Fair Isaac Corporation (NYSE:FICO) has declined by over 34% since the end of March, compared to gains of over 42% by the Insider Monkey Billionaire Index.
The company has spent decades turning a three-digit number into something far more valuable. The FICO score became part of the machinery of lending. Banks use it to judge credit risk, while mortgage investors use it to understand the loans behind securities. That is why the recent pressure on FICO is more serious than a normal competitive threat.
On May 29, we published an article about the best wide moat stocks to buy according to Wall Street analysts. FICO ranked eighth on that list. The #1 stock in that list returned more than 60% since the article was published.
The moat was never the data
The obvious argument is that FICO has a gigantic database that competitors cannot reproduce. That is not really true.
Fair Isaac Corporation and VantageScore can use the same underlying credit data. The difference is how each company turns that information into a prediction of whether someone will repay a loan. FICO argues that decades of experience building these models give it an edge.
FICO’s moat is less about owning unique information and more about convincing the financial system that its interpretation can be trusted. A credit score has to be accepted by lenders, regulators, and investors who ultimately buy the loans.
DON’T MISS: 10 Best Cybersecurity Stocks to Buy According to Analysts
That is why VantageScore matters
The biggest threat is that the market gets comfortable using more than one. Fannie Mae and Freddie Mac have opened the door to VantageScore in mortgage lending. FICO’s management says lenders are now pulling both scores, partly because the system creates an incentive to “score shop.”
That creates a problem even if FICO keeps most of the volume.
A competitor does not need to take the entire market away to change the economics. It just needs to give lenders another option. That could put pressure on FICO’s pricing power.
FICO has another moat investors may be missing
FICO has been turning its technology into a broader decision-making platform for financial companies. The software helps businesses make decisions around fraud, credit, and other risks in real time.
FICO’s Platform ARR grew 62% year over year in the latest reported quarter, while platform net retention reached 148%. Platform revenue also overtook the older non-platform business for the first time.
A lender using FICO for several risk decisions has more reasons to stay. FICO can also add new use cases without having to win that customer all over again.
The company has acknowledged a weakness here. For years, management described FICO as “IP rich” but “distribution poor.” Its partnership strategy is meant to fix that by using large consulting firms and other partners to sell its technology.
But the moat is being tested
Mortgage scores remain a major part of FICO’s business, while the company is also trying to develop new products and expand beyond mortgages. UltraFICO, for example, adds consumer-permissioned cash-flow data to the traditional score.
The timing is not ideal.
FICO’s shares have fallen sharply this year as the mortgage scoring landscape changed. On October 6, the company announced plans to cut roughly 15% of its workforce as part of an AI-focused restructuring.
Still, a broken moat and a weakened moat are not the same thing.
FICO does not need to remain the only acceptable score. It needs its score to remain the one lenders and investors trust when the consequences of being wrong are immense.
The Valuation Has Changed
At 16.08x forward earnings, FICO is no longer being valued as if its dominance will last forever. Its trailing P/E is 25.47x, which suggests analysts expect earnings to improve. But the bigger question is whether FICO can keep growing while competition puts pressure on its core business.
The lower multiple is understandable. FICO used to benefit from a position that was difficult to challenge, and investors were willing to pay for that predictability. Now, there is a risk that lenders get more comfortable using alternatives, and FICO loses some pricing power. The company could remain the leading credit score provider and still make less money from each score it sells.
But FICO has another business that is growing quickly. Platform ARR grew 62% year over year, while net retention reached 148%. That means existing customers are spending more on its platform. This is encouraging, but the software business still needs to become large enough to make a real difference if the scoring business comes under pressure.
At 16.08x forward earnings, FICO is worth a closer look. The market has good reasons to be concerned, but it may be treating a weaker moat as a broken one. If FICO can hold on to its position with lenders and keep growing its software business, the stock could be undervalued. But if competition starts eating into scoring profits faster than software can make up for them, the low multiple may be justified. The stock is cheaper for a reason. The question is whether the market has gone too far in pricing in the damage.
Conclusion
FICO’s moat does not appear to be gone.
It is being tested in a way investors have not seen before. The mortgage market could become more competitive. But the real moat is not the three-digit score or even the data behind it. It is the confidence that lenders, regulators, and investors place in FICO when real money is on the line.
That is much harder to replace.
At 16.08x forward earnings, the question is whether the market has gone too far in assuming that confidence can disappear.
Market Sentiment
Hedge fund sentiment toward Fair Isaac weakened in the second quarter. According to Insider Monkey’s database, 50 hedge funds held FICO in Q2, down from 60 funds in Q1, while the value of their positions increased slightly from $2.93 billion to $2.94 billion. Despite fewer funds holding the stock, the nearly unchanged value suggests that larger investors largely maintained their positions.
READ NEXT: Visa vs. Mastercard: Does a 241% Return on Equity Make Mastercard the Better Buy? and What is American Tower’s (AMT) Economic Moat, and is it Widening or Narrowing?
This article is originally published at Insider Monkey.
