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FICO

Fair Isaac Corporation

$1463.17 34.7B market cap February 1, 2026
Fair Isaac Corporation FICO BUFFETT / MUNGER / KLARMAN SUMMARY
1 SNAPSHOT
Price$1463.17
Market Cap34.7B
2 BUSINESS

FICO operates the most powerful legal monopoly in American consumer finance. The FICO Score is used in over 90% of U.S. lending decisions and is effectively mandated by regulation for mortgage underwriting. This creates extraordinary pricing power - FICO has raised prices annually with minimal customer defection, driving gross margins to 82% and operating margins to 47%. The company is capital-light (CapEx <1% of revenue), generates prodigious free cash flow ($770M in FY25), and returns all of it to shareholders via buybacks. Chuck Akre's new position signals superinvestor validation of this "compounding machine." While the stock trades at a premium valuation (54x P/E), the quality of the moat and runway for continued price increases justify accumulation on pullbacks below $1,300 for long-term investors.

3 MOAT WIDE

FICO Score is used in 90%+ of U.S. lending decisions. Embedded in QM/QRM regulations, Fannie/Freddie requirements, and Basel risk calculations. All 3 credit bureaus calculate FICO Scores under license. 30+ years of validation data makes switching extremely costly and risky.

4 MANAGEMENT
CEO: Will Lansing

Excellent - Aggressive buybacks at reasonable prices, no dilutive M&A, disciplined spending

5 ECONOMICS
46.5% Op Margin
54.1x P/E
0.77B FCF
6 VALUATION
FCF Yield2.2%
DCF Range1500 - 1650

Fairly valued at current prices, 0-12% upside to midpoint

7 MUNGER INVERSION
Kill Event Severity P() E[Loss]
Regulatory intervention - CFPB could mandate alternative scores or cap pricing HIGH - -
Prolonged high interest rates reducing mortgage origination volumes MED - -
8 KLARMAN LENS
Downside Case

Regulatory intervention - CFPB could mandate alternative scores or cap pricing

Why Market Right

CFPB or Congressional action on credit scoring; Higher-for-longer interest rates; FHFA indefinitely delayed bi-merge implementation

Catalysts

Annual price increases (mortgage royalty to $4.95 for 2025, likely higher for 2026); FICO Score 10 T adoption for non-GSE mortgages ($261B originations signed up); Mortgage rate declines could boost volumes 20-50%; Software ARR growth (platform up 20% YoY); International expansion opportunities

9 VERDICT WAIT
A+ Quality Strong - Negative equity is a feature not a bug; debt is manageable for a monopoly, all FCF returned via buybacks
Strong Buy$1050
Buy$1300
Fair Value$1650

Initiate small 1% position at current prices; add to 3-4% if price drops below $1,300 (20% MOS)

🧠 ULTRATHINK Deep Philosophical Analysis

FICO: The Toll Bridge of American Credit

Deep Philosophical Analysis (Buffett/Munger/Klarman Style)

The Core Question: What Makes This Business Special?

There is a particular kind of business that Warren Buffett and Charlie Munger have spent their careers seeking - businesses where the fundamental economics are so tilted in the company's favor that even mediocre management couldn't destroy the returns. They call these "wonderful businesses." FICO is perhaps the purest example of this concept in modern markets.

Consider what FICO actually does: it provides a three-digit number that sits at the heart of nearly every credit decision in America. When you apply for a mortgage, your FICO Score determines whether you get approved and at what rate. When you apply for a credit card, auto loan, apartment rental, or even some jobs - there it is again. The FICO Score has become such a fundamental piece of financial infrastructure that most Americans know their score the same way they know their weight or their age.

This is not an accident. FICO spent 30 years embedding itself into the regulatory fabric of American finance. The Qualified Mortgage rules reference FICO. The GSE requirements mandate FICO. Basel risk-weight calculations use FICO. When something becomes the regulatory default, displacing it requires not just a better product, but a complete rewiring of an entire industry's plumbing. No competitor has come close in three decades of trying.

The beauty of this position is that FICO can raise prices and customers simply pay. They grumble, they complain to Congress, they threaten to switch to VantageScore - and then they pay. Because what is the alternative? Tell your shareholders you're going to spend three years and $50 million revalidating your entire credit operation on an unproven scoring system? Tell regulators you're abandoning the methodology they've blessed for decades? Tell investors you're using scores they don't recognize?

The evidence is in the numbers. FICO raised its mortgage score royalty to $4.95 for 2025. The CEO noted this makes FICO's take just 0.2% of average closing costs. That leaves enormous room for future increases. And every year, like clockwork, FICO raises prices, and every year, customers pay.

Moat Meditation: The Nature of This Competitive Advantage

Munger teaches us to think carefully about the durability of competitive advantages. Most moats are slowly eroding even as the companies profit from them. Newspapers had moats once. So did Kodak. So did Blockbuster. The question is always: what could destroy this?

For FICO, I've thought hard about this, and I keep returning to the same conclusion: the moat is widening, not narrowing.

First, consider the network effects. Every time a new lender adopts FICO, every time an investor requires FICO for securitization, every time a regulator references FICO in a rule - the network becomes more valuable. The more people speak the language of FICO, the harder it becomes to speak any other language. VantageScore was created by the three major credit bureaus specifically to compete with FICO. They had every advantage - they own the data, they control distribution, they had aligned incentives. It's been 20 years. VantageScore has perhaps 10% market share in some segments, and essentially zero in mortgages. That tells you everything you need to know about how hard it is to disrupt a deeply embedded standard.

Second, consider the regulatory moat. This is underappreciated. When a scoring methodology is written into regulations - as FICO is into QM, QRM, and GSE requirements - displacing it requires regulatory action. The FHFA just announced it has "no specific timeline" for implementing alternative scores for conforming mortgages. The bureaucratic inertia is immense. Regulators are risk-averse by nature; they prefer proven methodologies with decades of validation data. FICO has that. Alternatives don't.

Third, consider that FICO is constantly improving its moat. FICO Score 10 T incorporates trended credit data - staying ahead of alternatives. FICO is integrating Buy Now Pay Later data - adapting to new consumer behaviors. FICO is expanding into fraud detection and decision analytics through its software platform. Each of these moves extends the relationship with customers and makes FICO more essential.

What could actually disrupt FICO? I can think of only three scenarios:

  1. Regulatory intervention - Congress or CFPB mandates free scores or alternative methodologies. This is the highest probability risk, but still unlikely. FICO represents 0.2% of mortgage closing costs - it's not a political priority. And FICO has lobbying power.

  2. Technological obsolescence - AI creates such superior credit prediction that FICO's methodology becomes irrelevant. But FICO itself is incorporating AI and machine learning. And even if a better mousetrap exists, switching costs and regulatory embeddedness would delay adoption for years or decades.

  3. Major fraud or breach - If FICO's methodology was proven to be fundamentally flawed or manipulated, trust could evaporate. But FICO has survived 30+ years of scrutiny and lawsuits. The methodology is validated across multiple economic cycles.

None of these scenarios is particularly likely. The moat is wide and widening.

The Owner's Mindset: Would Buffett Own This for 20 Years?

Let us imagine Warren Buffett bought FICO today and planned to hold it for 20 years without looking at the stock price. What would he see?

He would see a business that:

  • Is essential to a $20 trillion credit market
  • Has pricing power that allows revenue to grow regardless of volumes
  • Requires almost no capital investment (CapEx < 1% of revenue)
  • Generates free cash flow that exceeds net income
  • Has management that returns all excess cash to shareholders
  • Is protected by regulatory embeddedness
  • Has no meaningful competitor

This is the textbook definition of what Buffett calls a "wonderful business." It compounds value without requiring retained earnings. It doesn't need to build new factories or develop new products to maintain its position. It simply exists at the center of credit markets and collects a small toll on every transaction.

The only concern Buffett might have is valuation. At 54x trailing earnings, FICO is not cheap by traditional measures. But Buffett learned from Munger that "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Let's do the thought experiment. If FICO compounds earnings at 15% annually for 10 years (conservative given recent trajectory), earnings will grow from ~$27 to ~$109 per share. If the stock trades at 30x earnings at that point (reasonable for a monopoly), the stock would be worth $3,270 - a 123% return from today's $1,463. That's about 8.4% annualized. Not spectacular, but respectable for a high-quality business.

But here's the key insight: if you can buy FICO at $1,050 (35% below current), the same analysis yields $3,270 / $1,050 = 211% return, or 12% annualized. That's Buffett-worthy.

This is why patience matters. The business quality justifies ownership. The question is at what price.

Risk Inversion: What Could Destroy This Business?

Munger's inversion principle demands we consider: how does this investment fail catastrophically?

Scenario 1: The Regulatory Bulldozer

Imagine a populist administration declares war on "hidden fees" in the housing market. They identify FICO as a monopoly profiting from essential services. CFPB mandates that credit bureaus must provide free scores to lenders. Congress passes the "Fair Credit Access Act" requiring alternative scoring models be accepted for all federally-backed mortgages.

Could this happen? Theoretically, yes. Is it likely? I believe not, for several reasons:

  • FICO's take is 0.2% of closing costs - political return on attacking it is low
  • Financial industry would lobby fiercely to protect existing systems
  • Years of implementation would be required
  • Alternative scores would need validation, creating delay
  • Even if mandated, doesn't eliminate FICO - just adds alternatives

Scenario 2: The Technological Leapfrog

Imagine an AI breakthrough creates credit prediction so superior that FICO becomes irrelevant. New entrants offer this technology at lower cost. Lenders gradually adopt, and FICO's market share erodes.

Could this happen? Over a very long time horizon, perhaps. Is it likely in the investable timeframe? I believe not:

  • FICO is incorporating AI/ML into its own scores
  • Switching costs and validation requirements are enormous
  • Network effects mean everyone needs to switch together
  • Regulators would need to approve new methodologies

Scenario 3: The Black Swan

Some unforeseen event destroys trust in FICO. Major fraud discovered in methodology. Massive data breach (though FICO doesn't actually hold consumer data). Revelation that FICO scores are systematically discriminatory in ways not previously understood.

This is the hardest to assess because black swans are by definition unexpected. But FICO has survived 30+ years of scrutiny, lawsuits, and multiple economic cycles. The methodology has been validated repeatedly.

Net Assessment: The business is not invincible, but the probability of permanent capital loss is low. The more likely "risk" is paying too much and earning mediocre returns - not catastrophic loss.

Valuation Philosophy: Is Price Justified by Quality?

Here we confront the central tension in FICO investing. The business is exceptional. The price is elevated. How do we reconcile this?

Graham would say: "Price is what you pay, value is what you get." At 54x earnings, FICO offers a 1.9% earnings yield. This compares unfavorably to risk-free rates of 4-5%. By Graham's strict standards, FICO fails.

Buffett would say: "It's far better to buy a wonderful company at a fair price." He has moved beyond strict value criteria to quality-adjusted value. A monopoly with 47% operating margins deserves a premium to a commodity business with 10% margins. The question is how much premium.

Klarman would say: "Show me the catalyst and the margin of safety." At current prices, the margin of safety is thin. But catalysts exist - annual price increases, FICO 10 T adoption, potential rate cuts boosting mortgage volumes. Klarman might take a small position and wait for a better entry.

My synthesis: FICO deserves a premium multiple, but not an infinite one. At 54x current earnings / 32x forward earnings, it's pricing in substantial growth that needs to materialize. A 20-25% pullback would create a more comfortable entry point. The business quality justifies patience - this isn't a "catch the falling knife" situation where you must act now or miss forever. FICO will still be a monopoly in six months if the price drops.

The Patient Investor's Path: When and How to Act

For the patient, disciplined investor, here is the path forward:

  1. Acknowledge the quality. FICO is a generational business - a legal monopoly embedded in the regulatory fabric of American credit markets. It belongs on any watchlist of exceptional companies.

  2. Accept the premium. Quality commands a premium. FICO will rarely be "cheap" by traditional metrics. The question is whether it's reasonably priced, not whether it's a deep value bargain.

  3. Wait for volatility. The stock fell 34% from its November 2024 highs. Such volatility is normal for high-multiple stocks. The next recession, the next rate scare, the next regulatory headline will create another opportunity.

  4. Set price targets in advance. Strong buy at $1,050 (38x P/E, 35% MOS). Accumulate at $1,300 (47x P/E, 20% MOS). These are the prices where conviction can translate to action without emotional interference.

  5. Size appropriately. At current prices, a 1% position acknowledges quality while respecting valuation risk. At $1,300, grow to 3%. At $1,050, go to 4-5%. Never bet the farm on any single position, no matter how wonderful.

  6. Hold through volatility. Once positioned appropriately, ignore price movements that aren't accompanied by fundamental changes. FICO will be more valuable in 10 years. The path between now and then will be noisy. That's okay.

Final Reflection

Chuck Akre built his career finding "compounding machines" - businesses that can reinvest capital at high rates of return for long periods. His new position in FICO is a signal worth heeding. This is not a trader's stock or a momentum play. This is a business to own for a decade or more.

The FICO Score is one of those rare inventions that became so essential to an industry's functioning that displacing it is nearly unthinkable. Like the Bloomberg Terminal for finance professionals, or Google for internet search, FICO has achieved a position that transcends competition. It simply is the standard.

For patient capital seeking to compound at attractive rates while minimizing the risk of permanent capital loss, FICO represents an opportunity worth studying, worth monitoring, and at the right price, worth owning.

The right price has not yet arrived. But it will.

"The stock market is a device for transferring money from the impatient to the patient." - Warren Buffett

Written February 1, 2026

Executive Summary

Investment Thesis (3 sentences): FICO operates the most powerful legal monopoly in consumer finance - the FICO Score is embedded in 90%+ of all U.S. lending decisions and is effectively mandated by regulation for mortgage underwriting. The company possesses extraordinary pricing power, having raised prices annually with minimal customer defection, generating 82% gross margins and 47% operating margins. While the stock trades at a premium valuation (54x P/E), the quality of the moat and runway for continued price increases justify accumulation on pullbacks.

Key Metrics Dashboard:

Metric Value Assessment
Revenue Growth (5yr CAGR) 8.6% Accelerating to 15%+
Gross Margin 82.2% Exceptional
Operating Margin 46.5% World-class
FCF Margin 38.7% Outstanding
P/E (TTM) 54.1 Premium but justified
Forward P/E 32.4 More reasonable
EV/EBITDA 37.5 Elevated

Decision: WAIT - Current price is 12% below fair value. Accumulate on further weakness below $1,300 (25% MOS).

Primary Catalyst: Continued mortgage score pricing increases (announced $4.95 for 2025) and FICO Score 10 T adoption for non-GSE mortgages.

Phase 0: Opportunity Identification (Klarman Framework)

Why Does This Opportunity Exist?

  1. Multiple Compression from Rate Sensitivity: Stock has pulled back 34% from November 2024 all-time highs ($2,382) due to concerns about higher-for-longer interest rates reducing mortgage origination volumes.

  2. Complexity/Misunderstanding: Many investors see FICO as a "cyclical" mortgage play, missing that:

    • Pricing power offsets volume declines (110% mortgage revenue increase in Q1 FY25 despite modest volume)
    • Software segment (46% of revenue) provides stability and growth
    • Non-mortgage scores (auto, credit card) provide diversification

  3. Superinvestor Interest: Chuck Akre established a NEW position - a rare event for this highly selective manager who looks for "compounding machines" with exceptional returns on capital.

  4. Valuation Reset: The market is valuing FICO closer to a traditional tech company rather than a toll-booth monopoly. For context:

    • Moody's (credit ratings monopoly): 35x forward P/E
    • S&P Global (indices/ratings monopoly): 30x forward P/E
    • FICO at 32x forward P/E with faster growth is arguably cheaper

Clear Reason for Opportunity: Short-term rate fears creating entry point in a structural winner.

Phase 1: Risk Analysis (Inversion Thinking)

"All I want to know is where I'm going to die, so I'll never go there." - Munger

Top 3 Ways This Investment Could Fail

1. Regulatory Intervention (Probability: 15%, Impact: -50%)

Risk: CFPB or Congress could mandate alternative scoring models, cap FICO Score pricing, or require credit bureaus to provide free scores to lenders.

Evidence Against:

  • FICO Score is embedded in decades of mortgage regulations (QM, QRM rules)
  • Fannie/Freddie mandate FICO; changing would require years of validation
  • FHFA just delayed bi-merge/dual-score implementation indefinitely
  • Even Biden administration's CFPB didn't target FICO pricing
  • VantageScore (competitor backed by bureaus) has gained no meaningful share

Mitigation: FICO is only 0.2% of mortgage closing costs - politically low priority.

2. Technology Disruption - Alternative Data/AI Scoring (Probability: 10%, Impact: -40%)

Risk: Fintech companies using alternative data (rent payments, bank account data, AI) could create superior credit scores.

Evidence Against:

  • FICO has already incorporated Buy Now Pay Later data (Q1 2025 announcement)
  • FICO Score 10 T uses trended data - staying ahead of competition
  • Lenders are extremely risk-averse; new scores require years of validation
  • "FICO Score" is a brand trusted by consumers and regulators
  • No alternative score has achieved meaningful market penetration in 30+ years

Why Competition Fails:

  • Network effects: All 3 bureaus support FICO; investors/insurers require it
  • Switching costs: IT systems, credit policies, regulatory filings all reference FICO
  • 30+ years of default data validates FICO's predictive accuracy

3. Severe, Prolonged Recession (Probability: 20%, Impact: -30%)

Risk: Extended economic downturn reduces lending volumes across all categories.

Evidence Against:

  • FICO demonstrated pricing power during COVID (raised prices while volumes collapsed)
  • Software segment is 46% of revenue and growing (recurring ARR business)
  • Even in 2008-2009, credit decisions still required FICO Scores
  • FCF positive through every economic cycle

INVERSION SECTION (Required)

How could this investment lose 50%+ permanently?

  1. Congress mandates free credit scores for lenders (politically unlikely - FICO has lobbying power)
  2. Major fraud or data breach destroys brand trust (low probability - FICO doesn't hold consumer data)
  3. AI breakthrough makes traditional credit scoring obsolete (FICO would likely acquire/adapt)

What would make me sell immediately (non-price triggers)?

  1. CFPB rule mandating alternative scores for mortgage qualification
  2. Major lender consortium announces switch to VantageScore
  3. CEO/CFO departure combined with strategy change
  4. Accounting irregularity or restatement

If I were short this stock, my 3-sentence bear case: "FICO is a one-trick pony trading at 54x earnings in a rising rate environment. Mortgage origination volumes will remain depressed for years, and their aggressive pricing increases will eventually trigger regulatory backlash. The software business is a low-growth afterthought that can't sustain the multiple."

Can I state the bear case better than bears? Yes - but I disagree because pricing power > volume sensitivity, and regulatory risk is overblown given FICO's embedded position.

Phase 2: Financial Analysis

Income Statement Trends (5 Years)

FY Revenue ($B) Gross Margin Operating Margin Net Margin
2025 1.99 82.2% 46.5% 32.7%
2024 1.72 79.7% 42.7% 29.9%
2023 1.51 79.0% 40.0% 28.4%
2022 1.38 78.9% 39.9% 30.1%
2021 1.32 73.0% 32.9% 23.6%

Key Observations:

  • Revenue CAGR: 8.6% (accelerating to 15%+ in recent years)
  • Gross margin expansion: +920 bps over 5 years
  • Operating margin expansion: +1360 bps over 5 years
  • Operating leverage is extraordinary - incremental revenue flows to profit

Balance Sheet Analysis

FY Total Assets Total Debt Cash Equity
2025 $1.87B $3.07B $0.13B -$1.75B
2024 $1.72B $2.60B $0.15B -$1.60B
2023 $1.53B $2.17B $0.13B -$1.25B
2022 $1.39B $1.82B $0.12B -$0.98B
2021 $1.32B $1.56B $0.15B -$0.74B

Negative Equity Explained: FICO has negative book value because it has aggressively repurchased shares for decades, funded by debt and FCF. This is actually a POSITIVE signal:

  • Demonstrates extreme confidence in business durability
  • Shows capital-light nature (no need to retain earnings)
  • Similar to Moody's, which also has negative equity

Debt Analysis:

  • Total Debt: $3.07B
  • Net Debt: $2.94B
  • Net Debt/EBITDA: 2.9x (manageable for monopoly business)
  • Interest Coverage (EBITDA/Interest): 7.1x (healthy)
  • 53% fixed rate, average rate 5% (well-structured)

Cash Flow Analysis

FY Operating CF CapEx FCF FCF Margin
2025 $779M $9M $770M 38.7%
2024 $633M $26M $607M 35.4%
2023 $510M $26M $484M 32.0%
2022 $450M $24M $426M 30.9%
2021 $385M $20M $365M 27.7%

FCF Highlights:

  • FCF nearly doubled over 5 years ($365M to $770M)
  • CapEx is minimal (<1% of revenue) - truly asset-light
  • All FCF returned to shareholders via buybacks
  • FCF/Net Income conversion: 118% (cash generation exceeds accounting income)

Valuation Analysis

Current Valuation Metrics:

  • Market Cap: $34.71B
  • Enterprise Value: $37.65B (adds net debt)
  • P/E (TTM): 54.1x
  • Forward P/E (FY26E): 32.4x
  • P/FCF: 45x
  • EV/EBITDA: 37.5x
  • EV/Revenue: 18.9x

Owner Earnings Calculation:

Net Income (FY25):                 $652M
+ D&A:                             $15M
- Maintenance CapEx:               $9M
- Working Capital Changes:         ~$0
= Owner Earnings:                  $658M

Owner Earnings per Share: $658M / 23.7M = $27.76

Conservative Value (10x): $278/share
Fair Value (15x): $416/share
Premium Value (20x): $555/share

Wait - this gives a very low valuation. The issue is FICO deserves a much higher multiple than traditional businesses due to:

  1. 90%+ market share monopoly with regulatory protection
  2. Accelerating pricing power
  3. Near-zero capital requirements
  4. Negative working capital
  5. Extremely high incremental margins

DCF Valuation (15-Year Model):

Assumptions:

  • Revenue growth: 12% for 5 years, 8% for years 6-10, 4% terminal
  • FCF margin: 40% (conservative vs current 39%)
  • WACC: 9% (higher to be conservative)
  • Terminal multiple: 18x FCF
Year Revenue FCF PV of FCF
1 $2.23B $892M $818M
2 $2.50B $999M $841M
3 $2.80B $1,119M $864M
4 $3.13B $1,253M $888M
5 $3.51B $1,404M $912M
6-10 -- -- $3,500M
Terminal -- $1,900M $14,000M

Total PV: ~$22B + $14B terminal = $36B Per Share: $36B / 23.7M = $1,520

Relative Valuation:

Company Business Forward P/E P/FCF
Moody's (MCO) Ratings Monopoly 35x 32x
S&P Global (SPGI) Indices/Ratings 30x 28x
MSCI (MSCI) Index/Analytics 38x 35x
Verisk (VRSK) Risk Analytics 32x 30x
FICO Credit Scoring 32x 45x

FICO's forward P/E of 32x is reasonable relative to peers, but P/FCF is high.

Intrinsic Value Estimate:

Method Value Weight
DCF (Conservative) $1,520 40%
Relative to MCO/SPGI (35x forward) $1,750 30%
Private Market (25x EBITDA) $1,060 30%
Weighted Average $1,435 100%

Margin of Safety:

  • Current Price: $1,463
  • Intrinsic Value Estimate: $1,435 (base) to $1,650 (bull)
  • Current MOS: ~0% at base case

This suggests FICO is roughly fairly valued today, but offers compelling value on pullbacks.

Buy/Sell Price Levels

Level Price P/E MOS
Strong Buy $1,050 38x 35%
Accumulate $1,300 47x 20%
Fair Value $1,500-$1,650 55-60x 0%
Take Profits $1,980 73x -20%
Sell $2,400 89x -40%

Phase 3: Moat Analysis

Moat Sources

1. Network Effects (Strong)

Mechanism: The FICO Score is the common language of credit. Everyone speaks it:

  • 90%+ of U.S. lenders use FICO Scores
  • All 3 credit bureaus (Equifax, Experian, TransUnion) calculate FICO Scores
  • Mortgage investors, insurers, and servicers require FICO
  • 27 million+ consumers check their FICO Score monthly

Evidence:

  • VantageScore (backed by all 3 bureaus since 2006) has gained negligible share
  • FICO Score 10 T adoption: $261B in annualized mortgage originations, $1.43T in portfolio servicing
  • "FICO Score" is consumer-recognized brand (like "Google")

2. Switching Costs (Very Strong)

Mechanism: Switching away from FICO would require:

  • Regulatory approval/revalidation
  • IT system changes across entire organization
  • Credit policy rewrites
  • Investor/counterparty agreements
  • Years of parallel testing

Evidence:

  • No major lender has switched away from FICO in 30+ years
  • FHFA's attempted transition to bi-merge/dual-score just got delayed indefinitely
  • Even fintechs offering "alternative data" still use FICO as primary

3. Regulatory Moat (Very Strong)

Mechanism: FICO Score is embedded in:

  • Qualified Mortgage (QM) rules
  • Qualified Residential Mortgage (QRM) definition
  • Fannie Mae/Freddie Mac requirements
  • Basel risk-weight calculations
  • Auto insurance pricing regulations

Evidence:

  • Changing these rules requires multi-year regulatory processes
  • Industry has enormous sunk cost in FICO-based systems
  • Regulators are risk-averse - prefer "proven" methodologies

4. Brand/Trust (Strong)

Mechanism:

  • "FICO Score" is the recognized standard - consumers and lenders trust it
  • 30+ years of performance data across economic cycles
  • Lawsuits and regulatory scrutiny have validated methodology

Moat Durability Assessment

Threat Severity Timeline FICO's Mitigation
Alternative data scoring 3/5 5-10 years Already integrating BNPL, utility data
Regulatory intervention 2/5 Ongoing Lobbying, pricing discipline, embeddedness
Open-source scoring 2/5 10+ years Proprietary algorithms, bureau relationships
Bureau in-house scoring 3/5 Ongoing 30+ year contracts, revenue sharing
AI/ML disruption 2/5 5-10 years Investing heavily in ML capabilities

Key Question: Will the moat be wider or narrower in 10 years?

Answer: WIDER

  • FICO Score 10 T adoption extends moat into new data types
  • Software platform (FICO Platform) creates additional stickiness
  • International expansion opens new markets
  • Network effects compound over time

Phase 4: Management & Incentive Analysis

Leadership

Will Lansing - CEO (Since 2012)

  • Background: Former CEO of InfoUSA, various tech leadership roles
  • Tenure: 14 years as CEO - exceptional stability
  • Track Record: Stock up ~2,000% during tenure, revenue ~3x, margins dramatically improved
  • Ownership: ~$50M+ in stock (aligned)

Steve Weber - CFO (Since 2019)

  • Background: Former CFO at various tech companies
  • Focus: Operational efficiency, capital allocation
  • Communication: Clear, consistent guidance

Capital Allocation Track Record

Use of FCF 5-Year Total Assessment
Share Repurchases ~$3.5B Excellent - bought consistently, not at peaks
Debt Increased $1.5B Used to fund buybacks - smart use of leverage
Dividends $0 None - all FCF to buybacks
M&A Minimal Disciplined - small tuck-ins only
CapEx ~$100M Minimal - asset-light model

Buyback Analysis:

  • FY24: Repurchased 606K shares at $1,366 avg
  • FY25 Q1: 79K shares at $2,015 avg, 47K in January at $1,905 avg
  • Total shares outstanding down from 26.8M (2021) to 23.7M (2026) = 11.5% reduction

Management has demonstrated they are disciplined buyers - they reduced purchases at all-time highs and increased at lower prices.

Insider Activity

Recent Form 4 filings show:

  • Routine option exercises/sales (compensation-related)
  • No significant open-market purchases
  • No concerning large sales

Munger's Question

"If I were management with these incentives, what would I do?"

Management compensation is tied to:

  • Revenue growth
  • Non-GAAP EPS growth
  • Stock price performance (equity grants)

This creates incentive to:

  1. Raise prices (directly increases revenue and EPS) - aligned with shareholders
  2. Repurchase shares (increases EPS, reduces dilution) - aligned
  3. Control costs (operating leverage) - aligned
  4. Maintain software ARR growth (key metric disclosed) - aligned

Assessment: Compensation structure is well-aligned with long-term shareholder value.

Phase 5: Catalyst Analysis

Near-Term Catalysts (6-12 months)

Catalyst Timeline Probability Impact
FY25 guidance beat Feb-Nov 2025 70% +10%
Mortgage rate decline boosts volumes 2025-2026 50% +15%
Annual price increase announcement Q4 2025 90% +5%
FICO Score 10 T adoption milestone Ongoing 80% +5%
Software ARR acceleration Quarterly 60% +10%

Medium-Term Catalysts (1-3 years)

Catalyst Timeline Probability Impact
GSE implementation of bi-merge (delayed but eventual) 2027+ 40% +20%
International expansion acceleration 2025-2027 50% +10%
FICO Platform market share gains 2025-2027 60% +15%
M&A activity (acquirer or acquiree) Anytime 20% +/-20%

Why Mr. Market Will Eventually Recognize Value

  1. Pricing Power Demonstrates: Each annual price increase proves the monopoly
  2. Earnings Growth: 20%+ EPS growth will eventually be valued
  3. Relative Value: Peers trade at similar multiples with weaker moats
  4. Superinvestor Validation: Akre's involvement signals institutional interest

Phase 6: Decision Synthesis

Megatrend Resilience Score

Megatrend Score Notes
China Tech Superiority +1 Immune - domestic U.S. business
Europe Degrowth +1 Minimal European exposure
American Protectionism +2 Benefits - dominant U.S. position
AI/Automation +1 FICO uses AI; hard to displace
Demographics/Aging 0 Neutral
Fiscal Crisis +1 Pricing power in inflation
Energy Transition 0 Neutral

Total: +6 | Tier 2 "Resilient"

Final Valuation Summary

Method Value/Share vs Current MOS
DCF (Conservative) $1,520 +4% -4%
Relative Valuation $1,750 +20% 16%
Private Market Value $1,060 -28% N/A
Owner Earnings (20x) $555 -62% N/A

Weighted Intrinsic Value: $1,500-$1,650

Position Sizing

Using the formula:

Position Size = Base × (MOS/Target) × (Quality/100) × (1-Risk) × Catalyst
             = 3% × (12%/25%) × (90/100) × (1-0.15) × 1.0
             = 3% × 0.48 × 0.90 × 0.85 × 1.0
             = 1.1%

At current prices, only a small position is warranted. At $1,300 (25% MOS), increase to 3-4%.

Expected Return Scenarios

Scenario Probability 3-Year Return Weighted
Bull (Multiple expansion + growth) 25% +80% +20%
Base (Fair value + earnings growth) 50% +40% +20%
Bear (Multiple compression) 20% +0% 0%
Disaster (Regulatory action) 5% -40% -2%
Expected Return 100% +38%

Sell Triggers (Pre-Defined)

  1. Thesis Break: CFPB mandates alternative scores for mortgage qualification
  2. Moat Erosion: Major lender consortium announces VantageScore adoption
  3. Management Failure: Departure of key executives with strategy reversal
  4. Valuation: Price exceeds $2,400 (90x P/E, 50%+ above fair value)

What I Will NOT Sell On

  • Short-term price drops due to rate fears
  • Quarterly mortgage volume fluctuations
  • Media articles about "FICO alternatives"
  • General market corrections

Investment Recommendation

+---------------------------------------------------------------------+
|                     INVESTMENT RECOMMENDATION                        |
+---------------------------------------------------------------------+
| Company: Fair Isaac Corporation          Ticker: FICO                |
| Current Price: $1,463          Date: February 1, 2026                |
+---------------------------------------------------------------------+
| VALUATION SUMMARY                                                    |
| +---------------------------+-----------+-----------------------+    |
| | Method                    | Value     | vs Current Price      |    |
| +---------------------------+-----------+-----------------------+    |
| | DCF (Conservative)        | $1,520    | +4% upside            |    |
| | Relative to Peers         | $1,750    | +20% upside           |    |
| | Private Market (25x EV)   | $1,060    | -28% downside         |    |
| | Owner Earnings (20x)      | $555      | Floor (unlikely)      |    |
| +---------------------------+-----------+-----------------------+    |
|                                                                      |
| INTRINSIC VALUE ESTIMATE: $1,500-$1,650                              |
| MARGIN OF SAFETY: 0-12%                                              |
+---------------------------------------------------------------------+
| RECOMMENDATION:  [ ] BUY  [ ] HOLD  [ ] SELL  [X] WAIT               |
+---------------------------------------------------------------------+
| STRONG BUY PRICE:           $1,050 (35% MOS, 38x P/E)                |
| ACCUMULATE PRICE:           $1,300 (20% MOS, 47x P/E)                |
| FAIR VALUE:                 $1,500-$1,650                            |
| TAKE PROFITS PRICE:         $1,980 (20% above IV)                    |
| SELL PRICE:                 $2,400 (50% above IV)                    |
+---------------------------------------------------------------------+
| POSITION SIZE: 1% now, increase to 3-4% below $1,300                 |
| CATALYST: Annual price increases, FICO 10 T adoption                 |
| PRIMARY RISK: Regulatory intervention (15% probability)              |
| SELL TRIGGER: Regulatory mandate for alternative scores              |
+---------------------------------------------------------------------+

Sources Used & Data Extracted

API Data Retrieved

Source Data Type Key Extraction
AlphaVantage Income Statement 5 years P&L, margins
AlphaVantage Balance Sheet Assets, liabilities, equity
AlphaVantage Cash Flow OCF, CapEx, FCF
AlphaVantage Company Overview Valuation metrics, description
AlphaVantage Earnings Transcript Q1 FY25 Management commentary, guidance
AlphaVantage Earnings Transcript Q4 FY24 Full year results, strategy

Web Sources

Source Data Extracted
stockanalysis.com Current price, 52-week range, valuation
Company Earnings Calls Pricing strategy, 10T adoption, guidance
SEC EDGAR CIK 814547, filing history

Data Files Created

File Location
income-statement.json /research/analyses/FICO/data/
balance-sheet.json /research/analyses/FICO/data/
cash-flow.json /research/analyses/FICO/data/
company-overview.json /research/analyses/FICO/data/
financial-summary.md /research/analyses/FICO/data/
price-summary.md /research/analyses/FICO/data/
transcript-2025Q1.md /research/analyses/FICO/data/
transcript-2024Q4.md /research/analyses/FICO/data/

Analysis completed February 1, 2026 Superinvestor Signal: Chuck Akre NEW position