Why Fair Isaac Fell Today

Key Points

• Fair Isaac beat expectations in the second quarter for revenue and earnings.

• The company also raised earnings guidance, but kept its revenue guidance flat.

• Questions over the sustainability of today's strong growth and a high valuation nevertheless caused a sell-off.

• 10 stocks we like better than Fair Isaac ›

Shares of Fair Isaac (NYSE: FICO) fell 9.3% on Thursday as of 2:10 p.m. ET. The financial giant, which administers the well-known FICO credit score and related credit scoring analytics software, reported earnings last night.

While results on the surface showed a beat, the stock fell anyway. That may be because investors are aware FICO is benefiting from large price increases taken within the past year that might not recur.

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A beat, no raise, and questions about next year

In the second quarter, Fair Isaac showed 19.8% revenue growth to $536.4 million, with adjusted non-GAAP (generally accepted accounting principles) earnings per share growth of 37.1% to $8.57.

FICO's business is divided between the core Scores segment, which makes up about 60% of the business, and the newer Software segment, which makes up about 40% of the business. Scores was up 34%, while the Software segment was up 3%.

FICO management also raised adjusted earnings per share guidance for the year to $29.15, from $28.58 prior.

So, why didn't the stock move higher in response to a "beat"? It's likely a couple of things. First, while FICO raised earnings guidance, it did not raise revenue guidance, which is odd after beating expectations for the quarter.

Second, the Scores segment is benefiting from a massive price increase that happened last November. On Nov. 6, FICO raised the price of a FICO score on borrowers for mortgage originations by over 41%, from $3.50 to $4.95. Mortgages of course don't encompass all FICO score activity, but it is a significant portion of the Scores business. So in that light, there are questions as to how sustainable that 34% Scores growth rate is.

Image source: Getty Images.

FICO is expensive if its pricing power is constrained

While a FICO score is still a very small part of the overall costs of mortgages and homebuying, the company came under fire earlier this year from current Federal Housing Finance Agency (FHFA) director Bill Pulte regarding those price hikes and other matters relating to GSE agency-backed mortgages.

So, it remains to be seen if FICO can continue with high prices hikes going forward. That means that with the stock trading at 48 times this year's adjusted earnings estimates, investors may want to wait and see how the company's relationship with the current Trump administration and FHFA works out.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.