Jim Cramer - Mad Money Fair Isaac Corp. FICO-N COMMENT Jan 26, 2024

No one will build a better mousetrap than FICO.

The #14 stock on the S&P last year, up 94.5%. They created and own the FICO credit score, drawing revenues from companies and individuals alike. Their software business is strong, amounting to about 50% of their sales. They're innovative and keep offering new products. Banks are key clients who need credit scores. Software revenue was up 11% and annual recurring revenue was up 22%. Retention rate was 120% (gaining more business). Their performance supports a rising PE. But it now trades at 47x PE, higher than peers, too pricey. It'll likely pullback. A fine company.

Yesterday, they reported a sizable top and bottom line beat, accelerated revenue growth and raised their full-year forecast, but not as high as the street expected. So shares plunged 7% today. Also, the street is worried about long-term interest rates going higher.

This has survived countless fintech companies that can't beat FICO. They provide software to companies to manage credit risk. Is up 5,732% over 20 years.

Shares are down after an official in the Federal Housing Finance Administration made comments about the agencies push to a two-tier credit score from a three-tier in a bid to lower overall mortgage costs. This would certainly hurt FICO's growth if implemented, but the materiality of it may not be as much as the stock drop indicates. Still, it has changed sentiment and we are generally cautious stepping into these 'falling knife' situations, and here, with valuation at 58X earnings, we would see waiting (not buying) as the best option.
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The government has been unfair to them.

In Canada we have credit scores; in the US, people talk about a FICO score because of this company. Has been around forever, basically an oligopoly. Mountains of data. Extremely well run, profitable. As a value manager, expensive even with the drop. 

Concern is how could AI potentially dethrone its moat? Also, competitors could potentially access and capitalize on its data. Economic slowdown would lead to contraction of credit, so its revenues from credit checks might go down.