Terrible News for FICO Stock Investors
Summary
Parkev analyzes the impact of the Federal Housing Finance Agency's decision to include VantageScore in mortgage pricing, effectively ending FICO's decades-long monopoly in the sector. This news caused FICO shares to drop over 26%, contributing to a year-to-date decline of more than 63%. Parkev points out that the stock is now trading at a forward price-to-earnings (P/E) ratio of 11.6, its lowest valuation in history. Parkev notes that such a valuation is typically reserved for stagnant companies, yet Wall Street analysts still forecast strong revenue growth of 28% for the current fiscal year, followed by 14% and 12% in the subsequent years.
To account for the new competitive risks, Parkev updated his valuation model by increasing the Beta from a historical 1.32 to a more conservative 1.75. Even with this higher risk profile, Parkev finds the stock to be approximately 18% undervalued. Parkev highlights that if the original Beta of 1.32 were applied, the fair value would exceed $1,045 per share, representing over 69% upside. While acknowledging the risk of FICO becoming a value trap if revenue growth stalls, Parkev concludes that the current price offers a significant opportunity for those willing to weather the increased volatility.
Mentioned Stocks
Reasoning: Parkev confirms a buy recommendation for FICO, noting its record-low forward P/E of 11.6. Parkev argues that the market's reaction to the FHFA's inclusion of VantageScore is excessive given the projected revenue growth of 28% this year and double-digits in the following years. Parkev adjusted the risk Beta from 1.32 to 1.75 to be conservative, which still results in an 18% upside; using the previous Beta of 1.32 would suggest a price target over $1,045.