FICO’s Monopoly Cracks, But the Dip Could Be a Gift for Patient Investors

Fair Isaac (FICO) lost 17% on Friday after Bill Pulte, the Director of the U.S. Federal Housing Finance Agency, instructed that both Fannie Mae and Freddie Mac were to approve all mortgage lenders’ use of the VantageScore 4.0 credit scoring system, taking away Fair Isaac’s monopoly. 

“‘Fannie and Freddie’s initial rollout of VantageScore has been incredibly successful, with 50 lenders delivering loans. So, effective immediately, I’m instructing Fannie and Freddie to approve all lenders to use VantageScore,’ Pulte wrote on X,” Investing.com reported Pulte’s comments. 

“FICO has enjoyed a monopoly. No more.”

As a result, Fair Isaac’s standard deviation for the day’s trading was -3.78, the seventh-worst bearish price surprise. It now trades at the stock’s lowest level since April and November 2023 before that. 

Despite the bad news, contrarian, value-leaning investors still have reason to consider buying FICO on the dip. If you’re good with increased volatility, I’ve got three reasons that come to mind. 

Market Share Erosion Will Take Time 

While it’s understandable that investors would treat the loss of its monopoly as devastating for Fair Isaac, the reality is that the company hasn’t necessarily lost its competitive edge against the three credit bureaus: Equifax (EFX), Experian (EXPGY), and TransUnion (TRU).

VantageScore’s four-month pilot project began on May 1. In that time, the 50 lenders approved for the pilot have used VantageScore 4.0 for more than 9% of the mortgages securitized by Fannie Mae and Freddie Mac. That’s a big number to be sure. 

The big question is how many of these lenders beyond the 50 will use VantageScore 4.0’s “tri-merge” system, which pulls credit data from all three credit bureaus, which jointly own and operate VantageScore. 

Furthermore, Pulte is investigating whether to allow lenders to pull credit reports from two of the three bureaus, or even just one. 

While there’s no question Fair Isaac will have to lower its prices in the future, which will hurt margins, its new FICO Score 10T should be competitive with VantageScore 4.0 because it pulls data from the past 24 months rather than at a single moment in time, reducing delinquencies, while safely increasing the number of potential borrowers. 

It’s not a slam dunk that lenders will switch to VantageScore 4.0 despite the promotional pricing offered right now, which puts the cost of a mortgage credit score at $0.99, well below FICO Classic and FICO Score 10T at $10 per score. 

This will take years to play out, and it’s not certain how the credit bureaus will fare under Pulte’s future directives. 

Fair Isaac’s Business Is Sound

The company’s revenue in Q3 2026 was $674.2 million, 26% higher than a year earlier. The Scores operating segment, and more specifically, the B2B (business-to-business) solutions, which include FICO scores revenue from mortgage originations, was up 49% from a year ago. That’s the part that could be affected by Pulte’s directive. 

Broken down, about 87% of its Q2 2026 Scores revenue of $458.9 million was B2B. That means moving forward, about 59% of the company’s overall revenue could be in for some disruption. 

On the bottom line, adjusted EPS was $12.18, up 42.1% from a year ago. As of the end of July, it expected 2026 EPS of $42.43. After Friday’s haircut, its shares trade at 21.4 times that estimate. Fair Isaac reports its Q4 2026 (September year-end) results on Nov. 4 after the markets close. 

As I mentioned earlier, except for a brief time in April, FICO stock hasn’t traded at these levels since November 2023. A year later, its shares hit an all-time high of $2,402.51, 70 times the forward 2025 estimate according to S&P Global Market Intelligence. 

So, either FICO stock was ridiculously overvalued in November 2024, or investors have gone overboard the other way. 

The Software Business Could Become More Important

The company’s software revenue segment accounted for 29% of its revenue in the third quarter. Its ARR (annual recurring revenue) was 10% higher, with its FICO platform ARR growing by 62% to $412.8 million, the first quarter in which its ARR for the cloud-based FICO platform was higher than the non-platform legacy software products ARR.

Furthermore, the retention rate of its platform customers in the third quarter was 148% compared to 82% for the non-platform customers. That’s good news for the segment’s profitability as the company transitions to a cloud-based software analytics business. 

Make no mistake: the Scores segment’s operating profit margin of 90% is considerably higher than the Software segment's at 27%, but as the transition continues, that margin will move higher. 

Meanwhile, the company’s trailing 12-month free cash flow through June 30 was $996 million, nearly 42% of revenue. In the 12 months, it repurchased $3.71 billion of its stock. 

It could alter its capital allocation strategy, using free cash flow to make an analytics-focused acquisition or two to diversify revenue further away from the FICO score business. 

In other words, management has options to ride out this period of disruption.     

The Bottom Line on FICO Stock

As I write this on Tuesday morning, Fair Isaac’s stock is down 2.6%, continuing the correction caused by Pulte’s latest directive. Ultimately, Pulte may be right that mortgage credit reporting pricing needed to change. 

Fair Isaac will have to adapt to the push for change by lowering prices, providing more insightful products for mortgage lenders, and expanding the pool of potential mortgage customers. Still, it’s been in the credit scoring business for 68 years, since creating the first commercial credit scoring system in 1958 and, more importantly, the FICO score in 1989. 

It can and will weather the storm. If you’re a risk-tolerant investor, buy on the dip while saving some dry powder for future purchases, possibly at even lower prices. 

If you’re patient, you’ll look back on this time as an opportunity dressed up as dire straits.