By Jack Hough

"Good gracious a -- bodacious," called out a 50-year-old man recently to a gathered crowd of credit score enthusiasts. This was the Grammy-winning rapper Nelly performing his 2002 chart-topper "Hot in Herre" at FICO World, held on May 6-9 just north of Miami.

I know what you're wondering, and no, he didn't do "Shake Ya Tailfeather" -- but he did include "Ride Wit Me." Also, yes, FICO World is an actual thing. It's hosted by Fair Isaac, the credit analytics company. This year it drew 1,500 attendees.

Granted, that's no Dreamforce, the yearly conference from Salesforce, which does sales software. That one drew 45,000 last September and featured Pink and Imagine Dragons, after Elton John backed out on short notice due to an eye infection. Salesforce is a $279 billion colossus.

But Fair Isaac, based in Bozeman, Mont., has steadily, quietly risen past good gracious levels to bodacious territory. It's worth $51 billion, close to FedEx, at $55 billion. An investor who bought Salesforce stock, ticker CRM, on the day of its June 2005 initial public offering has made 6,700%, or 10 times the S&P 500 index's return. One who bought Fair Isaac, ticker FICO, on the same day isn't far behind, at 6,500%.

Fair Isaac went public decades earlier at a much smaller size. In July 1987, it sold 1.4 million shares at $9.50 apiece to little acclaim, judging by an 88-word item in The Wall Street Journal. An investor who bought that day has since made 172,000%. Only two companies in the S&P 500 have as long a trading record and have done better over the same stretch, according to FactSet. Microsoft has made 217,000%, and UnitedHealth Group, 194,000%. More on that in a moment.

By now you might be wondering what in the holy hash brown potatoes explains how a company best known for scoring borrowers on creditworthiness using a scale from 300 to 850 has outperformed Apple over the long run. I can think of five reasons, beyond the early IPO.

1. Fair Isaac has ridden powerful business trends. The company started in 1956, when credit assessment was shifting from paper records to computers. Engineer Bill Fair and mathematician Earl Isaac put up $400 apiece in start-up capital and sold their first credit score within two years. The Fair Credit Reporting Act in 1970 laid out rules for what would become the big three reporting firms: Equifax, Experian, and TransUnion. The industry needed an independent scorekeeper that could interpret the different reports, and Fair Isaac was the obvious choice.

At the time of the 1987 IPO, American Banker magazine noted that Fair Isaac's customers included half of the 100 largest banks, plus 12 oil companies, about 40 retailers, and the major "travel and entertainment" card companies. Over the years, society has become ever more credit- and data-driven, and FICO scores, thanks in part to an early endorsement from U.S. government mortgage agencies, are now used by 90% of U.S. lenders, for more than 10 billion credit decisions a year.

2. FICO score customers generally aren't the payers. Lenders request the scores, but borrowers ultimately pay for them through application fees. These fees are rising, but are still dwarfed by other costs in the loan process -- for example, title insurance in the case of a mortgage. Fair Isaac benefits from what economists call inelastic demand, and the rest of us call the ability to raise prices without customers walking away.

3. Fair Isaac can expand its sales and services much faster than its costs. In other words, its business is asset-light and highly scalable. It sells dozens of industry-tailored credit scores worldwide. More than a decade ago, the company launched a cloud-based software suite for making financial decisions. Last year, scores brought in revenue of $920 million, up 19%, while software made $798 million, up 8%. The company has lately turned more than half of revenue into operating profit. It has only about 3,700 employees. Among companies of similar market value, Allstate has more than 55,000 workers, and FedEx, 430,000.

4. Management has been gobbling stock. Last year, Fair Isaac's free cash flow climbed 30%, to $607 million. Buybacks totaled even more: $822 million. The share count has fallen by a third since 2013. BofA Securities calls this a "public LBO," or leveraged buyout.

5. Part of the return has come from a rising valuation. Shares go for more than 60 times forward earnings projections, up from closer to 30 times earnings at the start of last year. Fair Isaac has become an artificial-intelligence stock. Whether the business can grow into this valuation, or the stock is due for a drop, depends on the mood of fickle growth investors. Wall Street predicts 20%-plus earnings-per-share growth for years to come. BofA recently called the stock a top pick with a price target of $3,700, implying 70% more upside. Following FICO World, it predicted that Fair Isaac will become "the Palantir of the financial industry," a reference to that company's strong position in AI. If that were a rap lyric, even Nelly would call it a bold claim.

One last thing: I mentioned that Fair Isaac ranks third in the S&P 500, behind Microsoft and UnitedHealth Group, in returns since July 1987. Other top 10 members, you won't be surprised to learn, include Oracle, Home Depot, Apple, Costco Wholesale, and a maker of natural sodas that hit it big with energy drinks, called Monster Beverage. No. 3 and No. 6 get less attention. Texas Pacific Land is the product of a failed effort to build a railroad from Texas to California more than 150 years ago. The Texas land set aside for the job was put into a trust and today yields shale drilling royalties. And Jack Henry & Associates dates back to 1976 and the layoff of a bank data manager, who borrowed a computer and started what has become a $13 billion software company.

Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.

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May 16, 2025 01:30 ET (05:30 GMT)

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