Fair Isaac Corporation (FICO)

[FrostyEmpire44]

My thoughts on latest competition:

1) FICO under the previous arrangement benefited from the credit ratings agencies pull FICO scores for them and by default got free advertisement of FICO.

Why does this matter? it isnt about the expense FICO will pay to advertise. It is about what the 3 ratings agencies do, which is build the tri-merge report. The tri-merge report comes from the ratings agencies. The data behind the report comes from the ratings agencies. The question I have is can FICO really bypass the ratings agencies in building the tri-merge report. If the lenders still have to go to the agencies for ratings to build the report, then why would the lenders bypass them and purchase a FICO score...unless it really is cheaper and costs less. If you are lender and you have to work with the ratings agencies...and they offered a suitable product for less. Wouldnt you take it?

2) It is widely known, the VantageScores an average produce lower scores than FICO. Lower scores mean the lenders can potentially charge extra on the mortgage if they rely solely on VantageScores. So there is a hidden incentive for lenders to use/push VantageScore over FICO.

3) It doesnt make sense to use both FICO and VantageScore. I believe we will find there is a sweet spot for picking VantageScore over FICO for borrowers. I firmly believe that sweet spot will eat into FICO's market share in mortgage scoring. I also believe there is a different sweet spot for lenders to use VantageScore over FICO. And that also doesnt bode well for FICO's market share.

3) FICO is now in direct competition with the 3 ratings agencies. This means FICO as a stock needs to be compared to the ratings agencies in how the stock is valued. First off the ratings agencies have a positive book value. FICO has a negative book value. If we look at P/E multiples, the Rating agencies have a multiple which is half that of FICO. This means FICO is overvalued/overbought as a stock as its 3 direct competitors. The credit rating agencies also offer a dividend, FICO does not. And the ratings agency offer similar analytical products for fraud detection that FICO offers.

It may not happen tomorrow, but eventually institutions are going to revalue FICO as a stock...and they only way they can revalue it is to match it against the competition.