1 Under-the-radar fintech stock beat the market by nearly 50% this year

It has been difficult to find stocks with good results this year because the broader market has been hit hard and S&P 500 is down approximately 17.5 percent. It has been even more difficult to find good-performing fintech and technology growth stocks, many of which fell this year in the face of high inflation and rapidly rising interest rates. The Nasdaq Composite is down close to 31% in 2022.

But one fintech stock that seems to be flying under the radar, at least when it comes to some of the more frequently mentioned names, is Fair Isaac (FICO 0.23%). This is the company responsible for developing the FICO scoring system that assesses consumers’ credit risk.

Fair Isaac’s stock is up nearly 34% this year and beating the broader market by more than 50 percentage points. Here’s why.

There is more than meets the eye with Fair Isaac

You may know FICO as the three-digit score you often see on your credit report. But the company runs an extensive software business that leverages predictive modeling, transaction profiling and data to help businesses make better decisions.

To generate FICO scores, Fair Isaac uses publicly available information from property records and other records such as phone and cable payments to rate the consumer on a score range between 300 and 850. Lenders typically want to see a FICO score above 660, which is considered a prime borrower.

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Image source: Getty Images.

Fair Isaac’s business has two main segments: Points and Software. The scoring business is essentially the consumer’s FICO scoring business. Fair Isaac sells scores to most banks, credit unions, and mortgage and auto lenders, who can integrate the score into their business to make credit decisions. Fair Isaac also sells FICO scores directly to individuals through myFICO.com and other consumer channels.

The software segment leverages Fair Isaac’s technology to help businesses automate and improve decision-making for activities such as customer engagement, acquisition and pricing, as well as servicing and managing those customers and fraud protection.

Fair Isaac also assists companies with non-customer functions such as supply chain optimization, planning and policy compliance. This software can be deployed in the cloud or within a customer’s IT and sold as multi-year subscriptions. Fair Isaac’s software business is currently used by customers in more than 120 countries.

A strong business model with a good moat

FICO scores are maintained by national credit reporting agencies such as TransUnion, Experianand Equifax, and then users pay a fee for each individual FICO score. The reporting agencies then pay a fee to Fair Isaac.

This enables the company to generate solid results in a variety of climates. For example, mortgage originations have declined this year due to higher interest rates, but this has been offset by an increase in credit card and personal loans due to consumers’ declining personal savings and higher debt costs. As a result, Scores revenue managed to grow 3% year over year in Fair Isaac’s fourth fiscal quarter of 2022.

The company also continues to grow its software business, which had an annualized revenue run rate (ARR) in the most recent quarter of more than $569 million, up nearly 9% year over year.

In particular, there was a real escalation of the FICO platform solution, which allows businesses to gain real-time customer insights that can improve the way they interact with their customers. The solution also uses a land-and-expand model, where customers can increase usage, and increase Fair Isaac’s billings. The FICO platform went from just 11% of software ARR at the end of 2020 to 20% in the last quarter.

Management is also guiding for double-digit percentage earnings growth for the financial year 2023. Jefferies Analyst Surinder Thind believes Fair Isaac can continue to grow earnings at or above the mid-teens percentage point for the “foreseeable future.”

A well-deserved rise

Fair Isaac is undoubtedly a fintech company, but it is unique in that it can perform well in a variety of different economic climates, giving the business resilience that most fintech and technology stocks lack. Although the company was founded decades ago, management continues to innovate and push for solutions that are invaluable to customers and create recurring revenue and a strong moat. The significant additional return is well deserved.