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FICO
Dominating B2B Credit Scoring with Sticky Solutions Despite VantageScore Competition
Will Lenders Still Use FICO in the Future?
Fair Isaac Corporation (FICO), a leader in decision management and analytics, plays a pivotal role in the B2B (business-to-business) landscape through its FICO Scores, which are widely utilized by financial institutions, lenders, and insurers to assess creditworthiness. A prime example of a B2B use case is the deployment of FICO’s B2B Scores by major U.S. banks for mortgage origination and risk assessment. As highlighted in recent analyst reports from July 30, 2025, FICO’s B2B Scores revenue surged by 42% year-over-year in the third quarter of fiscal 2025 (3Q25), driven by a significant multi-year license renewal for its insurance score product and robust mortgage origination growth of 53%. This growth underscores FICO’s entrenched position in the B2B market, where its scores are integrated into core lending systems, enabling banks to price loans, manage risk, and comply with regulatory standards.
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What makes FICO’s B2B offerings particularly sticky, even with competition from VantageScore, is the deep integration and predictive power of its scoring models. FICO Scores, including the widely adopted FICO 10T, are the industry standard, built on decades of data and refined algorithms that lenders trust for their accuracy in predicting default risk. The multi-year license renewals, such as the unquantified renewal boosting 3Q25 results, reflect long-term contracts that lock in clients, making switching to competitors like VantageScore a complex and costly endeavor. Additionally, FICO’s management has emphasized its confidence in protecting market share, noting no significant client switches to VantageScore following the Federal Housing Finance Agency’s (FHFA) recent lender choice announcement for mortgages. The FHFA’s move, which allows lenders to use alternative scores, has introduced uncertainty, but FICO’s established reputation, combined with its predictable pricing strategy (aiming for a 15-20% mortgage score increase in CY26), reinforces its stickiness. The company’s ability to monetize intellectual property and adapt to regulatory pressures further entrenches its position, as switching would require lenders to overhaul systems and potentially compromise safety standards, a risk many are unwilling to take.
Valuation Analysis
To assess FICO’s intrinsic value, we conducted three valuation methods—Discounted Cash Flow (DCF), Sum of the Parts (SOP), and Exit Multiple—using the following data points from the July 30, 2025, analyst reports: current stock price of $1,527.80, 12-month price target of $1,915.00, FY3Q25 adjusted EPS of $8.57, FY2025 guidance implied revenue of $1.988 billion, FY4Q25 implied revenue of $505 million, and FY2025 adjusted EPS guidance of $29.15. These figures, combined with qualitative insights on growth (mid-teens revenue, 20%+ EPS growth) and margins (~56.8% pre-stock-based compensation in 3Q25), form the basis of our analysis.
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1. Discounted Cash Flow (DCF)
The DCF method projects unlevered free cash flows (UFCF) and discounts them at a weighted average cost of capital (WACC) of 8.5%, reflecting FICO’s risk profile as a tech-driven firm. Assuming a 15% annual revenue growth rate (aligned with mid-teens guidance), an EBITDA margin of 55%, a tax rate of 23%, capex at 3% of revenue, and working capital changes at 2% of revenue growth, we estimate the following cash flows over a five-year period:
Year | Revenue ($B) | EBITDA ($B) | NOPAT ($B) | Capex ($B) | ΔWC ($B) | UFCF ($B) |
---|---|---|---|---|---|---|
FY26 | 2.286 | 1.257 | 0.968 | 0.069 | 0.006 | 0.893 |
FY27 | 2.629 | 1.446 | 1.113 | 0.079 | 0.007 | 1.027 |
FY28 | 3.024 | 1.663 | 1.280 | 0.091 | 0.008 | 1.181 |
FY29 | 3.477 | 1.912 | 1.473 | 0.104 | 0.009 | 1.359 |
FY30 | 3.999 | 2.199 | 1.693 | 0.120 | 0.010 | 1.563 |
With a terminal growth rate of 4% and a terminal value of $36.15 billion, the present value of cash flows totals $28.67 billion in enterprise value. Subtracting net debt of $2.61 billion (based on current market data) and dividing by 24 million shares outstanding yields an equity value of $26.06 billion, or $1,086 per share. This conservative estimate reflects steady growth without aggressive price hike assumptions.
2. Sum of Parts (SOP)
The SOP approach values FICO’s Scores and Software segments independently. For FY25, Scores contribute ~55% of revenue ($1.1 billion), with a 70% EBITDA margin and 20% growth, while Software accounts for ~45% ($0.888 billion), with a 30% margin and 15% growth. Capex and working capital adjustments vary (Scores: 1%/1%; Software: 5%/3%).
Scores Segment:
Year | Revenue ($B) | EBITDA ($B) | NOPAT ($B) | Capex ($B) | ΔWC ($B) | UFCF ($B) |
---|---|---|---|---|---|---|
FY26 | 1.320 | 0.924 | 0.711 | 0.013 | 0.002 | 0.696 |
FY27 | 1.584 | 1.109 | 0.854 | 0.016 | 0.003 | 0.835 |
FY28 | 1.901 | 1.331 | 1.025 | 0.019 | 0.003 | 1.002 |
FY29 | 2.281 | 1.597 | 1.229 | 0.023 | 0.004 | 1.203 |
FY30 | 2.737 | 1.916 | 1.475 | 0.027 | 0.005 | 1.443 |
Terminal value: $33.40 billion → PV enterprise value: $26.15 billion.
Software Segment:
Year | Revenue ($B) | EBITDA ($B) | NOPAT ($B) | Capex ($B) | ΔWC ($B) | UFCF ($B) |
---|---|---|---|---|---|---|
FY26 | 1.021 | 0.306 | 0.236 | 0.051 | 0.004 | 0.181 |
FY27 | 1.174 | 0.352 | 0.271 | 0.059 | 0.005 | 0.208 |
FY28 | 1.350 | 0.405 | 0.312 | 0.068 | 0.005 | 0.239 |
FY29 | 1.553 | 0.466 | 0.359 | 0.078 | 0.006 | 0.275 |
FY30 | 1.786 | 0.536 | 0.413 | 0.089 | 0.007 | 0.316 |
Terminal value: $7.32 billion → PV enterprise value: $5.80 billion.
Total SOP enterprise value: $31.95 billion. Equity value after net debt: $29.34 billion, or $1,222 per share. This method highlights Scores as the primary value driver, leveraging its pricing power and market dominance.
3. Exit Multiple
This method projects to FY30, applying a 25x EBITDA multiple (conservative vs. current ~33x implied) and discounting back at 8.5%. FY30 revenue of $3.999 billion yields an EBITDA of $2.199 billion, resulting in an exit enterprise value of $54.98 billion. The present value of this exit, plus interim UFCF of $4.65 billion, totals $41.21 billion in enterprise value. Subtracting net debt gives an equity value of $38.60 billion, or $1,608 per share. This optimistic scenario assumes sustained growth and pricing leverage.
Valuation Comparison and Outlook
Method | Enterprise Value ($B) | Equity Value ($B) | Per-Share Value | Implied Upside from $1,381 |
---|---|---|---|---|
DCF | 28.67 | 26.06 | $1,086 | -21% |
Sum of Parts | 31.95 | 29.34 | $1,222 | -12% |
Exit Multiple | 41.21 | 38.60 | $1,608 | +16% |
The valuation range ($1,086–$1,608) reflects FICO’s strong fundamentals, tempered by FHFA-related risks and Q4 guidance softness ($505 million vs. $527 million consensus). Analyst targets ($1,800–$1,953) suggest higher upside, potentially from aggressive growth (20%+) or multiples (30x). The stock’s current price of $1,381 (down from $1,527.80 reported) indicates a sell-off, presenting a potential buying opportunity if FICO executes its pricing strategy and maintains its B2B dominance. With sticky Scores and a transforming Software business, FICO remains well-positioned for long-term growth, despite competitive pressures. We own FICO and plan to add to the position if it retraces even more.
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