Fair Isaac’s July Plunge: What Triggered the Nosedive?
Fair Isaac got wrecked in July—here’s why the FICO score maestro face-planted.
The Algorithmic Unraveling
Credit-score algorithms don’t crash quietly. Fair Isaac’s stock got shredded after Q3 earnings exposed cracks in its data-driven empire. Wall Street expected bulletproof growth—instead, it got a margin squeeze and guidance cuts.
The Bear Case Bites
Short sellers pounced when management hinted at softening demand for credit analytics. Turns out, even AI-powered risk models can’t predict their own revenue slump.
Finance Irony Alert
Nothing funnier than a company that monetizes financial predictability… missing its own targets. Maybe they should’ve run their earnings through a FICO model first.
Is FICO's monopoly in question?
While there have been some talk of alternative credit scores in recent years, the FICO score has typically enjoyed, and still does enjoy to a large extent, a near-monopoly on credit scoring.
But early in July, FHFA director Bill Pulte announced the agency would begin allowing lenders to use the alternative VantageScore 4.0 for assessing borrowers' creditworthiness for orloans, without having to build new tech infrastructure.
VantageScore was the creation of the three major credit bureaus in 2017, which aimed to incorporate alternative data not used by the traditional FICO score to assess hard-to-score borrowers who may not have more established credit. Since Fannie and Freddie loans make up about half of all mortgage loans in the U.S., the new rule relaxation could have an effect on the use of the FICO score.
Image source: Getty Images.
Then, toward the end of the month, FICO reported earnings, showing solid 20% growth on the back of 34% growth in its Scores segment. FICO actually beat revenue and adjusted earnings per share expectations for the second quarter, but the company didn't raise its full-year revenue guidance. Furthermore, the Scores segment's growth rate was lower than the 41% price hike FICO announced late last year.
When FICO raised prices, it was criticized by FHFA director Pulte at the time, and he appears to be looking for ways to drive down the costs of originating mortgages and homeownership. That may include going after FICO's monopoly in some ways, even though the FICO score is a very small proportion of the total cost of getting a mortgage.
Where does FICO go from here?
Even after the past month's drop, FICO still trades at 37 times this year's earnings estimates. While not cheap, that's a much more reasonable price to pay than the stock's super-high valuation earlier this year, when it was nearly double where it is now. After all, the FICO score is still the go-to credit score for the vast majority of lenders.
That being said, the company's small-scale skirmish with the new FHFA director may be an overhang that prevents much upside in the NEAR term. FICO has raised prices somewhat regularly over the past seven years or so, so there may not be more to be had on the price increase front. Therefore, investors may not see the same growth in revenue and profits going forward as they did in the past.
