat is deeply rooted in the structure of the credit ecosystem. Banks rely heavily on FICO’s scoring system, which is embedded in their decision-making workflows. The inertia within banks, which have been using FICO scores for decades, makes it difficult for any competitor, like VantageScore (created by the credit bureaus), to displace FICO’s established position. Despite VantageScore being a viable alternative, it hasn’t been able to achieve the same level of adoption, mainly due to the risk banks perceive in switching to an unfamiliar system that would require overhauling their processes. Moreover, FICO’s position is further reinforced by the regulatory landscape: Fannie Mae and Freddie Mac, which oversee a significant portion of the U.S. mortgage market, require FICO scores for the sale of loans in the secondary market. With over 70% of mortgages being sold, this requirement makes FICO’s scores indispensable, securing its place as a critical player in the mortgage origination process.
The company’s unique position also affords it substantial pricing power, a key driver of its profitability. While FICO scores used to cost banks around 50 cents per credit report, the pricing has increased significantly in recent years, reflecting FICO’s ability to flex its pricing power. For instance, the cost of a mortgage origination credit report has risen by more than 10 times since 2018, from about 50 cents to upwards of $5. This price hike, coupled with the volume of transactions, has led to remarkable margins, particularly in its “Scores” segment, which boasts operating margins of around 88%. The high margins reflect the low cost of goods sold—mostly just data—and the company’s significant leverage over the credit bureaus with whom it collaborates. Even with the rising prices, FICO’s fees remain a relatively small fraction of the overall costs of a mortgage, making it a low burden for consumers while generating considerable revenue for the company.
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