By Fair Isaac Corporation (FICO), Equifax (EFX), and Transunion (TRU) stocks are firing on all cylinders this year and beating Wall Street.
FICO has soared by 64% in 2024 and by over 122% in the last twelve months, bringing its market cap to over $46 billion.
TransUnion has jumped by 52% and 50% in the same period, pushing its valuation to over $20 billion. Equifax has also risen by 15% and 57% this year and by 57% in the last twelve months. Experiean, another top company in the industry, is up by 30% and 59% in the same period.
Boring oligopolies
FICO, Equifax, TransUnion, and Experian are some of the most important companies in the United States and around the world.
They are by companies like banks and credit unions to assess the credit quality of individuals and companies when they are borrowing money.
FICO is a bit different than the other three because of its business model. It is a technology company operating in two segments: scores and software. In scores, the company uses advanced models to put a credit score on millions of customers. Its most recent updates are the FICO Score 8 and FICO Score 9.
FICO’s software segment provides analytics to help companies make decisions like pricing, onboarding, and fraud protection.
Its biggest customers are the three credit bureaus – Experian, Equifax, and TransUnion, which account for over 40% of its total revenues.
These credit bureaus use FICO data and their advanced technologies to come up with a credit score, which lenders use to make their decisions. Whenever a customer borrows money in the US and other countries, chances are that banks first check their credit scores from these agencies.
Demand for credit is rising
These companies have done well because of the rising demand for credit in the United States, a trend that is expected to continue rising as rates retreat.
FICO’s annual revenue has grown gradually in the past few years. It has risen from $1.16 billion in 2019 to over $1.51 billion in the last financial year and $1.65 billion in the trailing twelve months (TTM).
FICO also boosted its forward guidance, with its revenue expected to jump to over $1.7 billion this year. Its net income will be $500 million, an improvement from the $478 million it made last year.
TransUnion has also done well, with its annual revenue rising from $2.4 billion in 2019 to $3.98 billion in TTM. Its revenue rose by 8% in the second quarter to $1.04 billion, with its US segment growing by 6% to $806 million.
Equifax’s numbers have also been impressive, with the annual revenue rising from $3.5 billion in 2019 to $5.4 billion in the TTM. Like the other two, its profits have continued rising, reaching $583 million in the TTM.
Interest rate cuts and credit demand
There are three main reasons why these stocks have jumped. First, FICO has boosted its prices for credit scores, especially for its mortgage business. It has boosted prices by as much as 500% in the last two years, costing lenders and consumers hundreds of millions of dollars.
The challenge for these customers is that FICO does not have any meaningful competitor in the US. Most importantly, lenders are required to obtain the FICO score of a customer when selling loans to Fannie Mae and Freddir Mac.
FICO’s price increases has also led to the three bureaus to do the same, which has helped them boost their margins.
Second, analysts expect that the falling interest rates will lead to more credit demand by individuals and companies. The Federal Reserve and other global central banks have all slashed interest rates, and the trend will likely continue.
Valuation concerns remain
Still, the biggest concern among analysts is that these companies, especially FICO, have become highly overvalued.
FICO trades at a forward GAAP price-to-earnings (P/E) ratio of 94, much higher than the tech sector median of 28. This valuation figure is significantly higher than that of Nvidia, one of the best-known companies on Wall Street.
TransUnion also has a forward multiple of 66, while Equifax has a P/E ratio of 51. Like FICO, these numbers are much higher than that of Nvidia and other companies like Microsoft and Alphabet. The metrics are also higher than that of the S&P 500 index, which has a forward multiple of 21.
These companies require a premium because of their market share and their role in the financial services industry. Besides, they all have a huge barrier to entry, meaning that no competitor is expected to disrupt them any time soon.
However, I believe that their valuation metrics are too high that a reset will likely happen in the near term.
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