What’s Behind FICO’s Bodacious Stock Returns?

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

You were a big help this week with the Nelly research, I have to say. I get my Nellys confused. One is, uh, one's a man, and then there's a, there's a There's a woman, Nelly.

Nelly Furtado. Right.

Yep. Correct. This was the male I was looking for, the rapper. We'll come to why in a moment. This is the Barron Streetwise Podcast. I'm Jack Howe. With me, our audio producer Alexis Moore.

Hello.

And show business researcher. All right, we're going to come to that, believe it or not, with Fair Isaac, the credit score company. But first, I guess we should say a word about tariffs. Not too much, just that in last week's episode, we talked about tariff purgatory and the possibility that we were in this in-between place where the stock market had bounced back, but there was maybe some bad news to come from tariffs. And we talked about how there was already a deal between the US and UK and that the US was headed for talks with China over the weekend. Tariffs there were set temporarily at 145%, but there was a possibility that they could come down. Some people were saying 60%. What we got instead is what analysts are describing as a best-case scenario. China tariffs have been slashed to 30% from 145%, and the tariffs that China is putting on the US, those are way down too, to 10% from 125%. And the stock market had some rip-roaring gains in response to that. So, this is good news. And I'd be a real gloomy Gus to say we're not out of the woods yet. Although I will just point out, you know, we heard from, for example, Walmart on earnings this week. They talked about raising prices due to tariffs. The CEO said, we will do our best to keep our prices as low as possible. But given the magnitude of the tariffs, even at the reduced levels announced this week, we aren't able to absorb all the pressure given the reality of narrow retail margins. Okay, so we'll see, but I think investors are most pleased about where we've gotten back to versus where we were for a while there. I mean, the S&P 500, I show it up a fraction of a percent for the year. Hopefully we'll get some more lasting trade terms soon. I think it makes it difficult for businesses to plan with the rates going back and forth like this. I'll just give you one last thought. On this subject, and it has to do with the Fed put and the Trump put. That's something we talked about last week. The Fed put is a belief that if things get bad enough in the stock market, the Fed will cut rates and that'll get stocks going again. And we heard from a strategist who said that might not be as possible as it was in the past because in recent decades, price growth has been held low by globalization, and now globalization has shifted into reverse. There's going to be some sticky inflation, and that might constrain the Fed's ability to cut rates when needed. As for the Trump put, government debt has become burdensome. And so if it needed to at some point, the White House could call for fiscal stimulus. I'm not sure how much stimulus we would be able to afford. But beyond these puts being less certain than they were in the past, I actually think about them working in reverse right now. And I'm not sure that's such a bad thing. In other words, I think of a market put on the government. We had the president announce tariff rates that were pretty large, pretty jarring to a lot of people watching. There was limited pushback among lawmakers in the president's party, but there was immediate and forceful pushback from the stock market. Remember, it was when stock prices and bond prices were falling at the same time. That the president announced the current 90-day pause on tariff rates while we negotiate. Right now, Congress is hashing out terms of a budget deal. There are some very large continuing deficits on the horizon. In the past week, the 10-year Treasury yield has climbed by a quarter point. That's kind of a lot. It's worth watching. Is that a return of what used to be called bond vigilantism? Or what you might today call a bond market put on deficits that are looking worrisome. Anyhow, that's enough about tariffs for now. This is, uh, Alexis, what would you call this, an evolving story?

Yeah, very alive, very active, a free-flowing story.

So we'll be watching for new events in the next, you know, 5 minutes or what. We'll see. Let's talk about FICO. You want to, uh, should we, should we talk about FICO World? Do folks know about FICO World? I don't think they do.

I don't. What is FICO World?

It is the hottest party in credit analysis, consumer credit analysis. I think it's fair to say.

Is it also the only?

Well, I don't know. There were 1,500 attendees this year.

It was just outside of Miami. It was in Hollywood, Florida. And the musical guest was Nelly. If you don't remember Nelly, he had a number one hit in 2002, and I'm going to try not to make this sound like your dad explaining this to you. The song is called Hot in Here, and, uh, you know what, sort of the opening line, I was like, good gracious, and then a word I'll skip over here, bodacious, and there's a flirtatious And then in the chorus, it's, it's getting hot in here. All right. There's not a lot of the lyrics I can read, but it's, uh, it was a big, uh, it was, you know, it was a real foot stomper. And, uh, and they were singing it out near the beach in Miami about a week ago at the big FICO World 2025. Salesforce has a yearly convention called Dreamforce. They get a lot more people. I think they had 45,000 last year. They had, they booked Elton John. He had to back out last minute with an eye infection. And so they ended up getting Pink and Imagine Dragons. So who got the bigger— who got the bigger get?

I think it's similar nostalgic vibes. I think if you were in college in the early 2000s and you're happy.

Yeah, that's what you do, right? This is all people who are like 45 to 50 in khakis right now. They've just been through 3 days of workshops and breakout sessions sweating through their polos. Yeah.

That you bring around the musical act and then they briefly, uh, relive their club days. Yeah, a few minutes, right? Exactly.

That's how this works. Yeah. So Salesforce obviously does cloud-based sales software, and that's a colossus. It's a $279 billion company. So I'm not trying to pretend that Fair Isaac is in that league, but I do think that the company's stock performance and market value is worthy of, uh, You know what, what Nelly would probably call a good gracious, maybe even a bodacious. I'll give you a few factoids. Salesforce went public in June 2005, and if you bought the stock at the time of the IPO, you've made 6,700% since then. That's 10 times the return of the S&P 500. You've done very well in Salesforce. But if on that same day you instead bought Fair Isaac, you've made almost as much, 6,500%. By the way, FICO is both the brand name of the score, stands for Fair Isaac Company, and it's also the ticker symbol FICO. And Fair Isaac actually went public decades earlier and at a much smaller size. There was an 88-word story in the Wall Street Journal back in 1987 in July that talked about the stock offering. It sold 1.4 million shares. That's very few at $9.50 apiece. And there was little acclaim. And if you had bought stock that day, you've made over 170,000%. There are not a lot of companies putting up numbers like that. Let's put it this way. Among the companies in the S&P 500 that have stock market histories that go back as far as Fair Isaac, in other words, to 1987, there are only two that have better returns. One is Microsoft and the other is UnitedHealth Group. That means Fair Isaac over that time has done better than Oracle. And Home Depot and Apple and Costco. And so I think the question that is probably on listeners' minds at this point is what? What would you say, Alexis?

Why? How? That's two questions.

I was thinking, did Nelly perform Shake Your Tail Feather at FICO World? No, he did not.

To my knowledge, he did not. But, you know, I think your question too, people have a lot.

Why? Why? This is a credit score company, right? This is the— you get a credit score from 300 to 850 when you apply for a loan, and that score determines whether someone's going to loan you money. And I don't know, it seems pretty straightforward. It seems like a simple product. What is it about that or about this company that has achieved those returns? Is it time for a break yet, Alexis?

No, we need to hear more.

Okay. Fair Isaac was founded—

how about now, Jack?

Sorry, sorry.

I want to give you 5 reasons that I think go a long way to explaining how Fair Isaac stock has done so well over the years. And reason number 1 is simply that the company has become a dominant player in an industry that has experienced massive growth. It started in 1956. That was around when credit assessment was first shifting from paper records to computers. There was an engineer named Bill Fair and a mathematician named Earl Isaac, and they put up $400 apiece in startup capital, and they sold their first credit score within 2 years. Later, the Fair Credit Reporting Act in 1970 laid out rules for what would become the the big 3 reporting agencies. These are Equifax, Experian, and TransUnion. The industry needed an independent scorekeeper, a company that could interpret the different reports, and Fair Isaac was the obvious choice. So now you have 3 main reporting companies and 1 main scoring company. At the time of that 1987 IPO, American Banker magazine noted that Fair Isaac's customers included half of the 100 largest banks, plus 12 oil companies, about 40 retailers, and the major— what it called travel and entertainment card companies. I think that's what you call credit cards today. I don't really know how they worked in the '80s. I was, you know, in middle school and high school then. I just remember on TV— I don't think this was a credit card, but on TV, There was a, a guy who played a cop. His name was Telly Savalas, and he used to do these commercials for the Players card. The Players Club card works in Atlantic City, Las Vegas. You could go to Las Vegas and Atlantic City and you do something with your Players card. To this day, I don't know what, but there were already plenty of other credit card companies operating. What has happened since then, of course, is that society has become ever more credit and data driven. And FICO scores are now used by 90% of U.S. lenders for more than 10 billion credit decisions per year. They got a big boost in the '90s from an early endorsement from U.S. government mortgage agencies. Okay, reason number 2, FICO score customers generally are not the payers. And by that, I mean that lenders are the ones who request the scores. But the borrowers ultimately pay for them. That's through application fees. And the fees are rising, but they're often still dwarfed by other costs in the loan process. If you're getting a mortgage, title insurance, for example, can cost thousands of dollars. So Fair Isaac benefits from what economists call inelastic demand. It can consistently raise prices without customers walking away. Number 3, Fair Isaac can expand its sales and services much faster than its costs. It's an asset-light company. It's very scalable. It sells dozens of industry-tailored credit scores worldwide. And more than a decade ago, the company launched a cloud-based software suite for making financial decisions. The two businesses are almost the same size, not quite. Last year, Scores brought in revenue of $920 million. That was up 19%. Software made $798 million. That was up 8%. In recent years, the company has turned more than half of revenue into operating profit. In other words, it has high margins, and that's in part because it has only 3,600 employees. How many is that? Well, among companies of similar market value, Allstate has 55,000 and FedEx has 430,000. So 3,600 for Fair Isaac isn't many at all. Number 4, management has been gobbling stock. Last year, Free Isaac's free cash flow climbed 30% to $607 million. Buybacks totaled even more than that, $822 million. The share count has fallen by almost a third since 2013. B of A Securities calls this a public LBO. That stands for leveraged buyout. That is a bit of investment bank hilarity. I will pause here for laughter. Okay. Moving on. Part of the return has come from a rising valuation. Shares go for more than 60 times forward earnings projections. That's up from closer to 30 times at the start of last year. Fair Isaac has become an AI stock. Whether the business can grow into this valuation or the stock is due for a big drop, that depends on the mood of fickle growth investors. I can tell you that Wall Street predicts 20%+ earnings per share growth for years to come. B of A recently called the stock a top pick with a price target of $3,700. That implies 70% more upside. And after FICO World, it predicted that Fair Isaac will become, quote, the Palantir of the financial industry. That's a reference to that company's strong position in artificial intelligence. And that is all I have to say for now about Fair Isaac. Did I get all 5? Number 5 was the rising valuation.

Time for a break. What do you say?

Yes, we can take a break now.

When we come back, we're going to answer a question about something called Wolf Speed.

Oh, no, no. Sorry. I should definitely have warned you about that.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

Welcome back, Alexis. We have a listener question and we don't have a recording of the question. Would you like to read it?

Yes. We have a question from C. From St. Louis who says, what is going on with Wolfspeed and is this a GameStop situation?

Thank you, C. The answers are it's trying to restructure its debt and no, it's not a GameStop situation, at least not by my definition.

It's not.

Wolfspeed is a company that makes silicon carbide wafers and semiconductor components. It makes them mostly in the U.S., which puts the company in line to get some funding from the 2022 CHIPS Act. But the company has taken on $6.5 billion of debt. That's a huge amount for a company this size. It has said that it's considering restructuring its debt either out of court or through a bankruptcy filing. And so its creditors are now talking about what's possible and who should get what. And the stock, as you might imagine, has done poorly. Mostly. It kind of depends when you bought it. I mean, back in April it was down to $2 and change, and in early May it jumped to over $4. So if you traded it at just the right moment, you've made a handsome profit. And I guess you could compare that with GameStop, which is a stock that was very cheap and heavily bet against by short sellers, and which rocketed higher. Where I think the comparison doesn't hold is that GameStop was what's now commonly referred to as a meme stock. There's no precise definition of a meme stock, but I think I attempted one in the past on an episode of this podcast. Basically, GameStop is a company that sells video game discs through mall stores at a time when gamers are increasingly moving away from discs and shoppers are moving away from malls. And the company, in my opinion, has yet to really articulate a path forward, how it's going to transform its business to keep up with the times. So for a while there, GameStop seemed like the last stock that should go rocketing higher, and it did. And there's an element of irony to that. There was some banding together of traders in chat rooms saying, hey, you know, GameStop's going to the moon, let's buy this thing.. It was very much a group effort, kind of self-fulfilling prophecy, but there was a joke to the thing. And the joke is there might be all these smart investors out there who are talking about cash flows and challenges and why you should stay away from the stock, but we're going to send it higher and blow those people up anyway. Like for a while there, there were people who traded up the wrong Zoom stock, a company called Zoom that is not the video conferencing software. They did that during the COVID shutdown for a while there. They traded up shortly after GameStop. I think they traded up a shell company that held some assets from the former Blockbuster Video. And as a guy who still has his Blockbuster card somewhere in the house, I definitely see the irony in that. I don't see the irony in bidding up shares of a company that has a lot of debt and where it's an open question about what's going to happen. To the stock values, what shareholders are going to receive in the end. Is the company going to be able to turn it around? And is it going to be able to do so in a way that is favorable for shareholders? That's just ordinary old deep value investing, right? That's investors making some kind of a call. Hey, I think the company will be worth this much, or I think it's too important. It'll get some kind of a bailout or it won't, or what have you. It's not a meme stock. In other words, it's just a cheap stock with potential for a binary outcome, meaning it could go up a lot or it could go kablooey. That makes it a risky trade and one that's exciting for a certain type of investor. I just, maybe I'm stickling here. I don't see it as a GameStop situation. You got to bring the ha-has if you want to call yourself a GameStop.

What's the, where's the irony?

Maybe it's just me. Anyhow, we have some more thoughts on Wolfspeed from a Barron's colleague of ours, I understand.

Yes. I sat down with Mackenzie Tatanani, who did reporting on Wolfspeed and the short squeeze.

All right, let's listen.

The stock has been essentially on a decline since 2021, and this is something the company has kind of been forced to acknowledge in SEC filings and on earnings calls. They attribute it to disappointing earnings reports, but they do have some ongoing financial troubles that have been weighing on the stock price.

A lot of debt, right?

A lot of debt. Exactly. At the end of April, the stock starts getting a lot of attention. There's a report from our sister publication, The Wall Street Journal, that dubs it the most shorted US stock. And then Raymond James puts out an industry report looking at the most shorted semiconductor stocks. And the analysts conclude that Wolfspeed was in absolute terms the most shorted semi stock in their coverage in a period between the end of March and mid-April. At the end of April, the stock is surging, and when we reported on this, we noted that it appeared to be the result of what's called a short squeeze.

Good. I'll just very briefly explain short squeeze for people who don't know. First, the short, and then the squeeze. Short means you're betting against the stock. It's, uh, you do the opposite of when you, when you buy a stock and hope it goes up and then you sell it at a higher price. Instead, you sell a stock that you don't own by borrowing it, then you hope it goes down so that you can buy it back to turn your position back to zero and profit from the difference. That's selling short. If there are a lot of shares of a stock sold short— that's a tongue twister— we refer to that as high short interest. And when you have high short interest relative to the float, or the available shares for trading, there's a possibility that you could set off panic buying, which works like panic selling in reverse. Let's say the stock starts rising. All those people who have shares sold short, they start losing money on paper and getting nervous. And maybe they get so nervous that they want to buy the stock back to cover their position, turn it back to zero. So they stop generating more losses. Well, that buying activity puts more upward pressure on the stock, and that can cause more people to panic buy and cause more of an increase in the stock price. And when that happens violently and all of a sudden, it's called a short squeeze. It's a lovable term for a painful financial condition, unless you're someone who owns the stock. Then you're loving the squeezing. I feel like if I were a Reddit trader, that would be my bio. Loving the squeezing. No G's on the end, just loving apostrophe the squeezing apostrophe. Anyhow, measures like short interest as a percentage of float or days to cover— how many days of typical trading volume would it take to cover all those shares sold short— those measures can help you identify potential squeeze targets. But really, whether a company gets squozen or not, squeezed, squeezed, squeezed, squeezed, it, it depends on what investors do, obviously. And these days, I would imagine it depends on whether or not you get that following going in the Reddit chat room. If you stand up Goonie style and scream, hey you guys, and everybody follow me, it's squeezing time. And then you go ahead and you buy the stock and no one really follows you. Well, that's not a short squeeze, is it? But if you can get a following, maybe. Anyhow, what do you say we hear from Mackenzie?

Yeah, let's go back.

After the short squeeze ran out of steam towards the end of April, the stock falls again. And this was in response to earnings. So the company shared its fiscal third quarter results on May 8th. And pretty notably, management declined to take questions from analysts on the earnings call, which is never a good sign. And in response to those earnings, we see a handful of downgrades from analysts. And beyond that, we saw multiple firms suspending their coverage entirely. William Blair suspended coverage and TD Cowen suspended coverage with analysts citing the company's increasing likelihood of financial restructuring and saying it was pretty much impossible to establish a valuation framework at the current moment.

With that in mind, I don't know what happens from here with the stock. That depends, I suppose, on the interplay between the bankers and creditors and the chatroom folks. Did we do it?

I think we did it.

Oh, I can't believe it. It's like a, it's like a magic trick every time.

I want to thank Mackenzie and C from St. Louis and anyone else. Nelly, Pink, Imagine Dragons, Elton John. Hope the eye's doing better. I think it is. I heard him in an interview the other day and the eye sounded great to me. Thank all of you for listening. If you have a question that you'd like played and answered on the podcast, you can send it in. Could be in a future episode. Just use the voice memo app and send it to jack.hough. That's H-O-U-G-H. @barons.com. Alexis Moore is our producer. You can subscribe to the podcast on Apple Podcasts, Spotify, wherever you listen to podcasts. If you listen on Apple, please write us a review. Thanks and see you next week.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data. So you have the right ingredients to help you shine.

Morningstar.

Where data speaks.