A-Z on IGV: Value Hunt in Software (F-M)

Why It Matters

FICO’s steep price hikes and regulatory exposure could compress margins, making its seemingly low valuation a hidden risk for investors in the software sector.

Key Takeaways

• FICO appears undervalued but faces aggressive price hikes and monopoly risk.
• Recent margin expansion at FICO driven primarily by steep price increases.
• Regulatory scrutiny could pressure FICO’s pricing power and future earnings.
• Five9 and Freshworks show steep valuation declines, signaling sector volatility.
• Fortinet’s strong growth and high GuruFocus score highlight cybersecurity tailwinds.

Summary

The Focus Compounding podcast continues its A‑to‑Z deep‑dive of the IGV software ETF, starting with Fair Isaac Corp (FICO) before skimming other mid‑cap names like Five9, Freshworks and Fortinet. The hosts use GuruFocus metrics to argue that, on paper, FICO looks cheap—trading around 34× earnings and 30× price‑to‑free‑cash‑flow—yet its recent performance has been volatile, down roughly 50% in the past year after a two‑year rally.

Jeff Gannon warns that FICO’s soaring operating margins (now above 50%) stem largely from aggressive price hikes rather than volume growth. He cites a Steve Eisman interview that highlighted the company’s near‑monopoly on credit‑score licensing and the widening cost gap with the cheaper VantageScore alternative. The hosts note mounting regulatory attention from agencies like FHFA, suggesting that the pricing strategy could trigger backlash and erode the firm’s moat.

Key excerpts include Jeff’s description of FICO as “predatory” after rapid price increases and Andrew’s observation that margins jumped from the mid‑70s to the mid‑80s percent range, implying substantial mark‑ups. The conversation then shifts to Five9’s stock collapse from $150 to $21, Freshworks’ modest SaaS growth, and Fortinet’s 94‑point GuruFocus score, underscoring divergent trajectories within the software sector.

For investors, the segment highlights a classic valuation paradox: attractive multiples coexist with heightened regulatory and competitive risk. While Fortinet offers a clear cybersecurity tailwind, FICO’s monopoly advantage may be waning, urging caution on any “cheap” label until the pricing controversy resolves.

Original Description

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