FICO presents structural risks from debt-financed buybacks and aggressive pricing; it lacks a margin of safety for value investors.

I've received a lot of comments about FICO , so what's going on there? The stock has fallen by 60% while profits are still growing by 40%. So, let's see if there is value or if the risks still exist .

Just one day before I prepared this, the stock had dropped 16-17% due to Fannie Mae and Freddie Mac using another points provider. Let's take a quick look at the numbers from the last presentation.

Everything looks amazingly good. Revenue increased by 26%. Points revenue by 41%. The software is stable, but the platform is still growing by 66%. Net income rose by 40%, and earnings per share were astonishing.

Free cash flow is high, and share buybacks are taking advantage of the low share price.

Huge revenue growth, especially in the points sector where they are raising the prices of that data for mortgage issuers. You can see booming revenues here over the past years, especially now with the price increases, which are boosting profits that have risen much more than revenues.

what is going on? Well, there are huge price increases. Since 2020, the company has raised its prices by 1800% per point, which is insane. And now they have also doubled their advertised prices for 2026, increasing the cost per point from four to more than 10. Hence the growth in revenues and profits.

But if they raise prices by 50% and revenues increase by 30%. So, there is a loss of some market share or a decrease in mortgage transactions. This is something worth thinking about.

When you raise prices like this, there are alternatives such as Vantage scores that are available for less than a dollar. It's taking over your market. However , people still use it.

Because it is considered a secure provider. There is good data, and therefore everything is improving; Margins are improving, free cash flow is improving, and is approaching one billion annually.

However, with regard to the share price, they are moving towards debt- financed buybacks , which is a very bold move for any management. Because when you borrow money to make buybacks thinking that the stock is undervalued, if you are wrong, you will be stuck in debt forever, and the value will be destroyed if the stock falls further. That's what happened last Friday.

So, there is a strong conviction on the part of the management. However, debt ratios are higher, and buybacks have been successful, but some might say they haven't . If the company continues to grow and perform well forever, then buybacks will be good.

But if there is a risk, then buybacks will not be a good option.

And here comes perhaps the most important description of this situation, which is that it is a "gamble". Management is betting on using debt to buy back shares, on raising prices aggressively, and on imposing higher and higher prices on customers without thinking about competition.

I feel there is a rush to get things done as quickly as possible so that operating income grows by 40%.

Also, the balance sheet became heavily indebted . Obligations are also increasing. This is then directed towards repurchasing shares. But management here says it is proud of the buybacks it has made.

Perhaps now that the stock has fallen further, they will return to buyback operations. But they will now use the cash to pay off the debts they used in the buyback transactions. They might change their minds again. We'll see.

In any case, if you look a little at the analysts’ estimates , they are still predicting 43 % growth, and then 20% growth over time. If that happens, the future price-to-earnings ratio will drop to 20, then to 14 by September 2028.

The price-to- earnings ratio is 14, which is why most Wall Street analysts recommend buying, and you can see that the targets are between 1500 and 2000, but there is also one analyst who sees a lower limit at 700.

If you look at what happened initially, when you look at the stock's price drop, yes, it is now at a price-to-earnings ratio of 27, which is relatively cheap compared to the stock's history, but not too cheap compared to some of the worst times in its history.

But when you buy something with a price-to- earnings ratio of 120, it's better that those profits grow quickly and significantly. Therefore , the decline in the share price can be explained first by the initial overvaluation, and now by a more realistic valuation.

The bet here is that valuations, let's say, will stay the same, and earnings will grow at a price- to-earnings ratio of 30. If earnings rise by 50%, you will make 50% over the next two years.

However, if management is overly aggressive about pricing and buybacks, and if competitors are genuinely able to offer lower prices, perhaps not everyone will switch, but some will .

And when you start losing market share, there is a risk that something else will slowly emerge to replace you. Especially now with artificial intelligence, data collection, and everything getting faster, that's possible.

Therefore, this represents a risk of permanent capital loss, which is something we, as value investors, do not engage in.

So, when I compare that to the square, and what we've discussed so far, and what we're following, when it comes to investing, it's better, let's say, to own companies with a little more security .

You also have a few of them on my research platform. Should I put it in the betting section of the box? This is a very high risk. There is no margin of safety if things go wrong.

When it comes to FICO, and the price-to- earnings ratio of 112, that's just an explanation for this market to me. The prediction markets are booming. The stock market, especially since the pandemic, has been used and viewed as a gambling casino, where one can make a lot of money quickly from cryptocurrencies, chips, and artificial intelligence. We are now on the betting side of things.

Yes, FICO, if you look at it, is relatively cheap. Perhaps it will reach 60 as earnings per share, then it will be acceptable. That's a price- to-earnings ratio of 15. But, even if you get to 60 and then grow slowly, at the price of 2.4 thousand that people paid, it will take 40 years to get your money back through profits.

So, the company now has structural risks. We'll see how things develop, but some people are going crazy over it, and the arrow has been punished. Will it be re-evaluated? This is just a bet that no one can answer right now .