The growth of the AI-driven platform could boost Fair Isaac's stock, but the upside is limited
On Tuesday, UBS initiated coverage on Fair Isaac Corporation (NYSE: ), a data analytics company known for its credit scoring services, with an average rating and a $2,100 price target.
The firm's assessment suggests that while Fair Isaac has potential for growth and margin expansion through its FICO Platform, these prospects may come from the current stock price.
A UBS analyst pointed out that Fair Isaac accounts for less than 5% of the software's Total Addressable Market (TAM).
The analysis highlighted the strength of the FICO Platform, which currently accounts for approximately 40% of total Software Annual Recurring Revenue (ARR) and revenue. The analysis suggests that as the FICO Platform scales, it could be the majority of Fair Isaac's revenue mix.
The company estimates that the FICO Platform, powered by the growing choice of General Artificial Intelligence (AI), has the potential to add annual growth and margin expansion of 300-500 basis points, respectively. This growth is expected as the company continues to re-mix its revenue streams and strategically position itself in the market.
Despite the positive outlook for the company's platform and its pricing power in Scores and the increased penetration of Platform software, UBS maintains that the current risk-reward balance is neutral. A target price of $2,100 reflects this assessment, indicating that the company sees limited upside for the stock from its current level.
In other recent news, Fair Isaac Corporation, better known as FICO, has made significant improvements in its financial performance. The analytics software company reported a strong third quarter for 2024, with revenue up 12%, to $448 million compared to last year.
GAAP FICO net income decreased 2%, to $126 million, while non-GAAP net income increased 9%, to $156 million. The company also reported free cash flow of $206 million for the quarter, marking a 69% increase over the previous year.
FICO announced a new share repurchase authorization of up to $1 billion. The company's Scores segment saw a 20% increase in revenue, primarily driven by B2B and loan originations, while the Software segment grew by 5%, driven by SaaS software.
In terms of future expectations, FICO projects GAAP net income of $500 million, with earnings per share of $19.90, and non-GAAP income forecast at $582 million, with earnings per share of $23.16.
In addition to its financial results, FICO also received an Outperform rating from Oppenheimer, indicating optimism about the stock's future performance. The company highlighted FICO's large market presence and pricing power, which are seen as reasons for the multiple premium gains. These are the latest developments surrounding FICO.
InvestingPro Insights
Fair Isaac Corporation (NYSE:FICO) has shown strong financial performance, consistent with UBS's positive outlook on the company's growth potential. According to InvestingPro data, FICO revenue grew 12.28% over the past twelve months, reaching $1.65 billion. This growth is accompanied by a strong gross margin of 79.35%, underlining the company's strong pricing power mentioned in the UBS analysis.
InvestingPro Tips highlights FICO's “impressive gross profit margins” and notes that the stock has shown “high profitability over the past year.” Indeed, the data reveals a net price return of 123.77% over the past year, reflecting investor confidence in FICO's business model and growth prospects.
However, stock test metrics suggest that much of this optimism may already be priced in, which supports UBS's neutrality. FICO trades at a high P/E ratio of 100.78 (adjusted for the last twelve months), which is in line with InvestingPro's tip indicating that it “trades at high earnings.” This high valuation may explain why UBS sees relatively high potential despite the company's strong fundamentals.
For investors looking for a comprehensive analysis, InvestingPro offers 15 additional tips on FICO, which provides in-depth information about a company's financial health and market conditions.
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