Toast is a near-perfect specimen. Roughly twelve years ago, three MIT graduates, Steve Fredette, Aman Narang, and Jonathan Grimm, started the company in Aman’s basement in Burlington, Massachusetts. Their first idea failed. They had set out to build a consumer app that let diners skip the agony of waiting for the check, only to discover that the legacy restaurant systems they needed to plug into were too clunky to integrate with anything. So they threw the idea out and did something far more ambitious. They rebuilt the entire restaurant technology stack from the ground up.

When they went looking for money, most investors said no, and not politely. Selling software to small restaurants was, in the prevailing wisdom, a terrible idea. Owners weren’t tech-savvy. Margins were razor-thin. The whole category was a graveyard waiting to happen.

Look at what that “terrible idea” became. Today Toast powers roughly 171,000 locations, up from a single customer in 2013 and up +22% YoY. Over the trailing twelve months, it processed a staggering $204 billion in gross payment volume. Something close to half a percent of total U.S. GDP now flows across its platform.

And this isn’t a tool reserved for corner delis and food trucks, though it serves plenty of those. Toast runs more than half of all Michelin-starred restaurants in the United States, and over a third of all James Beard Award winners. The finest kitchens in the country, the ones obsessed with every gram and every second, chose the same operating system.

So here’s the puzzle that pulled me in. If Toast is this entrenched, this profitable, this dominant in a $1 trillion industry, an industry it has barely begun to penetrate, why was the stock cut roughly in half over the last year, trading close to record-low multiples?

Because that’s where the stock is at as I write this.

Toast traded down around 50% from its all-time high, languishing in the mid-$20s ($14B market cap) while the business underneath it posted record results, grew subscription services and financial technology solutions gross profit 32% YoY, and added a record number of locations.

Arguably, the drawdown wasn’t triggered by anything “breaking.” I believe, it might have been triggered by the market deciding it would rather own something else. And this is where Toast’s situation gets genuinely interesting, because the company has the misfortune of sitting at the intersection of two of the most unloved corners of the market right now. It is part payment processor and part vertical-market software company, and capital has been fleeing both.

Money is being pulled out of fintech and SaaS at a remarkable clip and funneled into anything that can credibly attach the letters “AI” to its story.

Toast, ironically, is quietly building one of the more compelling vertical AI businesses around. The market just hasn’t decided to pay it for that yet. It’s been too busy selling.

That dislocation is the reason I’m writing this. When a high-quality business gets sold off for reasons that have little to do with the business, you get the rare setup every investor claims to want and few actually act on: a chance to buy something excellent while the crowd looks the other way.

Whether that’s what’s happening here, or whether the bears have spotted something real about competition, margins, and a stretched valuation, is exactly what I intend to find out.

I’ll lay out the bull case in five “Bams,” then spend the rest of this deep dive trying to break it. Understanding the business. The moat. Management. The risks. And finally, what it’s all worth.

By the end, you should be able to decide for yourself whether the market is handing you a gift or a warning.

Let’s get into it! (This was another fun one, and I hope you find it as enjoyable)

What this deep dive covers:

• The five-part bull case (”Bam Bam Bam Bam Bam”)

• What went wrong

• The origin story

• The business itself

• Unit economics analysis

• The moat

• The customer

• Is it a good business in a good industry

• The spawner thesis

• Growth drivers and forecasting

• Margins outlook

• Valuation

Disclaimer:

As of the date of publication the author doesn’t own shares in the company; but that may change. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

High-Level Thesis: “Bam Bam Bam Bam Bam”-90 Second-Hypothesis

As always, before I get into the weeds, a quick word on how I like to frame these deep dives:

I always come back to Bill Miller’s take on pitching a stock. His point is brutally practical. Portfolio managers have ultra-short attention spans, and as he tells it, there is basically no successful PM he’s ever met who wanted to hear a story longer than 90 seconds. Peter Lynch apparently kept an egg timer on his desk. An analyst walked in, the timer started, and the pitch had to be done in 90 seconds flat. The format Miller recommends is disarmingly simple: here’s the company, here’s the price, here’s the 52-week range, and here are the five reasons it’s a buy. Bam. Bam. Bam. Bam. Bam. Then what it’s worth, why, and the risks.

So that’s the structure I’ll borrow for this opening section. Five pillars. Five reasons Toast (NASDAQ: TOST) deserves a spot on your radar right now, each one a “Bam” that I’ll fire off before going deep on the business later in the post.

One semantic point that matters more than it might seem. I’m deliberately calling this an investment hypothesis rather than a thesis. A thesis is a statement of belief, and the word quietly nudges you toward hunting for information that confirms what you already think. A hypothesis is something you’re actively trying to break.

With that out of the way, let me load the first round.

Bam #1: The Generational Shift from Legacy to Cloud

The restaurant industry is one of the largest sectors of the U.S. economy, somewhere around $1 trillion in annual sales, or roughly 4% of GDP.

And yet it sits near the back of the class when it comes to technology. Most industries spend something like 5% of revenue on IT. Some (significantly) more. Restaurants, according to a 2022 VIC writeup, spend less than 3%, around 2.7%.

Avasant’s annual IT spending and staffing benchmarks study covers over 25 industry sectors, including food and beverage, and continues to confirm this structural gap: IT spending as a percentage of revenue deviates far more by industry sector than by company size or geography.

That gap didn’t appear by accident. For decades, the industry ran on manual paper processes and a fragmented collection of “point solutions” that never really talked to one another, so the under-investment compounded year after year.

The restaurant management software market was valued at about $6.54 billion in 2025 and is projected to grow from $7.49 billion in 2026 to $14.73 billion by 2031, at roughly a 14.5% CAGR, with cloud technology identified as the driver. Critically, cloud solutions accounted for 60.87% of that market’s revenue in 2025 and are growing faster than hybrid and on-premise alternatives.

Picture the setup that dominated for most of that period. Incumbents like Oracle, through its Micros division, and NCR, with its Aloha product, owned the market with on-premise architecture. The hardware lived on dedicated physical servers, frequently parked in a restaurant basement or a sweltering back closet. Those boxes fail. They’re expensive to maintain. And when one goes down, so does a chunk of the operation. Worse, the legacy stack lacked modern APIs, which forced operators into an inefficient patchwork of separate vendors for online ordering, payroll, and inventory. Staff ended up manually re-entering the same data across systems that refused to communicate, a recipe for errors and constant operational friction. The data itself sat trapped in disconnected silos, which meant owners historically made decisions on gut feel rather than anything resembling real-time analytics. A legacy nightmare, basically.

This is the opening Toast walked through. The company is replacing those clunky terminals with a cloud-based “restaurant operating system” meant to act as the central brain of the business.

What makes it more than a generic cloud play is the vertical-specific depth. Toast obsesses over the thousand little things that are specific to restaurants: hardware engineered to survive grease and heat, software that handles the genuinely messy problem of complex menu SKU modifications and ingredient-level inventory. It pulls the front of house (the POS, the handhelds) together with the back of house (kitchen display systems, payroll, supplier management) so data finally flows across the whole ecosystem instead of dying in a silo.

And it’s built for high-stakes conditions. The “Offline Mode” is a good tell here. If the internet drops in the middle of a packed Friday night, the restaurant keeps taking payments and firing orders to the kitchen anyway. For an operator, that reliability isn’t a nice-to-have. It’s the difference between a normal shift and a catastrophe.

Here’s the part that makes this a hypothesis worth the effort, though. The generational shift is still in its early innings. The legacy players still hold close to 50% of the market. They are, in effect, the share donors, and Toast is the primary beneficiary as their increasingly frustrated customers go looking for something modern and flexible.

Consider the runway. For all its growth, Toast today powers only about 13% of U.S. restaurant locations (as of the 2024 Investor Day), roughly 170,000 of them (as of the latest quarter).

Management frames the rest as a vast greenfield, pointing toward a global TAM they peg at something like 15 million locations as international markets eventually march through the same legacy-to-cloud transition the U.S. is living through now.

Whether you take that 15 million figure at face value is a fair question (what % of the TAM is actually obtainable?).

But the direction of travel is hard to argue with.

This is where it gets interesting

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This post is where I go deeper on three more subjects related to TME.

I’ll spend most of my time on the Ximalaya deal, because the more I dug into it, the more I realized how big of a deal this may turn out to be. My first instinct was skepticism. Long-form audio looked, on paper, like a structurally worse business than music streaming, and I went in expecting to talk myself out of liking the acquisition. What I found instead was something more layered. I assess this acquisition from multiple angles.

Before that, I’ll pick up the thread Pitc2d started on the buyback, and untangle the gap between what TME has authorized and what it has actually spent.

And to close, a shorter flag. My friend Niklas raised a point about TME’s 2025 earnings that I think a lot of investors will miss on a first pass, the kind of thing that sits in a footnote, but shouldn’t be missed. I’ll keep that one brief, but I’d argue it’s as important for anyone building a valuation model as the Ximalaya deal. I also added another interesting recent development last-second (the fourth subject we discuss) – a tie-in into Tencent’s ecosystem.

Let’s get into it.

Disclaimer: As of the date of publication, the author owns no shares in the company; but that may change. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

#1: $1 Billion Share Buyback Program

When a Chinese tech company announces a billion-dollar buyback, I’ve learned to do two things before getting excited. First, I read the fine print. Then I check whether they actually spend the money. With Tencent Music, both questions turn out to be more interesting than the headline suggests, and the gap between what was announced and what’s been executed says more about the company than the press release ever could.

Let me walk you through the details and my thoughts.

Let’s start with TME’s buyback history: Back in March 2021, in the middle of the brutal selloff in Chinese ADRs, TME’s board authorized a $1 billion repurchase over a twelve-month window. That one came and went. So did a $500 million program announced in March 2023. Over the last five years, TME’s share count is down around 8%.

The one that actually matters today was authorized alongside the Q4 2024 results: a fresh $1 billion authorization running over a 24-month period that began in March 2025. That puts the clock ticking toward roughly March 2027.

“The Company’s board of directors approved an annual cash dividend of approximately US$273 million for the year ended December 31, 2024, and authorized a new Share Repurchase Program up to US$1 billion during a 24-month period commencing from March 2025.”

A board authorization gives management permission to buy up to a dollar amount. It commits them to nothing. Companies announce these things constantly, especially when the stock has been beaten up, precisely because the announcement itself can prop up sentiment at zero immediate cash cost. The real tell however is execution.

So what has TME actually done? In the first quarter of 2025, the company repurchased 5.9 million ADSs for roughly $64.5 million, at an average price of about $10.8 per ADS.

“Under our previously announced share repurchase programs, during the three months ended March 31, 2025, we repurchased a total of 5.9 million ADSs in the open market with cash for an aggregate consideration of approximately US$64.5 million at an average price of US$10.8 per ADS.“

Worth noting: that disclosure referenced “previously announced share repurchase programs” in the plural, so some of that spend may have closed out the tail of the older $500 million program rather than the new one.

After that, TME stopped breaking out quarterly buyback dollars in its non-SEC PRs/earnings releases. You can still triangulate. For full-year 2025, net cash used in financing activities came to about $665 million. That bucket includes the dividend plus repurchases of roughly $57 million; which is just a drop in the bucket compared to the size of the authorized program.

As a result, weighted-average basic ADS barely budged, drifting from about 1,542 million in 2024 to roughly 1,534 million in 2025. That’s a net reduction of only around eight million ADSs. Eight million. On a base north of 1.5 billion. For a company brandishing a billion-dollar authorization, that is a remarkably small dent.

So is it actually accretive?

But then again, during the Q1 call, management said that it intends to actually complete the program.

“… as part of our long-term commitment to shareholder returns, we plan to complete the 2-year stock repurchase program that we announced in March 2025 on time.“

So if we assume the $1 billion program will be executed and that the majority of the “buyback dry powder” hasn’t been used, let’s run the numbers to determine how accretive it might be at the current valuation.

If TME deployed a full $1 billion at recent prices around the $9 mark, you’d retire on the order of 110 million ADSs ($1B ÷ $8.70 share price = ~114.9 million shares), give or take depending on where the stock trades during execution.

Against roughly 1.53 billion ADSs outstanding, that’s a reduction of about 7.5 percent, which translates into an EPS lift in the neighborhood of 7 to 8 percent if net income holds flat. 7-8 percent in EPS growth without requiring any topline growth; that’s far from trivial for a profitable, cash-generative business trading at a dirt-cheap valuation.

Of course, there is some dilution from SBC, and there’s not a full $1 billion left, and the Ximalaya deal (to be discussed next) will also have a dilutive effect, but still, I think this program is very much noteworthy and should be highly value accretive at the current share price.

“Q: And partly relating to that what’s management latest thought on the share repurchase program, we noticed that there’s still a large quota left?

A: Well, we’re still communicating with the regulator on the Ximalaya deal. If there is any update, we will disclose at that point.“ - Q4 Call

The most attractive moment to retire stock is when it’s cheap. TME spent part of early 2025 buying around $10.8 per ADS; the stock has since spent stretches trading below that. If management leans into the program while shares are depressed rather than mechanically spreading purchases evenly, the per-dollar value created climbs. Buybacks executed into weakness are worth far more than buybacks executed into strength.

#2: The Ear Economy – TME Paid Billions for Ximalaya & Whether It’s Worth It

This is where it gets interesting

Become a paying subscriber to read the rest of this post and get access to all of my other research, including valuation spreadsheets, deep dives (e.g. well-known mid- and large caps such as LVMH, Duolingo, Meta, Edenred as well as more hidden gems such as Tiger Brokers, Digital Ocean, Ashtead Technologies, InPost, Timee, and MANY more), and powerful investing frameworks.

As a member, you get:

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Now imagine that the market is pricing all of that at roughly 9x forward earnings – and that once you start digging past the headline multiple, the true price you’re paying for the actual streaming engine is even more jaw-dropping than that already-cheap number suggests (to be discussed below).

That is the Tencent Music Entertainment (ticker symbol ) situation today.

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The stock has gone nowhere for over five years. It currently sits 69% below its all-time high. In just the ten months between August 2025 and June 2026, more than 63% of the stock’s value has been wiped out – a collapse that would feel right at home in a speculative biotech bust, not in a cash-generative, monopoly-like platform business beating analyst estimates on both revenue and earnings per share for six consecutive quarters.

So what is going on?

The short answer: the market is reacting to a cocktail of anxieties rather than the underlying business reality. When you layer these concerns (to be discussed below) on top of a persistent “China discount” – VIE structure anxiety, memories of the 2021 regulatory crackdown, rock-bottom Chinese consumer confidence – you get a reflexive sentiment vortex. The street sells first and asks questions later.

The question worth asking, I believe, is: at what point does the geopolitical discount become too much of a discount?

Disclaimer: As of the date of publication the author owns no shares in TME; but that may change. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

The Business of Tencent Music Entertainment Group

Tencent Music Entertainment Group (TME) is listed on both the NYSE under the ticker symbol TME as well as the Hong Kong Stock Exchange under the ticker 1698. TME dominates the Chinese audio landscape through an ecosystem of powerhouse applications like QQ Music and Kugou Music.

Think of it as a much more versatile version of Spotify operating within a highly protective domestic duopoly alongside NetEase Cloud Music. For years, in fact, China’s digital music landscape was highly fragmented and plagued by piracy. The market consolidated rapidly due to two major events:

• Tencent’s Consolidation: In 2016, Tencent merged its own streaming service (QQ Music) with China Music Corporation (owners of Kugou and Kuwo). This brought China’s three largest music apps under one corporate roof (TME), giving them an overwhelming market share.

• The Exit of Competitors: Smaller platforms simply couldn’t keep up with the soaring costs of licensing music; there’s a natural winners-take-most dynamic at play in this industry (think of Spotify’s massive, dominant lead in “the West” (estimated 40% market share) alongside Apple, Amazon and YouTube music). The duopoly became firmly cemented after Alibaba shut down its music streaming platform, Xiami Music, leaving NetEase as Tencent’s only viable, scale-driven competitor.

But back to TME’s business. Rather than relying strictly on the standard freemium streaming model, TME is best thought of as a dual-engine machine that actively pairs a massive digital platform with both sub-licensing and direct content ownership.

Yet Tencent Music Entertainment does not operate as a traditional, singular record label in the same way that a “Major” (like Universal, Sony, or Warner) does. Instead, it employs a hybrid strategy that combines large-scale distribution with an internal production ecosystem.

Its structural integration with Tencent’s WeChat ecosystem provides a virtually unassailable distribution moat, converting casual video and social interactions into sticky, high-margin music subscribers.

“In the competitive world of business, having a superior product isn’t always enough to guarantee success. Often, the ability to distribute a product widely and efficiently can create a significant competitive advantage known as a ‘distribution moat.’ A distribution moat refers to a company’s capacity to leverage its extensive distribution network to dominate a market or quickly penetrate new markets, making it exceedingly difficult for competitors to gain a foothold.“ - from my investing framework

By managing its own in-house music labels and locking down early-release windows for tier-one artists, the business keeps its content procurement costs low while keeping user retention incredibly high.

When you look at how the revenue flows, the business splits its operations into two primary reporting segments:

• Music Related Services (82.5% of Q1 revenue; further broken down into “membership services” (58% of total revenue) and other “music related services”) – formerly known as Online Music – …

• … and Social Entertainment (17.5% of Q1 revenue).

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Think about an ecosystem so technologically hardened that its core architecture – EVENTIM.Net – can effortlessly handle over 1 million concurrent users during a high-stakes stadium tour on sale for elite artists like Taylor Swift or Ed Sheeran without breaking a sweat, a technological feat very few regional competitors can dream of replicating.

Picture a company so dominant that it has secured the prestigious Arthur Award, widely recognized as the “Oscar” of the global live entertainment industry, in the Best Ticketing Provider category.

And did you know that the 200 major European festivals are owned by just four companies? (the company we cover today being one of them; the other three being Live Nation, Superstruct, and AEG)

Reset! and Live DMA recently published the map above to make the ownership of various music festivals (which historically has been rather obscure to the average consumer) more transparent and accessible to the public.

The company we will cover in this deep dive is CTS Eventim, a business that billionaire founder Klaus-Peter Schulenberg took over as a small Munich-based software firm with just 83 employees back in 1996. Since its initial public offering in February 2000, it has compounded capital to deliver a staggering 2,350% total shareholder return – amounting to a 13% annually over more than two decades (17% before the recent drop).

Yet, if you pull up a stock chart today (the chart above gives a clue), you will confront an entirely different emotional landscape. The equity has been practically dead money, trading completely flat to slightly down over a trailing five-year period. More shockingly, the stock has plunged roughly 50% from its absolute peak achieved only in May last year. This steep correction has caused valuation multiples to heavily compress across the board – be careful just glancing at research terminal multiples though! (for reasons we will discuss below) –, drawing immense skepticism from short-term public market analysts.

So what caused this premier long-term compounder to lose its tune?

The answer lies in a highly visible shift in corporate strategy and near-term execution headwinds, coupled with investors favoring clear “AI winners.”

The company is currently navigating a major physical infrastructure revolution, aggressively transitioning from a pure, asset-light digital software play into a heavy-capital venue powerhouse. It operates iconic spaces like the LANXESS Arena in Cologne – which Pollstar officially ranked as the third most successful entertainment arena on the planet, trailing only Madison Square Garden in New York and the SSE Hydro in Glasgow –, which Eventim has managed since 2012, alongside a rapidly growing international portfolio.

The company here follows PropCo/OpCo philosophy, which is a corporate arrangement that splits a business's real estate assets from its daily operations; PropCo owns the land and buildings, while OpCo leases the property and manages the core business.

“As you rightly mentioned, we follow a propco/opco strategy. We follow the idea and we confirm the idea of an asset-light model for the entire company. Having said this, this is work in progress, but we are in accordance with our planning. I sincerely hope more details can be shared later this year. As I mentioned in the last call and in our bilateral discussions, these are very structured or highly structured discussions and negotiations with a variety of different partners. So please rest assured we are working on this and working on this very hard. Nothing has changed that we want to keep only a minority share in propco. And in other words, we will preserve the asset-light model, but we don’t have a result yet, which can be announced at this state.“ - Q1 Call

Furthermore, it recently celebrated the opening of the Unipol Dome in Milan (the former Milan arena), which stands as Italy’s most modern arena, and secured a major contract to build a brand new 20,000-seat arena in Vienna.

“… after hosting the Olympic Ice Hockey Tournament in February with about 400,000 visitors, the Unipol Dome in Milan opened for music concerts in May this year. The Milan arena contributes, therefore, already to the operational results and is a meaningful addition to our high-margin venue portfolio.“ - Q1 FY26 Call

But this real estate pivot has come at a steep near-term price, hit by unexpected construction cost overruns in Milan that temporarily decimated free cash flow and induced sudden structural panic throughout the market. When CTS Eventim originally took on the project to plan, build, and operate the 16,000-capacity arena for the Milan-Cortina Winter Olympics, the total construction budget was estimated at €180 million. However, a combination of severe global inflation, skyrocketing energy prices, supply chain disruptions, and tight design modifications turned it into a financial nightmare, and the actual cost ballooned to roughly €400 million.

This tension sits at the absolute center of my core investment hypothesis. Is the market right to re-value Eventim as a lower-return, capital-heavy infrastructure play, or is it handing long-term investors a classic mispricing in a structurally competitively advantaged, recession-proof business model? Let’s not forget how this engine behaves during a broader economic crisis. During the 2008–2009 Global Financial Crisis, while traditional industrial sectors faced absolute ruin, Eventim’s ticketing revenues surged by 29%, proving that modern consumers stubbornly prioritize experiences over material goods.

In this comprehensive deep dive, I will break down the underlying mechanics of Eventim’s vertically integrated flywheel, evaluate the hidden risks of its venue expansion, audit its balance sheet strength, and dissect the valuation disconnect to determine whether this live entertainment monopoly represents a compelling asymmetric opportunity for patient, long-term capital.

Disclaimer: I bought shares of CTS Eventim for my parent’s portfolio. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

High-Level Thesis: “Bam Bam Bam Bam Bam”-90 Second-Hypothesis

As my regular readers know, if you spend any time presenting investment ideas to portfolio managers, you quickly realize they have ultra-short attention spans. Bill Miller always used to emphasize that no successful fund manager wants to hear a story longer than 90 seconds. Miller’s advice was simple: give them the ticker, the current price, the valuation anchor, and then hit them with five immediate, hard-hitting reasons. Bam. Bam. Bam. Bam. Bam.

That is exactly how I want to look at CTS Eventim. Well, I ended up putting together eight BAMs. Close enough.

Let’s look at the baseline. The stock is currently trading around €56. It has carved out a 52-week range between roughly €49 and €111, pulled down heavily after management issued a cautious outlook in late March that spooked short-term traders.

CTS Eventim’s stock plummeted by up to 21% following its March 26, 2026, annual report because unexpected future headwinds completely overshadowed record-breaking 2025 revenues. The primary shock to investors was a stagnant outlook for 2026, with management guiding for flat-to-minor profit growth that fell drastically short of the increase analysts expected.

“With this in mind, we guide for 2026. In ticketing, we expect all KPIs on previous year level, respectively, slightly higher. In Live Entertainment, we expect moderate growth in adjusted EBITDA and EBIT, whereas the revenues are expected to reach prior year level. Finally, we expect Eventim Group level KPIs on or slightly higher level than previous year. CTS Eventim has a consistent track record of returning value to its shareholders.“ - Q4 Call

This growth slowdown was further compounded by the disclosure of a major structural ticketing contract expiration with Stage Entertainment, leaving a revenue gap the company must now work to fill.

“Finally, let's have a look at our 2026 guidance and our new capital market communication approach. […] Eventim will stay a growth asset for the years to come, even though our 2026 budget needs to compensate for a onetime effect in form of a structural income change from a long-term contract. We have set ourselves ambitious midterm targets in both our segments and on group level.” - Q4 Call

However, treating this as a total loss of the Stage Entertainment relationship misses a critical nuance. On April 20, 2026, CTS Eventim, in fact, announced an extension of their retail ticketing partnership across Germany, France, Spain, and the Netherlands.

So the “structural income change” management warned about in March likely stems from Stage Entertainment insourcing its core, backend white-label software infrastructure. However, Stage Entertainment cannot easily replicate Eventim’s massive consumer-facing distribution network. By maintaining the retail relationship, Eventim protects its high-margin transaction fee volumes on the actual point of sale, mitigating a portion of the feared revenue cliff.

Furthermore, investors were deeply rattled by a massive drain on the company’s liquidity. The final construction costs for the newly opened Unipol Dome in Milan more than doubled from an initial €180 million budget to nearly €400 million, according to a Barclays research note. This aggressive capital expenditure caused full-year free cash flow to drop significantly, and “Cash and cash equivalents decreased by EUR 162,889 thousand compared to 31 December 2024. Cash and cash equivalents decreased, inter alia, due to the higher investments in property, plant and equipment […].“

But if you look past the temporary headwinds and noise, the core compounding machine seems completely intact.

Before listing the core pillars, I want to clarify how I approach this setup. I am intentionally calling this an investment hypothesis rather than a thesis. To me, a thesis implies a static statement of belief, which naturally tempts an investor to search for confirmatory data. A hypothesis is something you actively try to falsify. You test the edges, look for structural cracks, and remain objective. My core hypothesis here is that the market is currently over-indexing on temporary venue cost overruns and a conservative near-term corporate outlook, entirely missing a structural, vertically integrated monopoly that is exporting its elite unit economics globally.

The full story starts here:

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Most market participants spend their time operating within the comfortable confines of first-level thinking.

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They ask a straightforward, reactive question, such as …

Is this a good asset?

The answers to that query fill hundreds of generic media headlines, financial blogs, YouTube videos, and podcasts every single day, often culminating in a crowded consensus where everyone stares at the identical set of obvious variables.

“Costco is a high-quality compounder!“

Or what about …

“Adobe is an AI loser!“

If the game were that simple, research analysts and/or historians would easily be the wealthiest individuals on Wall Street instead of working for a fixed salary. As always, Buffett has expressed this view many decades ago already:

"If past history was all that is needed to play the game of money, the richest people would be librarians."

Thus, generating alpha requires more.

True outsized equity returns are born from an entirely different analytical filter. To win, you must step into second-level thinking. You must systematically ask what everyone else is assuming about that stock, what exact expectations are already embedded in the current price – this goes back to the concept of expectations investing by Michael Mauboussin –, and who you are betting against (and why they view the asset the way they do).

And then, when you form a contrarian, non-consensus view, you additionally have to be right!

All/most of the above was shared by Tiho Brkan recently on X in a short, but punchy tweet (all the credits belong to him here), and he wrapped it up beautifully by referencing George Soros: he summarized this beautifully by stating that money is made by discounting the obvious and betting on the unexpected.

I figured this would be a very fitting way to start this post, focused on Wise Plc. The recent dual listing of Wise plc on the Nasdaq on May 11, 2026, alongside its secondary listing on the London Stock Exchange, provides a textbook example of first-level market noise completely blinding participants to a generational asset. When the ticker tape flashed on American screens, the financial media and algorithmic trading desks focused almost exclusively on immediate liquidity dynamics and mechanical price action. As outlined in my recent write-up on Wise’s Nasdaq listing presentation and special call, at first, the stock shot up by 7%, but it quickly encountered structural selling pressure over the subsequent trading days.

Check out my latest piece on Wise here:

First-level commentators instantly pointed to the bleeding tape – which is just a fancy way of saying “the stock is down (big)” – as definitive proof that the entire cross-border payment sector was structurally doomed.

If you only evaluate companies through headline narratives and short-term stock charts, you will completely miss the structural transformation taking place inside this network. They missed it. I have closely tracked Wise’s global infrastructure build since its initial public listing in 2021, and I believe there’s a massive disconnect between current market perception and fundamental operational reality.

This deep operational disconnect is part of my investment thesis. The market is fundamentally mispricing Wise because traditional analysts continue to treat it as a standard, sleek retail remittance application. They see a simple consumer tool and completely fail to comprehend the massive, proprietary payment infrastructure humming quietly beneath the application layer.

My Hypothesis

What I plan to focus on in this article is to outline a bullish hypothesis that I have never seen discussed by anyone following Wise. I’d argue many market observers do actually have a decent grasp on the competitive advantages of Wise and the length of the runway. That’s why if you believe in Wise’s guided underlying EBT margins of 15-20% (keep in mind that Wise is currently “overearning”), Wise isn’t clearly cheap as the implied current Price-to-Earnings ratio would sit somewhere in the range of 30-40x earnings.

This seems particularly “rich” in light of the pressure one can witness in the payments sector and the valuation multiple some “peers” currently demand (to be fair, what Shift4Payments or PayPal really have in common with Wise is simply the industry they operate in).

So the bullish hypothesis I want to discuss stands on two highly contrarian predictions that run directly counter to current Wall Street consensus models (where bears would argue Wise’s very mission of driving take rates to zero will eventually kill its own business).

• First, while the prevailing consensus assumes that Wise, like most businesses, will eventually be entering a permanent growth deceleration phase where revenue trends down (or plateaus in the low teens sooner than later), I predict that we might eventually see top-line growth reaccelerate comfortably above 20% – a pattern you wouldn’t normally find in your Econ 101 textbooks – as its global scale takes effect.

• Second, the consensus believes that Wise’s unique cost-plus pricing strategy naturally limits its ultimate profitability, but in this write-up, I argue that the business might reach a point where it will post long-term profit margins vastly superior to current market assumptions – potentially reaching 40% (or more!) as its massive operating leverage unlocks. Why should Wise not achieve 40% pre-tax margins once it captures a dominant share of the global money movement market? The consensus assumes that aggressive price cuts destroy terminal value, failing to recognize that lowering fees is actually a powerful customer acquisition tool that widens an unassailable structural moat.

Consider the incredible journey of this enterprise. Wise has scaled from absolute zero fifteen years ago to processing a staggering $0.25 trillion – trillion with a “T” – in transaction volume today.

The bull hypothesis is based on the idea that, despite its massive operational expansion, the company has only begun to tap into its total addressable market.

You are looking at a scaling cross-border payments infrastructure monopoly that is being valued like a soon-to-be maturing, legacy money transmitter.

That is the essence of a second-level thinking arbitrage, and it is precisely why the current market setup potentially offers an interesting entry point for disciplined, long-term capital – again, remember, IF (!) that hypothesis proves to be true.

Here’s what we will cover in this analysis:

• Why the post–Nasdaq listing selling pressure represents a classic first–level market trap, hiding a world-class asset behind short–term liquidity noise.

• A granular cost-layer audit isolating Layer 1 variable gross margins from Layer 2 administrative expenses to map out Wise’s latent profitability tier.

• Benchmarking Wise against the automated clearing engine of IBKR to demonstrate how scale economies shared unlock “elite” corporate operating leverage.

• Deconstructing the strategic shift from pure word–of–mouth acquisition to an aggressive 52% year–on–year boost in global brand campaigns.

• Evaluating Wise’s massive structural runway against digital peers – analyzing high–growth, high–fee competitors like Remitly alongside the sheer volume potential proven by Revolut’s 6 billion dollar revenue base.

• Exposing the technical Platform disclosure changes that hide the volume acceleration inside Wise’s B2B enterprise division.

• Tracking the rapid, quiet onboarding cadence of marquee global Tier–1 institutions

• How deep background optimization vectors – such as large language model chat assistants and algorithmic compliance screening – systematically collapse processing costs.

• Wise’s path to becoming a $100B company

Disclaimer: I own Wise shares. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

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When Wise executed its highly anticipated dual listing on the Nasdaq, the financial media focused almost entirely on the superficial mechanics of the ticker tape. The opening price hit the screens, algorithmic trading systems adjusted to the new liquidity pools, and during the first few trading days, the share price immediately came under some structural selling pressure.

Short-term traders quickly pointed to the downward price action as proof that the payment sector is doomed and that Wise won’t be the exception spared by the market’s forces, but for those investors who ignore day-to-day market noise, the more insightful story was unfolding elsewhere. While the tape was flashing green (at first Wise’s stock shot up 7%) and red (before later declining for a couple of consecutive days), management was hosting a special call for analysts and owners.

It turned out to be the single most illuminating corporate presentation Wise has delivered, maybe in second place behind the landmark 2025 Owners Day – a high-substance, 120-minute masterclass packed with raw operational data and profound strategic disclosures.

Listening to a call like that requires a completely different analytical filter. If you only look at headline narratives or commentary driven by share price developments, it is easy to move right past the immense fundamental transformations occurring inside this business and the massive opportunity ahead.

“We believe our US listing will help us accelerate our mission, helping to bring more of Wise to everyone in the US, as customers and as owners.” - Company press release

“But in the context of the enormous size of this market, we’re really only starting to scratch the surface. We moved less than 5% of the money moved by people and less than 1% moved in the small business market. So this means that overall, we’re less than 1% of this enormous $43 trillion market of cross-currency transactions. And it also means that there’s a huge opportunity ahead of us. We’ve gone from 0, 15 years ago to now moving $0.25 trillion, but we are building this network and the apps to move trillions.“ - Special call transcript

The presentation was dense with subtle nuances, regulatory engineering details, and competitive dynamics that you can only truly appreciate if you have been tracking Wise’s global infrastructure build for years. And that’s what I’ve been doing ever since the company went public on the LSE in 2021. And the stock hasn’t moved anywhere since fwiw:

It is precisely this gap between superficial commentary and deep, operational reality that makes Wise arguably one of the most misunderstood, high-quality future compounder stocks in the entire global market right now.

To cut through the market skepticism and map out exactly where this business is heading over the next decade, I have broken down the 10 most critical insights from that special call that every long-term investor needs to internalize.

So let’s get right to it!

Disclaimer: I own Wise shares. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

Insight #1 - More on the Stablecoin Disruption Risk

As described above, in my view, Wise remains one of the most deeply misunderstood high-quality companies in the global market today. Observers frequently look at the superficial layers of the business – treating it as just another sleek consumer remittance application that will bring take rates to levels where Wise will disrupt its own profit generation capabilities – while completely overlooking the monolithic, proprietary infrastructure humming beneath the surface.

"But if Wise keeps lowering prices, won't they run out of profit?"

Lately, especially in 2025, a new narrative has taken hold among skeptics looking to derail the investment thesis, and that is the supposed disruption risk posed by stablecoins. We have dissected this specific threat on the blog before, and I previously sat down to map out the mechanics of global liquidity in a comprehensive podcast episode with Mike from Money Flow Research. I’ll link all these pieces below:

• Will Stablecoins Kill Wise, Visa, and Mastercard? A Deep Dive into the Real Threat – and the Hype

• From Counter-Positioning to Being Counter-Positioned: Wise, Stablecoins, and the Psychology of Pivoting

• Link to Podcast Episode with Mike from Money Flow Research

The core argument from the bear camp is that blockchain architecture will render intermediaries obsolete by allowing value to transfer instantly across borders for fractions of a cent.

This narrative sounds convincing on paper, but it fundamentally misunderstands how global money movement actually functions. During Wise’s Nasdaq listing presentation, CTO Harsh Sinha directly confronted this crypto-native thesis, offering an analytical reality check that every serious investor needs to internalize.

Moving digital tokens between two crypto wallets is incredibly simple, yes, but the actual bottleneck of global commerce is not the token transfer itself. It is the friction of the real-world perimeter.

The true complexity of an international transaction is concentrated entirely in the on-ramp and off-ramp mechanics. People and businesses do not live, trade, or pay taxes in dollar-pegged digital tokens unless they happen to operate in a tiny, insular web3 sandbox.

As Harsh pointed out during the special call, “people and businesses want to use money in their local form.” They need to pay their local taxes in the United Kingdom or Brazil, settle domestic property transactions, and pay for university tuition.

“The real complexity arises when you actually have to on-ramp off-ramp these table cards to different currencies.”

This means that a stablecoin-based cross-border transaction is rarely a straight line. Instead, it typically requires a complex multi-leg execution sequence, often called a stablecoin sandwich. A user must convert their local fiat currency into a stablecoin, move the stablecoin across a blockchain network, and then convert that stablecoin back into the destination fiat currency via a local exchange or liquidity provider. Each leg of that sequence triggers financial crime screening protocols, compliance tracking, and foreign exchange conversion spreads. When you tally up the total structural friction, the economic argument for crypto rails completely falls apart. Harsh quantified this disparity clearly, noting that “most players in this space using the stablecoin route or stablecoin sandwich would charge anywhere between 100 to 200 basis points or more.”

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Compare that to Wise’s infrastructure, which charges a global average of just 52 basis points, and can drop below 20 basis points for large-volume corridors like Swiss Franc to British Pound transfers.

“… if you were to use stablecoins for doing cross-border payments, we’ve learned that the infrastructure we’ve built is by connecting local payment systems and direct connections that we’ve built, is is delivering a better price and speed than current stablecoin solutions can provide in this space. As we covered before, we charge 52 basis points on average.

And this is actually the global average. In some jurisdictions, if you were to move Swiss francs like CHF 1 million to GBP, we could get it as low as 20 basis points or even lower.”

The reason Wise can routinely outperform blockchain liquidity models is that it connects directly into domestic clearing systems. These massive local payment rails already process trillions of dollars in daily domestic volume, making them highly optimized and remarkably cheap.

Wise simply rides these massive local engines directly, bypassing the expensive intermediary spreads that plague crypto on-ramps.

The secondary argument for stablecoins is their utility as a capital flight hedge in inflationary environments. If you live in an economy where the local currency is rapidly losing purchasing power, holding a dollar-pegged digital asset is a rational defensive maneuver. Harsh acknowledged this macroeconomic reality, highlighting that “the Brazilian real has lost 15% against the USD in the last year,” which naturally drives local demand for foreign-denominated hedges.

Yet, the assumption that stablecoins are the only or best tool for this job is incorrect.

For the vast majority of non-crypto native users, a regulated multi-currency account is a vastly superior proposition. The Wise Account allows users to instantly hold 40 different fiat currencies at the click of a button, swap between them at the real mid-market exchange rate, and actively yield interest on those stable fiat balances without navigating the custody risks, smart contract vulnerabilities, or regulatory gray areas of decentralized finance. The company has already proven its ability to expand this framework into adjacent asset classes, having seamlessly integrated equities and money market funds into the core user interface over the past few years.

If stablecoins eventually achieve regulatory clarity and emerge as an efficient, compliant medium of exchange that users actively demand, Wise will simply add them to the platform as another standard asset class.

“But that said, that is the story today. We will continue to invest and see how this space evolves and as it evolves and if it does solve the problems for cross-commodity was for our customers in some regions, so maybe globally to make it cheaper and faster, we would, of course, use this technology. And the key thing here I want you to take away as the infrastructure we've built is extendable so that it'd be easy to add this.”

The primary takeaway for long-term owners is that Wise is completely agnostic to the underlying technology rail. Their proprietary software layer is entirely extendable. If public blockchain ledgers ever manage to outcompete domestic central bank rails on cost, compliance engineering, and raw speed, Wise will simply plug its global treasury engine directly into those networks.

Until then, their fifteen-year lead in regulatory licensing, domestic payment system access, and global compliance architecture remains an unmatched competitive moat. I am left with the exact same conviction that Harsh shared at the close of his presentation: “looking forward 10 years from now... I see most roads in cross-border payments leading to the Wise Infrastructure.”

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Insight #2 - Wise’s 15-Year Headstart?

When evaluating the global payments landscape, investors routinely crown Visa and Mastercard as the ultimate, untouchable monopolies.

It is an accurate assessment, of course. Two fantastic and incredibly “moaty” businesses. Their entrenched network effects are virtually impossible to dislodge.

Yet, I believe Wise is quietly emerging as another incredibly structurally advantaged, unassailable business in the payments sector – a sector not necessarily known for deep, impenetrable moats (with a few exceptions) – outside of those two card giants.

The source of Wise’s competitive advantage lies in the difficult-to-replicate process of bypassing the traditional correspondent banking system entirely. I think most investors glancing at Wise misunderstand this part.

During the Nasdaq presentation Q&A, David Scharf from Citizens Capital Markets pressed management on this exact topic, asking about the backlog of other remittance providers trying to replicate Wise’s feat of becoming a non-bank member of local domestic payment networks like ACH in the US, BACS in the UK, or Zengin in Japan.

“Wanted to follow up on the competition question. I mean at a high level, it seems like at the end of the day, the biggest differentiation for Wise as you bypass correspondent banks and became a nonbank member of individual payment networks. Can you speak specifically to first, just what are some of the hurdles and challenges for a nonbank to get accepted to a local payment network like ACH, BACS, [ Zengin ] And then secondly, since these payment networks by admitting you have sort of set the precedent for admitting a non-bank, are you aware of any kind of backlog of other remittance providers sort of seeking to ultimately embark on the same kind of integration.“

Founder and CEO Kristo Kaarmann’s response revealed the immense structural headstart Wise has and that younger FinTech upstarts AND legacy providers face. He noted that while Wise has been trailblazing through its first eight direct integrations, “in order to build up this network, it’s kind of not worthwhile doing just 2. You kind of need to invest behind doing the 30 or the 40 or the 50.”

This reality completely changes how we think about competition. Gaining direct access to a central bank clearing system as a non-bank financial institution is a regulatory and technical nightmare. It requires YEARS of intense local lobbying, securing bespoke financial licenses, maintaining pristine compliance frameworks, and embedding custom physical and digital infrastructure directly into domestic clearing houses. Doing this in a single country takes years of focused effort. To build a globally competitive cross-border network, a competitor cannot just succeed in Japan or the UK – they have to repeat this agonizing process dozens of times across the globe.

And importantly, as Kristo bluntly observed, “none has seriously started yet. So it’s hard for me to comment how far behind they will be. But it’s an enormous investment of time, efforts and the kind of expertise that you need to build up.” If no one “has seriously started yet,” Wise, which was founded in London in January 2011, has a 15-year headstart!

Insight #3 - On the SES Playbook

This fifteen-year operational lead is further reinforced by an exceptional economic model and corporate DNA known as the scale economies shared (SES) framework.

In a standard business model, growing transaction volumes should yield fatter profit margins as operating leverage dynamics are harvested that are promptly pocketed by executives and shareholders.

But that’s a rather vulnerable, and arguably short-sighted model to run a payments business as PayPal has learned the hard way. For years, PayPal’s branded checkout button commanded premium take rates – historically hovering around 2.9% plus $0.30 per transaction. This yielded strong margins because merchants paid a premium for PayPal’s trusted brand and built-in buyer base. However, aggressive unbranded competitors like Adyen and Stripe disrupted this dynamic. Instead of relying on a consumer-facing button, these processors embed directly into a merchant’s white-label checkout, driving massive volume by undercutting PayPal on price. Unbranded processing operates on razor-thin margins, often charging large enterprise merchants take rates well below 2%, and sometimes just basis points above interchange fees. To defend its market share, PayPal had to aggressively push its own unbranded solution, Braintree. But this strategic pivot forces a brutal trade-off: trading its high-margin branded volume for low-margin unbranded volume, effectively neutralizing the very operating leverage that executives and shareholders once took for granted.

And here comes Wise! Because Wise flips this script entirely.

They treat their massive infrastructure as a utility, systematically returning the cost savings achieved through higher volumes directly back to the customer in the form of lower fees and faster speeds.

This creates an agonizing dilemma for any potential rival trying to catch up. If a well-capitalized competitor decides to spend the next decade and hundreds of millions of dollars building direct integrations into global payment systems, they will eventually emerge into the light only to realize that Wise has already used its massive scale to cut global average prices down to 52 basis points or lower. The competitor, lacking Wise’s multi-billion dollar volume and the underlying infrastructure, regulatory licenses, etc., etc., to subsidize their fixed operational overhead, would have to price their transactions at a devastating loss just to match Wise on day one. Wise has effectively commercialized its cost structure into an aggressive defensive weapon, starving out potential rivals before they can even achieve the scale and the infrastructure buildout required to compete.

When you blend this scale economies shared flywheel with the sheer operational friction of global regulatory licensing, it becomes incredibly difficult to envision any traditional competitor ever catching up.

The structural moat is simply too wide. Barring a radical, black-swan technological regime shift – such as the stablecoin disruption risk we already debunked – Wise’s position at the center of global cross-border rails looks increasingly bulletproof.

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Insight #4 - Measuring the Scale Economies Shared Playbook: Nick Sleep’s Formula

To truly appreciate the strength of this operational framework, we might look past vague corporate buzzwords and actually measure the financial footprint of Wise’s economic engine.

Most of my readers are likely familiar with Nick Sleep, who famously generated a 921% return over 13 years at Nomad Investment Partnership by mastering a counter-intuitive concept: the aforementioned idea of scale economies being shared.

To quantify this dynamic, Sleep invented the robustness ratio, a metric designed to calculate exactly how much economic value a company passes back to its customers relative to the residual profit it retains for its own shareholders.

When Sleep ran these calculations on Costco, he discovered the wholesale retailer operated at a ratio of roughly 5:1. For every single dollar Costco kept in profit, it left five dollars in savings inside the consumer’s wallet compared to standard supermarket prices.

Costco is, in fact, considered the gold standard of scale economies shared.

Yet, Wise is weaponizing this exact formula today at an even higher clip, a reality made clearly measurable by the fresh financial disclosures from their recent Nasdaq listing.

When I first ran these calculations on Wise two years ago using their fiscal year 2023 disclosures, the results were staggering. Back then, the network saved its cross-border users £1.5 billion while retaining just £114 million in net income, yielding a jaw-dropping robustness ratio of 13.2. It was a textbook manifestation of a management team aggressively prioritizing multi-decade customer goodwill and terminal market share over short-term earnings optimization.

Updating the math with the preliminary fiscal year 2026 data allows us to see how that structural defensive perimeter is tracking. According to the listing presentation, Wise generated $3.3 billion in direct customer savings compared to traditional market alternatives.

Meanwhile, the business pulled in $2.5 billion in preliminary total net revenue. If we apply a net income margin of roughly 18% based on their first-half financial profile, Wise generated an estimated $450 million in full-year net profit for its equity owners.

Placing those updated metrics into the formula – dividing the $3.3 billion in quantified customer savings by the estimated $450 million in total shareholder profit – leaves Wise with a current aggregate robustness ratio of 7.33.

On a superficial level, an analyst might glance at this shift from 13.2 down to 7.33 and assume the company’s customer centricity is beginning to erode. That conclusion would be entirely incorrect, as it overlooks a massive structural evolution in the revenue mix.

Back in the 2023 fiscal year, cross-border payments was the undisputed primary engine of the firm (around 70% of total revenue). Fast forward to today, and core cross-border transaction fees have stepped down to comprise just 52% of the total revenue mix. The remaining 48% is now driven by the rapid scaling of adjacent ecosystem products, specifically international card services and net interest income from customer balances.

This product diversification means that looking at the aggregate company-wide net income distorts the true underlying efficiency of the payment rails. The $3.3 billion in customer savings highlighted by management refers specifically to the efficiencies achieved on the cross-border transaction side of the house. If we isolate that specific segment, assuming a standard 18% profit margin on cross-border operations and halving the retained net income to align with its 52% revenue contribution, the true transaction-level robustness ratio remains comfortably in the exact same double-digit territory as before.

Even if you choose to take the more conservative, consolidated company-wide ratio of 7.33, the underlying economic reality remains an absolute powerhouse. It demonstrates that for every single dollar Wise keeps in net profit across its entire global enterprise, it actively leaves more than seven dollars (or up to $14) in its users’ pockets.

The best part is just ahead — unlock the full post to continue (insights #5-10).

Investing is the one domain where better thinking compounds. If this intro gave you new insights, the full piece goes even deeper. A paid subscription is an investment in your decision-making process – and your returns.

PS: Using the app on iOS? Apple doesn’t allow in-app subscriptions without a big fee. To keep things fair and pay a lower subscription price, I recommend just heading to the site in your browser (desktop or mobile) to subscribe.

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Sure, Mercado Libre is also facilitating transactions, but on top of this, it has built, and still is in the process of building, an entire digital economy through its synergistic pillars: the marketplace itself, the fintech platform Mercado Pago, the logistics network Mercado Envios, and the advertising arm Mercado Ads.

Together, these elements create a self-reinforcing flywheel that few companies in emerging markets can rival.

What fascinates me most is the sheer runway for growth. E-commerce penetration in Latin America still lags the US, UK, and China by roughly half, while a vast swath of the population remains underbanked or unbanked. Mercado Libre has positioned itself to capture both markets. Its fintech arm, Mercado Pago, leverages proprietary data and machine learning to extend credit to underserved populations – replacing the need for traditional collateral and turning users’ digital footprints into financial access. Meanwhile, the logistics network now reaches over 94% of the population in key markets, enabling deliveries that brick-and-mortar retailers struggle to match.

Moreover, Mercado Libre’s management doesn’t chase short-term profits. Their “time arbitrage” strategy is clear: invest boldly now to cement long-term dominance. The mantra “The best is yet to come” isn’t marketing fluff – it’s a strategic declaration.

This approach has allowed MELI to compound value at an extraordinary pace. Even with the current 37% drawdown and a stock that has essentially gone sideways over the past five years, …

… it’s remarkable to remember that over nearly twenty years, Mercado Libre has delivered an average annual return north of 24%, far outpacing global indices.

Yet dominance has its challenges. Chinese entrants like Temu and Shein are pressing into Brazil and Mexico with aggressive pricing and logistics models. Singapore-based Sea Limited's Shopee is also actively competing with Mercado Libre in Brazil. Furthermore, regulatory scrutiny is intensifying in key markets, particularly around anti-competitive practices and data governance. The platform, too, faces reputational pressure from counterfeit products and disputes over seller accountability.

Still, Mercado Libre’s network effects, data-driven lending, and logistical moat give it a resiliency few competitors can match, even in the face of Latin America’s macroeconomic volatility.

Did I catch your interest yet? This was only the start, as this post is a deep dive into Mercado Libre – not just as a stock, but as a business, a strategy, and a regional powerhouse. I’ll explore how it built its moat, how management thinks about growth, the risks it faces, and ultimately, whether the stock still deserves a place in a long-term portfolio.

Disclaimer: I own Meli shares. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

High-Level Thesis: “Bam Bam Bam Bam Bam”-90 Second-Hypothesis

As always, let’s return to Bill Miller, who has long emphasized that portfolio managers have ultra-short attention spans. He recalls how Peter Lynch would literally set an egg timer for 90 seconds during stock pitches – forcing the analyst to get to the point fast. As Miller put it: “The best thing to say is, ‘I want to talk to you about [stock]. It is at $X. Here are the five reasons why I think it is worth $Y.’”

Following that philosophy, I want to give you the quick Mercado Libre hypothesis. Admittedly, this one is longer, and I’m playing around with different formats here. I went with a similar format in my Nintendo write-up, where I try to condense down the core thesis to the most important pillars (I ended up putting together eight “BAMs” in this write-up; but one could certainly add more), and then couple this with a very thorough business model overview, thoughts valuation, plus other relevant findings.

Mercado Libre (Ticker: MELI) is trading around $1,556 as I type this, down another 4-5% after the 10% decline post Q1 results, as highlighted, even as net revenue growth reaccelerates to 49% (its fastest growth in four years). I believe it might be an interesting buy for the following five reasons:

• Bam 1 – Ecosystem Control: It controls Latin America’s leading integrated commerce and fintech ecosystem, creating a self-reinforcing flywheel where marketplace traffic feeds payments, and payments feed deposits and proprietary credit data, and traffic feeds its advertising business, and the generated profits are reinvested into its infrastructure and logitiscs.

  “Mercado Libre’s logistics network is one of our strongest competitive advantages. We deliver a world-class experience for buyers, driving greater traffic, conversion, and sales for sellers, along with higher NPS and improved cost efficiency. We continue to innovate and offer multiple delivery options, such as Next Day Delivery, Meli Delivery Day, and Meli Places“ - Company website

  

  

• Bam 2 – Riding the Secular Growth Runway: One of the most compelling reasons to consider Mercado Libre is the sheer size of the opportunity in Latin America. While e-commerce is a global trend, the region remains roughly half as penetrated as more mature markets like the U.S., UK, or China.

  

  Regional e-commerce penetration sits in the mid-teens as a share of total retail, compared with roughly 15-25% in the U.S. (depending on which analysis you look at) and over 35% in some Asian countries. Management believes the market could more than double – in fact, LatAm e-commerce has been the fastest growing market recently – as the region catches up, meaning the growth runway is enormous.

  

  The habit of online shopping itself is still in its infancy. The average American makes 41 online purchases per year; in Latin America, that number is just seven.

  “We have a once-in-a-generation opportunity to transform how hundreds of millions of Latin Americans shop, pay and access financial services. In commerce, the region is at an early stage of a shift that markets like the US are much further along. The average American makes 41 online purchases per year whereas the average Latin American makes just 7. Our own buyers average 11 – ahead of the region, but still a fraction of what we expect over time as online shopping becomes a habit for many more people.“ - Q1 Letter

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• Deep Dive: Tiger Brokers ($TIGR)

• Revisiting UP Fintech ($TIGR)

• 2026-01: Investing in China When the Rules Are Changing: Opportunity, Illusion, and Tail Risk

• The Most Absurd Stock Valuation in the Market Right Now?

• Robinhood’s Entry into Singapore: Assessing the Competitive Threat to Tiger Brokers and Futu

Despite all the noise surrounding anything China-related, and despite the underwhelming share price performance, I still believe it is one of the most inefficiently priced stocks in all of Asia right now.

Most investors see a volatile fintech play. The “Robinhood of Asia,” which completely misrepresents the business we are looking at.

I see something else entirely. A brief discussion in our community this morning sparked a new perspective for me, which I wanted to write about.

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Tiger being a prime takeover target at a roughly $1B market cap has crossed my mind before. But today, for some reason, I was immediately reminded of a valuation framework I applied to Edenred recently (in the article linked below; that buy worked out quite well from those levels so far).

In that analysis, I argued the market was completely ignoring the replacement cost of the underlying network (merchants, users, corporate clients).

It turns out that when you apply that same logic to Tiger, the math becomes similarly impossible to ignore.

This is not a traditional discounted cash flow exercise. It is a look at what the business is actually worth to a strategic buyer today. It’s another lens to illustrate the massive mispricing in Tiger’s stock.

If a massive financial institution wanted to replicate Tiger’s footprint in Singapore or Hong Kong, they couldn’t just snap their fingers. They would have to spend a lot of money (and I’ll share my best estimate in this analysis). They would have to fight for every single user.

This replacement cost lens provides a massive, invisible floor for the stock that the current market price seems to completely disregard. I also looked at churn and valued the Up Fintech funded account base on an LTV basis. This was fun. I hope you enjoy the analysis.

Disclaimer: I own a lot of UP Fintech stock (relative to the rest of my portfolio). The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

If you’re unsure about what you get, here’s an overview of some of the companies we covered in a little over a year:

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The acquisitions of foodpanda Taiwan and Stash Financial were both announced in Q1 2026, but if you check the latest Q1 earnings, you won’t see these deals reflected anywhere in revenue yet.

Both are still awaiting regulatory approvals, and Grab categorizes them as “planned acquisitions” in the earnings report; and thus, they are also not reflected yet in the full-year 2026 revenue guidance of $4.04B – $4.10B.

At first glance, it’s tempting to ignore these deals when thinking about Grab’s valuation. After all, the revenue hasn’t hit the books, and the balance sheet hasn’t felt the full impact – and what if they won’t be approved by regulators in the first place? In 2025, Uber ended its ambitions of acquiring Delivery Hero’s foodpanda in Taiwan, roughly three months after Taiwan’s antitrust regulator blocked the deal (citing competitive issues).

But that would miss the bigger picture. As investors, we are required to project the future, and each acquisition adds a meaningful slice of revenue and, in the case of Stash, a high-margin, subscription-based business that could reshape how to think about Grab’s overall revenue, margin, and growth profile.

The numbers tell part of the story. Foodpanda Taiwan closed at $600 million in cash and delivered roughly $1.8 billion in 2025 GMV.

Stash, with a 50.1% stake priced at $425 million, manages over $4 billion in assets under management.

Both deals are sizable, but the more interesting question is what they contribute to Grab’s future revenue once fully integrated.

This is what I was thinking about over the past weekend, and I put together this write-up. Because by ignoring these acquisitions, the market could be underestimating the scale and quality of revenue that’s about to hit the company – very soon!

In the sections that follow, I’ll break down the projected revenue contributions, how deal-related cash outflows affect Enterprise Value estimates, and how to think about Grab’s valuation after making some key adjustments.

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The full story starts here:

The rest of this post covers TAM penetration and market share dynamics, the identification of key growth drivers going forward, and two valuation approaches. If you’re serious about sharpening your investing edge, the full post (and all my previous premium content, including valuation spreadsheets, deep dives (e.g. well-known mid- and large caps such as LVMH, Duolingo, Meta, Edenred as well as more hidden gems such as Tiger Brokers, Digital Ocean, Ashtead Technologies, InPost, Timee, and MANY more) and powerful investing frameworks are just a click away. Upgrade your subscription, support my work, and keep learning.

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Imagine two Harvard Business School students, sitting together, brainstorming ideas that would go on to reshape the landscape of Southeast Asia’s transportation, food delivery, and financial services.

In 2012, Grab was born from a simple, but ambitious business plan aimed at tackling one of the most unreliable and unsafe taxi systems in the world – Malaysia’s. Fast forward to today, and Grab has evolved from that small idea into effectively the “operating system” for daily life in (most of) Southeast Asia.

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And Grab is not just another app. In Southeast Asia, Grab is more than a name – it’s become a verb for many. People say, “It’s raining; let’s just Grab to the mall instead of walking” or “I’m too tired to cook, should we Grab some Thai food?” without thinking twice. And it doesn’t stop there – Grab has mastered the art of creating habits, seamlessly integrating itself into the daily lives of millions of people who now rely on it for everything from getting from point A to point B to paying bills to online shopping.

Grab’s story is also a survival narrative that most tech companies would envy. In 2018, Grab managed to outmaneuver the global giant Uber in its home region and, eventually, when Uber basically gave up, acquired Uber’s Southeast Asian operations in a unique deal. That was a pivotal moment in Grab’s history, solidifying Grab’s dominance and ensuring that Uber’s exit from Southeast Asia would make Grab the undisputed leader in ride-hailing and delivery services.

Fast forward to 2025, and Grab hit a major milestone: profitability. After years of burning through capital in pursuit of growth, Grab reached its first full year of net profit in 2025 – $200 million in the black. This marks a significant inflection point, where the company is transforming from a “growth-at-all-costs” startup-like-business into a more disciplined, profitable growth powerhouse with a clear path to long-term value creation.

But here’s the thing: Grab’s story is far from over. In fact, despite its massive scale already – Grab is a multi-billion-dollar company today –, the company is still just scratching the surface. Grab’s Monthly Transacting Users (MTUs) currently represent just 6% to 7% of the Southeast Asian population. That means there’s a huge growth runway ahead – roughly 94% of the market is still untapped.

What’s even more exciting is Grab’s ecosystem flywheel. About two-thirds of Grab’s users engage with two or more services, and for those using three or more services, the one-year retention rate is an impressive 88%. When customers stay, they not only use more services, but they spend more, too. This is a growth driver that keeps feeding itself.

And then there’s Grab’s cutting-edge use of AI-driven efficiency. By utilizing proprietary AI models, Grab has been able to double its revenue from 2022 to 2024, all while keeping headcount flat. Over 90% of mobility rides are now dispatched using AI, showcasing just how much the company has automated its operations.

On the financial side, Grab has successfully expanded into digital banking. In just three years, Grab amassed 7.4 million deposit customers across its three digital banks, and its loan portfolio crossed the $1 billion mark in 2025 and is expected to exceed $2 billion by 2026 year-end.

And as if all of this wasn’t enough, Grab is setting its sights on global expansion. In early 2026, it completed the $600 million acquisition of foodpanda Taiwan, signaling the company’s intention to push beyond Southeast Asia and tap into new, high-value markets. This marks the first major step in Grab’s journey toward becoming a truly global player.

Of course, this is just the tip of the iceberg. Grab is positioning itself for the future with ambitious plans around autonomous vehicles (AVs) and scaling its financial services. The company is constantly innovating, finding new ways to integrate its services and make the lives of its users easier and more connected.

But what does this mean for investors? Can Grab sustain its growth? What challenges lie ahead? And most importantly, what kind of valuation can you expect as this story unfolds?

As you can tell, Grab is a fascinating business to dive into. So let’s do exactly that and dive deeper into Grab’s history, business model, management team, moat stack, its future, and the growth drivers that will continue to propel this Southeast Asian juggernaut forward.

Are you excited yet? Let’s dive into the first part (11,500 words) of this deep dive.

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Disclaimer: I own Grab shares. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

High-Level Thesis: “Bam Bam Bam Bam Bam”-90 Second-Hypothesis

As always, in the style of legendary investors like Bill Miller and Peter Lynch, I’m attempting to give you the quick 90-second rundown on Grab Holdings (GRAB) – what’s the investment hypothesis (which we are then going to test throughout this deep dive?

Right now, the stock trades around $3.6, a significant pullback from its 2021 debut. While that might sound concerning, the real story lies in the business transformation that’s been happening under the hood (i.e. not reflected in the share price).

Here are the five reasons why I think Grab is an interesting opportunity:

Via the link below, you get access to a rare 20% discount on the annual plan (limited to the first 5 who take it). The 20% discount is then locked in forever, meaning it applies to all future payments as well.

This is where it gets interesting.

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As a member, you get:

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On one hand, the latest results in Grab posted (Q1 of FY26) reveal a business that is firing on all cylinders, delivering a massive $120 million profit for the period.

“Q1 is off to a fantastic start for us across all the financial fundamentals of our business.“ - Q1 Earnings Call

On the other hand, a sudden political intervention from Jakarta and a bruising regional oil shock have created near- and medium-term challenges.

President Prabowo Subianto’s announcement of a commission cap on ride-hailing services – effective immediately and specifically targeting the “ojol” motorcycle sector – briefly wiped 7% to 8% off the market capitalization as the news broke. When you combine that with a fuel crisis that saw prices spike sharply across the region in March, the bearish narrative had plenty of ammunition.

Market volatility is nothing new for Grab shareholders. If you look at the historical chart, the story is one of persistent struggle against gravity. We are, in fact, currently hovering around a critical support line that has been tested repeatedly over the last twelve months.

The technical picture remains bleak for long-term holders. A negative five-year CAGR is a tough pill to swallow for anyone who bought into the initial listing hype.

However, price and value are frequently distinct entities. While the stock initially buckled under the weight of the Indonesian news and the fuel headwinds during last week’s trading sessions, today’s pre-market reaction – up roughly 2% – suggests a more nuanced interpretation might be beginning to take hold.

This feels like a defensive posture. It is the sound of investors weighing a localized regulatory headwind and a short-term margin squeeze against a group-level performance that, frankly, exceeded some investors’ expectations.

Before I peel back the layers of this quarterly report, I recommend revisiting my broader thesis. You can find the foundational details in my Grab Holdings Deep Dive Series (four parts), where I explore the business model, the ecosystem’s structural moats, and the long-term unit economics of the superapp model, the management team, and the stock’s valuation.

What I will discuss in this analysis is that, personally, I view the “Indonesia shock” and the fuel crisis not as terminal blows, but as “Darwinian filters.” The panic selling we saw earlier this week stems from Indonesia’s significant footprint. It accounts for roughly 21% of group revenue, with mobility specifically representing 36% of that total. A mandated drop in platform commissions from 20% to a mere 8% for motorcycle rides is, on the surface, a brutal hit to the top line. But as I’ll explore in the coming segments, the mechanical reality is far more complex.

I am increasingly convinced that we are seeing a “scale economies shared” business in the making. Much like the regulatory shifts that have historically impacted companies like Edenred, these interventions – alongside the exogenous pressure of rising fuel costs – often end up entrenching the dominant player. When margins are squeezed by decree or by the pump, only the most efficient, best-capitalized, and technologically superior operators survive.

The question is whether the market can look past the immediate revenue “shock” and see the reinforced moat being built underneath. I think we are seeing a fundamental decoupling of operating results from share price sentiment.

I find myself surprisingly relaxed. The runway is long. The flywheel is accelerating. And as we transition into the granular details of the Q1 results, I want you to keep one thought in mind: in a world of 8% commission caps and expensive fuel, the only thing that matters is who has the lowest cost of operation. Right now, that is Grab.

Disclaimer: I own Grab shares. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

Q1 2026 Highlights: Seventeen Quarters of Momentum

Usually, the first quarter in Southeast Asia is a period of “holiday hangovers” where the festivities of Lunar New Year and Ramadan dampen both delivery demand and driver availability.

“… the confluence of Lunar New Year and Ramadan within the first quarter, both in the first quarter this year, creating acute supply pressures as usual during those 2 festive periods.“ - Earnings Call

Yet, the latest Grab results tell a different story.

In Q1, Grab reached an all-time revenue high of $955 million, a 24% leap year-on-year (19% YoY on a constant currency basis) that suggests the platform is still finding new pockets of demand.

Group MTUs increased both YoY (16%) and QoQ to 52 million.

In addition, we are looking at the seventeenth consecutive quarter of Adjusted EBITDA growth. This is a testament to a compounding machine that has finally learned how to generate profits.

“As we look ahead to the rest of the year, we remain committed to delivering durable, profitable growth while standing shoulder-to-shoulder with our communities — leaning deeply into AI to outserve our users with hyper-personalized experiences, while simultaneously unlocking more sustainable earnings opportunities for our ecosystem partners.“ - Anthony Tan

Grab posted $120 million in profit for the period. The business is now self-sustaining. It generated $98 million in Adjusted Free Cash Flow this quarter alone, pushing its trailing twelve–month total to a very healthy $489 million (remember that management aims for $1.2 billion in FCF by 2028, so we’re very well on track).

For those of us who remember the days of billion–dollar annual burn rates, this feels like a historical pivot point.

This profitability is not a result of “starving” the ecosystem. On the contrary, user engagement is at record levels. As mentioned, Monthly Transacting Users (MTUs) grew 16% to 51.6 million, and the On-Demand GMV accelerated to $6.1 billion.

I find the segment–level efficiency particularly revealing. In the Deliveries division, GMV reached $3.9 billion despite the festive season. This was driven by a clever “barbell” strategy. On one end, affordability initiatives like Saver Deliveries and Group Orders brought in the volume. On the other hand, the segment’s Adjusted EBITDA margin improved to 2.3% of GMV (from 2%). It seems like they are capturing the budget–conscious user without sacrificing the overall margin profile.

Mobility followed a similar path, with GMV reaching $2.2 billion. Interestingly, transactions grew faster than GMV at 28%, indicating that the service is becoming more accessible and high–frequency rather than just more expensive.

They are maintaining a steady 8.9% Adjusted EBITDA margin here, even while navigating the sharp regional fuel crisis that could have easily derailed a less efficient operator.

On the autonomous vehicle side of things, Grab is clocking 40,000 autonomous kilometers in a controlled Singapore residential estate, learning how to integrate hybrid fleets of human and AI drivers. They want to be the most experienced operator in Southeast Asia, ready to plug in any AV software player when the technology and the regulators are finally ready. However, as noted on the earnings call,

“… the adoption of AVs in Southeast Asia remains nascent. We see governments and regulators taking a measured approach in implementing AVs, which we believe is the right approach for our region. We will continue to incorporate AVs in our platform at a pace that reflects the trust communities place in us and our emphasis on customer safety. To be clear, we do not expect anyone to be able to deploy impactful disruption to our human driver network in the near future.“

If there was a “shock” this quarter beyond the Indonesian regulation, it was the explosive growth of Financial Services. The $1 billion milestone in quarterly loan disbursals is hard to ignore.

That is a 67% year-on-year increase.

More importantly, the Gross Loan Portfolio has swelled to $1.4 billion – even though QoQ growth was more modest – while credit discipline and credit quality actually improved. They are lending into their own ecosystem – to drivers and merchants, and consumers (app users), all of which they already know – which creates a massive information advantage for their underwriting AI.

According to Grab’s management team, “more than 1/3 of that incremental revenue dropped straight to the bottom line for Financial Services, demonstrating that operating leverage that we've been speaking about.“

So this segment is on a clear trajectory to break even in the second half of 2026.

“We also reiterate our expectations to exit 2026 with a Gross Loan Portfolio of over $2 billion and achieve Segment Adjusted EBITDA breakeven in the second half of 2026 for the overall Financial Services segment.“ - Earnings Call

It is becoming a legitimate third pillar for the group, not just a loss–leading side project.

Furthermore, management is increasingly talking about the “Grab Intelligence Layer” as their ultimate competitive moat – 20 billion transactions of historical data built over 14 years are hard to replicate.

“We capture highly localized real-time data on how over 50 million users and partners interact across 8 markets […] We feed these multimodal signals, from hyperlocal mapping to in-store payment terminals, into our AI Intelligence Layer to optimize our marketplace efficiency, from dynamic pricing to last-mile routing. Crucially, we paired this data advantage with our massive through physical fulfillment network. That closed loop system or ecosystem is our biggest competitive moat, which is why our AI investments translate directly into measurable financial outcomes.“ - Earnings Call

For instance, consider the “Turbo” mode for drivers. Those who opted into this AI–powered optimization saw a 23% uplift in earnings per hour. It is a simple equation: more efficient routing means more jobs per hour, which protects driver livelihoods even when fuel prices are at record highs (here Grab tried to cushion the impact by deploying targeted fuel rebates and proactively engaging with regulators across their markets).

“This has contributed to Mobility transactions growth outpacing Mobility GMV growth, with transactions up 28% YoY.“

On the fuel crisis subject, to provide some more context, management also said the following on the call:

“In the medium term, we are committed to accelerate the EV transition to reduce our driver partners exposure to fuel price volatility. So for example, in Thailand and Philippines, we have a drive-to-own program that connects our drivers with OEMs like BYD and GAC, where we have deals of up to 70,000 vehicles available across 6 markets with accessing to financing so they can own those more easily.

In Vietnam, we have secured preferential charging rates also through our charging network partners, EBOOST and Charge+, which helps our drivers in the transition also. And finally, in Thailand, I am pleased to say that our total fleet supply has crossed 30,000 EVs on the platform and demand for those from consumers is also strong, where they can select that EV option, and that demand has grown by over 35% year-on-year. So this fuel crisis has become an opportunity in the sense that it helps us to accelerate that EV transition.“

For merchants, the AI Assistant is driving a 15% GMV uplift for those who engage with it.

The high-margin ad business is also developing favorably: average advertiser spend grew 44% YoY as merchants see increasing measurable returns. However, as @the_zack_zhu shared on X (see overview below), the number of active advertisers only grew 5%, and it remains to be seen whether Grab has already hit a structural ceiling or whether this is just a temporary slowdown (I’m leaning towards the latter).

Overall, Grab is “winning” because they are out-serving the competition by making the platform more profitable for the people who actually do the work.

The strategic horizon is also expanding. The acquisition of foodpanda’s business in Taiwan is a bold move into a high–ARPU market outside their traditional Southeast Asian stronghold. And importantly, the Q1 figures and the outlook do not include revenue from both the Stash and Foodpanda Taiwan acquisitions.

The outlook remains remarkably steady despite the near-term noise. Grab reiterated its full–year 2026 guidance, targeting revenue up to $4.10 billion and Adjusted EBITDA as high as $720 million.

As readers of my initial deep dive know, they are also putting their money where their mouth is with a $500 million share repurchase agreement.

“In March 2026, we entered into an accelerated share repurchase agreement and a contingent forward purchase agreement to repurchase $250 million and up to $150 million, respectively, worth of Class A ordinary shares, as part of our previously announced $500 million share repurchase programme approved by the Board of Directors in February 2026.“

At the same time, it’s important to note that nonetheless, the basic and diluted shares have increased both year-over-year and quarter-on-quarter.

However, management added some more nuance on this subject during the call:

“So a total of $400 million has been accelerated, which means only in the market for 5 to 5 trading days in Q1 itself. So you can’t look at it in isolation. Now both these programs are expected to be executed over the next 4 months. So I’ll share a lot more in the next quarterly earnings when we look at the Q2 results. Now in terms of share count, it would have amount to roughly around 2% of our total share count, which will more than offset for the dilution from stock-based compensation. So that’s how we’re viewing it. As a reminder, there’s still another $100 million left to go in the share buyback program, and we’ll continue to have discussions around capital allocations with our Board.“

The Indonesia Shock: Regulatory Caps and Its Implications – Is the Grab Thesis Now Broken?

Indonesia, one of Grab’s largest and most important markets, just threw a curveball at investors. In early May, the government introduced price caps on ride-hailing fares through Presidential Decree No. 27/2026, aiming to protect drivers and curb rising ride costs for consumers.

On the earnings call, management clarified that the regulations will specifically target the “ojol” (short for ojek online) motorcycle sector.

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Over the years, it has weathered near-bankruptcy, transformed from a niche card business into the world’s leading entertainment company, and solidified its place as a titan of the gaming industry.

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What’s most striking, though, is how Nintendo continues to reinvent itself while staying true to its core philosophy: long-term survival over short-term gains.

Fast forward to 2025. The Nintendo Switch 2, launched with skepticism from critics, has shattered all expectations. It has become the fastest-selling console in history – 3.5 million units sold within just four days, 15 million in six months.

This is a company that’s not just surviving but thriving, breaking records and pushing boundaries.

And of course Nintendo’s recent success is not just about the recent hardware sales records – if anything, hardware is the enabler of the broader Nintendo thesis –; no, Nintendo has become a self-funding marketing machine. The success of The Super Mario Bros. Movie, which grossed over $1.36 billion, directly boosted game sales, essentially turning its own movies into profit-generating advertisements.

This is the kind of business model that’s rare in any industry.

Perhaps most impressive of all is Nintendo’s $13-14 billion fortress balance sheet. With zero long-term debt and a robust cash position, the company has the freedom to weather any storm and invest in its future, whether that’s through new IP or expanding its already vast gaming ecosystem. Add to that its 400 million Nintendo Accounts, ensuring customer retention across platform generations, and the company is in a much stronger position than it was during the cyclical “boom-bust” hardware cycles of the past.

From a strategic point of view, Nintendo is also positioned well. While Sony and Microsoft continue to duke it out in the performance arms race, Nintendo has carved out a unique niche, competing on intuitive gameplay and portability, not raw hardware specs. This deliberate choice has given Nintendo a near-unassailable lead in the family-friendly gaming space, where it faces little direct competition.

In this post, I’ll explore how Nintendo’s unique approach to business, combined with its world-class intellectual property, gives it an edge that few companies can match. From the fastest-selling hardware in history to a growing digital ecosystem and unparalleled financial stability, Nintendo is shaping up to be one of the more interesting opportunities in the entertainment sector. What makes the setup especially compelling right now is the disconnect between the business and the stock. Despite the strong fundamental backdrop, the shares have recently seen a drawdown of roughly 50%, now trade about 40% below the level around the Switch 2 release, and have effectively round-tripped back to 2020 levels.

To me, that is exactly where things start to get interesting. So stick around – I’ll show you why I believe the market is missing the full potential of this global powerhouse.

High-Level Thesis: “Bam Bam Bam Bam Bam”-90 Second-Hypothesis

Nintendo is currently undergoing a massive growth inflection point that the market is still (or once again?!) mispricing as a standard, legacy hardware cycle.

“Case in point, this is now the fourth time this cycle that false Nintendo narratives have been proven wrong.“ - Ryan O’Connor

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I always spend a considerable amount of time tracking the prices of some of the world’s most dominant businesses that every once in a while trade at valuations that seem completely disconnected from their long–term earning power trajectories.

This post is a collection of my notes on five specific names that have moved to the very top of my watchlist. For those new here: I’m not interested in chasing temporary bounces or playing for a quick relief rally. Instead, I want to explore why the “competitive advantage period” (CAP) for these firms is likely much longer than a standard discounted cash flow model would ever suggest. If you follow the logic of the recent Mauboussin research on this concept, you know that the true value of an enterprise lies in the “how long” part of the equation – how long a company can maintain its return on capital before the inevitable regression to the mean.

Arguably, the current opportunity set is much broader than many macro and market commentators make it seem. It isn’t often that you get a chance to buy into fortress–like moats when the sentiment is this sour. Whether it is a luxury icon caught in a currency storm, a real estate gateway navigating a cyclical slump, or a mission–critical software provider being repriced as a commodity,

For the five names I’m presenting today, the aforementioned CAP period appears to be significantly underestimated by the current share prices. Hence, I believe the recent drawdowns might be offering a rare window for patient, long–duration capital and deserve your attention too.

Disclaimer: The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

#1 – Boston Omaha ($BOC)

Boston Omaha is a multi-segment holding company and capital allocator that functions like a heavy-duty train powered by three distinct locomotives: outdoor advertising, high-speed broadband, and surety insurance. Founded in 2015 through the recapitalization of a small real estate shell, the company has stayed remarkably disciplined. Its primary mission is simple. It aims to grow intrinsic value per share by deploying capital into asset-heavy businesses that generate durable, predictable cash flows. Think of it as a vehicle designed to compound wealth slowly but surely through essential infrastructure.

The competitive moats here are deeper than the current market price suggests. In the billboard segment, the moat is largely regulatory; getting permits for new signs is notoriously difficult, making existing faces valuable local monopolies. Meanwhile, the broadband division focuses on fiber–to–the–home in underserved markets, creating a “first–in” advantage that is incredibly hard for competitors to displace economically. Despite these defensive qualities, the stock has been hit hard. It currently sits roughly 70% below its all-time highs reached in 2021. For a business focused on long-term compounding, this level of detachment from previous valuations is striking.

Recent developments suggest management is leaning into this disconnect. I’m particularly focused on the $30 million share repurchase program adopted late last year–a significant move for a company that historically preferred using its cash for new acquisitions.

“Our approach will be opportunistic and disciplined: we will only buy back shares when we believe they trade significantly below our conservative estimate of intrinsic value, and when doing so makes more economic sense than deploying capital into our existing businesses or potential acquisitions. Repurchases are also dependent on our excess cash availability at any given time. Shareholders should expect any repurchases to be lumpy in their timing because of the above factors, but also subject to volume and other restrictions on such a program imposed under federal securities laws and our limitations on repurchasing shares during blackout periods.“ - 2024 letter

On the operational side, the broadband segment recently secured approximately $37 million in federal ReConnect and BEAD awards. This non-dilutive capital will significantly accelerate fiber deployment in rural areas. They are also maturing in their asset management arm, showing that the “locomotives” are still gaining steam even if the share price hasn’t followed suit.

What’s dragging the price down?

It is no secret that the market’s relationship with Boston Omaha has soured. If I had to pin down why the stock has struggled to find a floor, I would point to a combination of persistent earnings misses and a sudden lack of operational “cleanliness.” The most recent Q4 2025 results were a punch to the gut for some bulls. While revenue actually beat expectations at $29.71 million, the bottom line was a different story. The company reported a GAAP EPS loss of –$0.22, which was significantly wider than the analyst consensus of –$0.03. This wasn’t a one–off event either; it followed a string of misses throughout 2025, leaving investors wondering when the “locomotives” will actually start contributing to net income instead of just soaking up capital.

Beyond the raw numbers, there are three specific structural pressures weighing on the share price:

• The Surety Slip–up: The General Indemnity Group (GIG) faced unexpected “larger losses” totaling roughly $6.7 million in 2025. For a segment that is supposed to be a steady provider of float and cash, these losses suggest that scaling the business has introduced a level of complexity that management is still learning to navigate.

• The Cost of Growth: While the broadband division is growing, it remains a massive cash sink. The $25.9 million invested into fiber passings last year is a long–term bet, but in a “higher–for–longer” interest rate environment, the market has lost its appetite for businesses that prioritize future infrastructure over immediate free cash flow.

  

• The “Value Trap” Narrative: There is a growing fear that without a clear catalyst or a pivot toward consistent profitability, the stock is becoming a classic value trap. Despite trading at a significant discount to its book value, the lack of near–term guidance or a concrete timeline for GAAP profitability has led many institutional players to move to the sidelines.

The recent sell–off reflects a market that has run out of patience for “potential.” Investors are no longer willing to give management a blank check for capital allocation if it results in widening losses. This skepticism is now baked into the price, creating a scenario where the stock essentially needs to prove its model all over again to regain its former premium.

High-Level BAM-BAM-BAM Hypothesis

Boston Omaha currently sits in that awkward spot the market almost always mishandles. It is a multi–segment holding company with lumpy results and operating businesses that are functionally impossible to value by staring at a single quarterly print. You should care because the market is currently fixated on what it can see today – near–term noise and accounting complexity – while completely underweighting the quietly compounding, asset–heavy platforms maturing in the background. The compelling angle here is the massive gap between the current share price and the embedded, long–duration earning power of its core “locomotives.”

My thesis rests on three specific pillars that I believe the market is missing. First, the business is built on physical infrastructure – billboards and fiber broadband – with unit economics that improve exponentially as utilization rises. Second, there is a massive “complexity discount” at play; the mix of subsidiaries and equity investments makes reported GAAP earnings look far noisier than the actual value being created. Finally, we are witnessing a fundamental segment inflection. The company is shifting from a capital–intensive “build mode” into a “harvest mode,” where incremental revenue carries much higher margins as these platforms reach scale. It is a classic transition from spending money to making it.

The bull case is anchored by Link Media, which has become the sixth–largest owner of billboard faces in the U.S. This is a high–margin, non–consumable business protected by regulatory barriers; once a structure is up, maintenance costs are negligible – roughly $1 million annually for the entire base – letting revenue drop straight to the bottom line. This is mirrored in the broadband segment’s “protected build” model. By focusing on Bulk HOA deals and government–funded projects, they create local utility monopolies with 10–year agreements and 100% take rates. When you add in the niche surety insurance business and management’s aggressive $30 million share repurchase program, you see a team focused on intrinsic value per share rather than cosmetic optics.

Solving for the intrinsic value reveals a potential opportunity that traditional P/E ratios hide. If you subtract the value of the Sky Harbour stake and other minority investments from the total market cap, you are effectively paying roughly $280-300 million for the core operating businesses. Against a normalized steady–state free cash flow of approximately $25 million (my bullish estimate), this implies a forward multiple of just 10-12x, or an 8-10% yield. As the broadband network matures and digital billboard conversions continue through 2026 and 2027, I expect this multiple to compress toward 10x or lower. For a business with utility–like durability and a history of mid–20% revenue–per–share growth, that is a low price to pay.

You can find my detailed analysis of BOC, which I released earlier this year, here:

#2 – Hermès ($RMS)

Hermès is a fortress of artisanal excellence. I view it as the gold standard of vertical integration and scarcity–driven demand. The business model revolves around the uncompromising quality of its leather goods – most notably the legendary Birkin and Kelly bags – which are produced in limited quantities by highly trained craftsmen. The Hermès business model and investment hypothesis does not encompass mass production or trend chasing like some of its fashion “peers”, but instead, Hermès maintains its competitive moat by managing supply so tightly that the waiting list itself becomes a product feature. By controlling almost every step of its production chain and avoiding the trap of discounting, the house has built a level of pricing power that few other companies on Earth can match.

However, it is vital to understand that Hermès does not possess the same type of moat as a traditional industrial giant. While they have intangible assets of an even higher degree–specifically brand power and prestige–they do not rely on massive economies of scale to create cost advantages. They do deliberate scarcity instead. In the luxury goods sector, success operates on this principle of exclusivity.

Beyond just keeping products hard to access, there is a literal scarcity of resources at play. There are simply not that many artisan hands capable of working on these specialized products, and it takes nearly a lifetime to train them to the required standard. A competitor cannot simply scale operations to match this, especially when many of the world’s top–quality leather tanneries are already owned by Hermès, LVMH et. al., creating a physical barrier to entry for any upstart.

In recent years, we have seen a clear divergence among the “Big Four” players: LVMH, Hermès, Richemont, and Chanel. While the sector as a whole is cooling, Hermès has continued to gain market share alongside names like Richemont, Brunello Cucinelli, and Prada. Conversely, Kering has lost significant ground, and Burberry has struggled to maintain its footing. Even LVMH has seen a slight erosion of its dominant share as consumers pivot toward “quiet luxury.”

Despite this relative strength, the stock has not been immune to the broader market malaise. Hermès is currently trading roughly 40% below its recent all-time-high (the biggest drawdown since the GFC), caught in a wave of sector–wide headwinds that as of the recent quarter, even the great Hermès is not immune to.

What’s dragging the price down?

While the brand remains peerless, the stock’s recent performance has hit a significant roadblock, primarily driven by a “optics versus reality” disconnect in the latest financial reports. In the Q1 2026 update, Hermès reported consolidated revenue of €4.1 billion, which represented a 5.6% increase at constant exchange rates. However, the market focused heavily on the published figures, which showed a 1.4% decline in revenue.

This published revenue contraction is a rare sight for a company that usually trades at a significant growth premium, and it suggests that even the most resilient luxury players are not immune to the volatility of global foreign exchange markets.

Beyond the currency pain, a few specific pressure points have emerged that are weighing on investor sentiment and the fundamentals:

• Geopolitical and Tourist Headwinds: Sales in France fell by 3% as slowing tourist flows, particularly in March, were linked to the ongoing tensions in the Middle East. This regional instability also bled directly into the “Other” geographical area, which saw a 13.4% published revenue decline as wholesale activity to concession stores in Middle Eastern airports was significantly affected.

  

• Specific Category Softness: While Leather Goods remained robust with 9.4% constant growth, the Watches métier struggled significantly, posting a 10.3% decline in published revenue and a 3.7% drop at constant exchange rates. This indicates that the “aspirational” or “entry–level” luxury buyer – often the first to pull back in an uncertain economy – is becoming more cautious.

• Market Share and Margin Fears: Although the group maintains a recurring operating margin of 41% , the lack of an EPS beat in the most recent updates and the slight growth deceleration in Asia–Pacific excluding Japan (+2.2% constant) have raised questions. In a market where LVMH and others are also seeing a normalization of growth, investors are penalizing any sign that the post–pandemic luxury “super–cycle” has truly reached its plateau.

I believe the recent sell–off was likely triggered by this cocktail of changing investor sentiment, slowing growth, currency headwinds, and macro-related regional instability. Investors who were used to double–digit top–line growth were clearly rattled by the –1.4% published revenue figure, which likely fell short of consensus expectations for a “stable” published performance.

Furthermore, while management remains confident in its “ambitious goal for revenue growth” (management’s outlook), the formal outlook for 2026 remains couched in language about a “still uncertain economic and geopolitical context.” This lack of specific, upgraded guidance for the back half of the year has allowed the “too richly priced given the slowing growth” narrative to creep in, as the stock’s multiple remains high relative to the broader luxury sector even as growth rates normalize toward mid–single digits

High-Level BAM-BAM-BAM Hypothesis

When I think about how to pitch a stock, I often return to Bill Miller’s philosophy: you need a “Bam–Bam–Bam” thesis – a quick, undeniable sequence of reasons why a business is fundamentally mispriced.

In this spirit, the investment hypothesis goes like this: Hermès is currently the victim of a classic market overreaction to macro noise and short-term challenges (a “problem” that is solvable over the short to medium term). You should care because the market is fixated on a headline –1.4% published revenue decline in Q1 2026 while completely ignoring the long-term pricing power of the brands as well as shorter-term currency headwinds that will eventually lap. The thesis is that the market is missing a “perfect storm” of temporary factors – currency, geopolitical tension, and a specific French tax hike – that are masking the strongest pricing power in the luxury world.

I’ve identified three key pillars that might make this a compelling entry point. First, there is the “Artisan Monopoly” – the physical limit on how many Birkins can exist because it takes a lifetime to train the hands that make them. Second, the resilience of the ultra–high–net–worth client base is being underestimated; while “aspirational” luxury is dying, Hermès’ local client loyalty in places like Japan (+10% growth) and the Americas (+17% growth) remains exceptional. Finally, there is the “Fiscal Normalization” play. LVMH and Hermès might currently be navigating a temporary tax headwind in France, where the corporate rate for giants earning over €1 billion jumped from 28% to 33%. This five–percentage–point drag is a matter of fiscal policy, not brand health, and it might serve as a mechanical catalyst for earnings growth as these measures start diminishing in 2026 and potentially disappear by 2027.

The bull case is further strengthened by a clear path to capacity expansion. The house just inaugurated its twenty–fifth leather goods workshop in Loupes, with three more major facilities planned through 2030. This is a high–margin secondary driver because incremental production of high–demand leather goods (+9% growth) carries significantly higher margins than entry–level métiers like watches.

From a valuation perspective, the stock has historically commanded a P/E multiple near 50x, but the recent sell–off has compressed the Forward P/E toward the mid–30s. When you factor in the €12.2 billion net cash position and a recurring operating margin of 41%, you are paying a “normal” price for an extraordinary business. I see this as a rare opportunity to buy a “scarcity engine” before the tax and currency headwinds shift into tailwinds.

The rationale for Hermès often trading at a 50x earnings multiple – a price I personally would never pay because I’m a “thumb-sucking” value investor – is rooted in the sheer durability of its growth. A standard discounted cash flow model, which typically forces growth down to a 3% terminal rate after ten years, simply cannot capture the weight of a brand with this much heritage. Hermès isn’t just another luxury label – it is a multi-generational compounding machine. When you apply a traditional “fade” to its growth, you are essentially betting against two centuries of evidence that suggests this brand power is anything but temporary, and comes with tremendous pricing power.

If you want to understand the mechanics of this better, I suggest checking out Michael Mauboussin’s recent report on the “Competitive Advantage Period,” or CAP. It is essential reading for anyone serious about quality investing. He makes the case that value creation is a function of how much a company’s return on invested capital exceeds its cost of capital and, crucially, how long it can sustain that positive spread. This “how long” part is what the market consistently misprices. For Hermès, the competitive advantage period isn’t measured in years but in decades, meaning the terminal value assumptions used by most analysts are likely far too conservative.

From a technical analysis perspective, Hermès is interesting as the long-term trend line indicates the stock hasn’t broken its uptrend since the early 1990s, …

… however, if you zoom in a little and consider the last twenty years, the stock of Hermès has already broken through the uptrend, indicating that there may be more downside. As we noted in our perception change framework, “the longer and steeper the uptrend, the more violent the reversion when it finally breaks.”

To follow up on this segment on this luxury powerhouse, I recommend reading this piece I released a few days ago next:

#3 – Hemnet ($HEM)

Over the years, I have spent a significant amount of time studying digital platforms and marketplaces – some of the best business models the world has ever seen –, and Hemnet is structurally just as “elegant.” While global peers like Rightmove or Scout24 often struggle with the inherent price sensitivity of real estate agents, Hemnet has cracked the code by monetizing the home seller directly.

This is a critical distinction because for a homeowner selling an asset worth millions of crowns, a listing fee of a few hundred is practically a rounding error – typically accounting for just 0.1% to 0.2% of the total property value. While Hemnet’s listing fees historically ranged from 1,500 to 10,000 SEK (roughly $150-$1,000), heavily dependent on the chosen package (Basic, Plus, or Premium), the Q4 2025 results show that Average Revenue Per Listing (ARPL) has actually surged to 10,916 SEK more recently.

This roughly 30% year-over-year increase demonstrates that through dynamic pricing and the new high-end Hemnet Max tier, many sellers are now paying well above the traditional 10,000 SEK “ceiling” to secure premium visibility.

This unique position gives the company a level of pricing power that its international counterparts can only envy, underpinned by the fact that nine out of ten homes sold in Sweden are listed on its platform.

Despite this dominant “toll bridge” status, the stock has been caught in a brutal correction, currently sitting roughly 72% below its early 2025 highs as the market has rotated away from high–multiple growth names.

This is where it gets interesting.

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And who would have guessed, it’s a Chinese company!

The stock is down a staggering 70% from its prior high. At first glance, the numbers appear enticing, but the story is admittedly a little more complex.

While earnings are expected to compress in the short term, there’s a compelling argument that if you look beyond the immediate quarterly turbulence (largely driven by macro factors the company cannot control), the long-term potential could offer attractive rewards. This company’s model is undergoing a significant shift: it’s aiming to become more capital-light, targeting higher-quality users, and is about to pursue international expansion ambitions. And while there are challenges, its low valuation, aggressive capital returns, and unique positioning make it a case worth exploring.

In this piece, I’ll dive into why, despite the near-term pressures, this stock could be a hidden gem.

Keep reading to discover if this opportunity warrants your attention.

High-Level Thesis: “Bam Bam Bam Bam Bam”-90 Second-Hypothesis

As always, we kick things off with Bill Miller’s “pitch framework.” Miller famously said that successful portfolio managers have ultra-short attention spans. When pitching a stock, you need to be punchy, data-driven, and get straight to the point. In the spirit of Peter Lynch’s egg timer challenge, where analysts had just 90 seconds to pitch a stock, I’m going to give you the essential pitch for this company in rapid-fire fashion:

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The recent performance of LVMH stock has been a sobering experience for many investors. As you can see from the current price action, the shares have been trending downward for quite some time now and are now hovering near the €480 mark.

Clearly, this is not just a temporary market fluctuation (depending on how you define "temporary,” of course). Arguably, the share price performance is a reflection of a fundamental trend that has been developing for several – and I mean SEVERAL – quarters now. If you look at the company’s recent financial dashboard, the picture is clear. Both the topline, cash flow, and net profits (all represented on a per share basis) have effectively reached a (temporary?) plateau.

Net income and operating profit have, in fact, been declining.

There has been very little meaningful movement in these key metrics for some time. The post-pandemic surge is over. We are now in a period of grinding stagnation.

The Q1 2026 revenue results were another clear disappointment. Revenue came in at €19.1 billion. This represents an organic growth rate of just 1% (-6% reported). For a company that market participants previously valued for its consistent double-digit growth, this is a stark change in reality.

External factors have certainly played a role in this quarter’s underwhelming print. Management noted that the conflict in the Middle East created a headwind that shaved roughly 1% off the organic growth figure in March alone.

However, the problems appear to be more than just geopolitical. The Fashion & Leather Goods segment – the core of the entire group –, for instance, saw an organic decline of 2% (-9% reported). This suggests a softening in demand for the primary brands that drive the company’s valuation.

In my previous piece from July last year, I discussed the long-term moats of the business. I still believe those brands have value. But the current data shows that even the strongest names are not immune to a broader slowdown. The fundamental business performance is simply not moving forward.

In this post, I want to unpack what this means for the future of the stock. I will start by placing these results in context by comparing them to the latest updates from Hermès and Kering. It is important to see if LVMH is an outlier or if the entire luxury sector is facing a structural shift.

I will then dig into the specifics of the Q1 earnings and share my takeaways from the earnings call; what are the executives saying? We will also examine the bull case provided by Francois Rochon of Giverny Capital who purchased the stock last year. I want to weigh his optimism against the growing list of concerns regarding management’s recent creative and strategic decisions. Furthermore, I will address a question that is becoming more common among seasoned investors: Has management forgotten how to run the business? And what could this mean for the future? Finally, I raise the question of what the implications of investors fleeing the US could be on LVMH as currency headwinds prove to be more permanent than many may anticipate.

As you can see, there is a lot to cover. Let’s get into the details.

Disclaimer: I own LVMH shares in the portfolio I run for my partens. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

Quick Q1 High-Level Overview

LVMH recorded revenue of €19.1 billion for the first quarter of 2026. On the surface, the headline figure of 1% organic growth might appear resilient in a volatile climate.

I find this narrative a bit too convenient. When you peel back the layers, the core engine of the group – Fashion & Leather Goods – actually saw an organic decline of 2%.

This is a significant yellow flag for a division that has historically been the bedrock of the company’s valuation. It is the first time in recent memory that we are seeing a sustained period where the brand heat of Louis Vuitton and Dior isn’t translating into growth (excluding the 2020 COVID quarters).

Management was quick to point out that the result was heavily weighed down by the conflict in the Middle East. That specific geopolitical drag shaved roughly 1% off the total organic growth in March. Without it, we would be looking at a 2% print.

“LVMH maintained its powerful innovative momentum and showed good resilience in a geopolitical and economic environment that remained disrupted, amplified by the conflict in the Middle East.” – PR

The geographic data tells a story of shifting dependencies. Asia excluding Japan remains a bright spot with 7% organic growth – the best quarterly performance really since the end of 2023 –, while the United States showed a decent start to the year at 3% (both geographies signaling a reacceleration QoQ).

“[…] it’s the best quarter since 2023. And it’s good because it’s broad-based. One thing to -- maybe to notice is that also Sephora is flat this quarter on the Asia cluster and especially China, which was one of the geographical areas that we were fixing for Sephora. So it’s good to see that it’s rebounding.“ - Earnings Call

However, the picture in Europe and Japan is much more somber, with both regions posting a 3% organic decline.

The culprit here is a significant drop in tourist spending. This highlights a structural vulnerability. If the wealthy globetrotter stays home or spends elsewhere, the European flagship stores suffer. While the top line is struggling, the currency situation made the reported numbers look even worse. A strong euro created a massive 7% headwind, dragging the reported revenue down by 6% year–over–year. This is a purely accounting–driven impact, but it adds to the general sense of a company under pressure.

There were some pockets of strength that deserve mention. Watches & Jewelry grew by 7% organically, driven by what I see as a successful transition at Tiffany and continued momentum for Bulgari.

“The Maison [Tiffany] continued to successfully renovate its store network and strengthen its iconic product lines, with HardWear in particular posting very strong growth. Highlights of the quarter for Tiffany included the launch of a marketing campaign featuring its new global brand ambassador, Natalie Portman, and its latest high jewelry collections being showcased in Gstaad and Beijing.

Bvlgari achieved strong growth and unveiled Eclettica, a new artistic vision of high jewelry and prestige watches. The iconic Serpenti and Tubogas lines performed very well. Chaumet was boosted by the expansion of its Bee de Chaumet collection.”

Selective Retailing, which includes Sephora, also managed 4% growth. These “defensive” segments are currently doing the heavy lifting while the main house is undergoing a period of creative and regional transition.

The contrast between these segments and the core fashion business is stark. It suggests that while the brand equity of the jewelry houses remains intact, the “lifestyle” and high–fashion components are facing a much tougher sell. You have to wonder if the aspirational consumer is finally reaching a breaking point. The numbers suggest that for now, the answer is yes.

Insights From the Earnings Call

I spent a significant amount of time parsing the most recent earnings call, but I’ll be honest: there was no single “aha” moment that fundamentally altered the long–term outlook. The discussion largely revolved around the kind of granular, technical questions that analysts love to use for fine–tuning their quarterly models. While understanding the exact timing of inventory shipments or the perception of social media campaigns is useful for a hedge fund trader, it doesn’t move the needle for a structural thesis. Example?

Real investing requires a different kind of lens. You have to ignore the noise of the quarter and look at the horizon.

Generally, the tone of the Q1 2026 earnings call was one of cautious defense. CFO Cecile Cabanis repeatedly leaned on the word “resilience” to describe a set of numbers that, in any other cycle, would be considered anemic.

“On the EU, actually, the Europeans are resisting and quite resilient, because the European clientele is only slightly negative. But you still have the impact on the touristic clientele because of your currencies. And you might have some disruption also, it’s very difficult to address, on some specific tourism because of the conflict. [...]

On the question on tourist and clients, the best performing local clientele have been American and Chinese on Fashion & Leather Goods. The Japanese is still a bit down. And the Europeans are quite resilient, but slightly negative -- flattish, slightly negative.”

One specific exchange worth highlighting, however, was the way management quantified the fallout from the Middle East. We finally got a clear look at the scale of the impact, which doesn’t fully show up in the quarter yet. During the Q&A, an analyst asked for more specifics on the month of March, and the response was illuminating. Management noted:

Question: “So first of all, coming back to the impact of the Middle East, I think you said down double digit, but is it possible to be a bit more specific on the month of March? Was it down 30, 50? And also, are you seeing a bit of an improvement early in the quarter? And also if minus 1% is the impact from 1 month, do you think that minus 3% would be the impact on the full quarter?“

Answer: “Middle East, maybe I’ll put it simple so that you can have an easy idea of the impact. If you take the group, it’s overall 6% of the mix. I’ve said earlier, there are plus and minuses depending on the division. When the conflict started in the month of March, there was a shortfall and a deterioration of demand between 30% and 70%, depending on the malls, depending on the businesses. So overall, if you take a 50% deterioration, then you can have the overall impact, which would be indeed 3 points in March and 1 point on the quarter. I think the outcome, it’s anybody’s -- probably anybody’s guess. What we have not seen yet is repatriation. And what we know is that the wealth has not evaporated. So there will be a time where we’ll see that coming probably elsewhere and mitigate the impact should the conflict continue.“

Moreover, I found the narrative particularly telling when the discussion shifted to the 1% organic growth figure. Management was quick to isolate the geopolitical noise, stating that “the conflict had a negative impact of around 1% on organic growth for the quarter.” By their math, the underlying business is running at a 2% clip. While I understand the need to strip out one–off events, you have to wonder if this is becoming a convenient shield for a broader slowdown. There is a clear divide between what I see as short–term volatility and more structural, long–term challenges. The short–term pain is obvious: a massive 7% currency headwind and the sudden disruption in Middle Eastern tourist flows. However, the commentary on the United States and China suggests something more permanent is shifting. Cabanis admitted that demand for Wines & Spirits, for instance, in the U.S. “is still soft and that we don’t see moving a lot.” What if this isn’t a temporary dip but rather LVMH reaching a saturation point? As we will discuss below, I generally consider the alcoholic beverages segment to be the more permanent “problem child.”

The Q&A segment also revealed an interesting divergence in how the group views its various “engines.” While the Fashion & Leather Goods division – the crown jewel – is currently contracting, management is pivoting the conversation toward “hard luxury” and selective retailing. They noted that for brands like Tiffany and Bulgari, “the overall response to the icon, the craftsmanship, the high jewelry are very strong.” This might suggest that the ultra–high–net–worth individual is still showing up for €50,000 necklaces, even if the “HENRY” (High Earner, Not Rich Yet) consumer has stopped buying €3,000 handbags (this thesis can only partly be confirmed when looking at Hermès’ results further below, though).

The Broader Black Hole of Luxury Consumption? Looking at LVMH’s Peers

LVMH is not an island. To understand the current stagnation, you have to look at the broader wreckage across the sector. I’d argue that for around three years (mainly during the 2021–2023 period), the luxury industry benefited from a massive pull–forward of demand – a pull-forward demand cycle. We are now witnessing the formation of a consumption “black hole.” This is the natural hangover that follows a period where “aspirational” buying became almost a mania – or a way to cope with Covid and its aftermath? Even the most resilient players – yes, I’m looking at you Hermès – are now showing signs of fatigue.

It seems like this is a sector–wide reset. The tide is (temporarily) going out.

Today’s results from Hermès provided the most shocking evidence of this shift. For years, Hermès has been treated as the ultimate safe haven, a stock supposedly immune to the laws of economic gravity. That illusion shattered this morning. The shares are cratering, down 9% in a single session (-13% at one point).

This is a rare, almost unprecedented move for a company that hasn’t seen a one–day drop of this magnitude in two decades, excluding the literal onset of a global pandemic. While organic growth was 6% (yet negative on a reported basis) – a number most peers would envy in the current environment – it wasn’t enough to hide the cracks. France saw a 3% decline, and the Middle East fell by 6%. The myth of “absolute pricing power” regardless of any macro backdrop is finally being tested. When even the UHNWI Birkin bag crowd starts to hesitate, you know the environment has turned challenging.

The disruption in the Middle East and the escalating conflict in Iran have created a double–sided trap. First, there is the direct loss of regional sales. Second, and perhaps more importantly, is the impact on global tourist flows. High–end travel is the lifeblood of luxury. If flights are more expensive or routes are canceled, the “concession” stores and airport boutiques – which represent a massive chunk of high–margin revenue – simply stop breathing. Management confirmed that their owned stores grew at 7%, but their concession sales dropped by an identical 7%. This tells me that the local, loyal client is still there, but the traveling luxury nomad has disappeared.

It is a structural headwind that LVMH, with its massive global footprint, is feeling just as acutely.

Kering, the industry’s perpetual laggard, also reported yesterday. You could describe the quarter as a period of “stabilization.” There is a massive divergence here though. Jewelry grew by 22%, proving that “hard luxury” is still a preferred store of value for the wealthy.

Meanwhile, fashion was down 3%. Gucci, the heart of the Kering investment case, is still stuck in a mid–turnaround purgatory (sales “down 14% on a reported basis and 8% on a comparable basis year on year“). While Balenciaga showed some signs of life, the overall fashion segment outside of Gucci looks remarkably similar to the flat performance we are seeing at LVMH. The “Gucci stabilization” is taking far longer than Kering bulls anticipated. It shows that once a brand loses its heat in this climate, rekindling it is an expensive and slow process.

“Outlook: In a still uncertain geopolitical and macroeconomic environment, the Group places a strong emphasis on agility and flawless execution, equipping each House with sharper, more sustainable brand strategies and the operational support required to accelerate progress. As Kering progresses through 2026, its objective remains to return to growth and improve margins.“

Looking at the results of these two peers, arguably, what we are seeing is a collective “pause” from the global consumer. The luxury powerhouses are paying the price for the excess of the COVID and post-COVID period. The industry pulled so much demand from the future that there is simply nothing left to harvest in the short term.

The question for investors is who can survive this black hole without diluting their brand or destroying their margins? And when can you reasonably expect a recovery and a return to higher growth (if any growth at all).

Right now, none of the big three look particularly comfortable.

Francois Rochon’s Longer-Term & High–Conviction View

I recently spent some time reviewing Francois Rochon’s discussion on “The Investor’s Podcast” with host Clay Finck (linked below). Rochon is a fund manager I’ve long admired for his ability to filter out the cacophony of the daily ticker and focus on the fundamental trajectory of a business. His perspective on LVMH is particularly valuable right now because it stands in such stark contrast to the prevailing gloom in the market.

He was refreshingly honest about his own position, noting that he bought into the company last year and has yet to see a positive return.

“Well, I’m not that good in timing because I bought it last year and so far has not yielded good results“

But for an investor of his caliber, the immediate price action is almost irrelevant. He is focused on the earning power five years from now. His central argument is that the current slowdown is not a sign of structural decay. Instead, just like I do, he views it as a necessary cooling period after the feverish growth of the pandemic era. He sees this as a return to normal rather than a collapse.

“I think probably the years 21, 22, 23 were very very strong but at some point you know consumers needed a little pause in their purchasing and it’s very hard to predict but I think part of the slowdown is just a return to normal so probably the first years 2021 22 was a little too strong relative to let’s say historical norms. So there’s part of that. Also you know inflation makes those products pretty expensive and it’s been a tougher period for consumer in general.”

This normalization thesis is a powerful counter–narrative to the panic selling we’ve seen recently. It suggests that the double–digit growth some investors grew accustomed to was actually the outlier.

Rochon remains unshaken because he believes the brand equity is intact. To him, the only thing that matters is whether the name Louis Vuitton still signifies unparalleled quality to the global elite. He argues that as long as the brand resonance hasn’t faded, the financial results will eventually catch up. It is a long game. The quarterly fluctuations of 2026 are merely footnotes in a much larger story of brand durability.

“I think the key factor is that you want the brand to be as strong as it ever been. That’s what you want. So perhaps people are a little wary of purchasing Louis Vuitton bags, but what you really want is the brand, the name still resonate to clients as quality, something you want to own because it’s of quality and also it’s been there for 150 years and I think that’s the key thing. If the brand is as strong as it was five years ago, eventually the sales will reflect that. […]

But the rest of the business I believe is more cyclical. So I think at some point earnings will rebound and I think probably from here earnings could increase 60 or 70% in the next 5 years. So let’s say a 10-11% growth rate and you’ve got a two percent dividend. So the two together I think … we should be able to attain our objective of finding a 13% grower including the dividend.”

The second pillar of Rochon’s thesis involves China. While many investors are running for the exits due to geopolitical tensions and the “common prosperity” movement, Rochon remains a dedicated optimist. He views China through a lens of decades, not years. His belief is rooted in the simple math of GDP per capita growth. He expects the Chinese middle and upper classes to continue expanding at a rate that will eventually surpass the Western world in terms of luxury consumption. To Rochon, the current political climate and the trend of “luxury shame” is a temporary headwind. He is betting on the triumph of human aspiration and the universal desire for status.

“As they get richer at a faster rate than North American, I think they’ll want to acquire LVMH products, luxury products. Could also be Hermès bags or Prada bags. But in general, I think the demand for luxury goods in China will increase. There will be ups and downs. Perhaps there will be some periods like you described that the government doesn’t really sponsor showing up your wealth but that’s temporary at some point we’ll be back to normal and as the country improves and continues to improve the GDP per capita it’s going to be a stronger economy and they’ll purchase more luxury goods and I think it’s going to be a good market for perhaps not in one year or two years, five year, 10 years, 15 years, and they’re building a business for the next decade.”

I think many investors also overlook the “hidden” engines within LVMH because they are so focused on the headline leather goods numbers. Keep in mind that LVMH is home to 75 distinguished Maisons rooted in six different sectors and hence, is arguably the most resilient of all the luxury stocks you can purchase on public markets (and yes, more resilient than Hermès, one could argue!).

Rochon’s enthusiasm for Sephora is a perfect example of this. He views it as a “fantastic business” and a “very very strong retailer.” While it only represents about 10% of the group’s total revenue, it is growing at a rapid clip. He even noted that Sephora is now a significant competitive threat in the U.S. market, putting visible pressure on the margins of companies like Ulta Beauty.

“Sephora I think is a fantastic business. And I think people when they talk about LVMH, they don’t talk that much about Sephora, but it’s probably just 10% of revenues, but I think it’s growing pretty fast and it’s a very very strong retailer. We’ve been following also Ulta Beauty, which is a very very well-managed company, but you know there there have been some pressure on margins because in the IM they got more competition from Sephora in the United States.”

One of the most intriguing details Rochon highlighted during the interview – and something I haven’t seen discussed much elsewhere – is the specific tax headwind LVMH is facing in France. He noted that a “temporary increase in the tax rate” has been quietly eating into the reported earnings per share. The corporate tax rate for entities earning over €1 billion jumped from 28% to 33%. This is a five–percentage–point drag that has nothing to do with brand heat or consumer demand. It is purely a matter of fiscal policy. Rochon remains hopeful that this is a temporary measure, and if the rate reverts to 28%, it would serve as an immediate and mechanical catalyst for earnings growth.

What I also found compelling about Rochon’s stance is his focus on the Arnault family’s stewardship. While I have my own concerns about the current creative direction and the headwinds facing the aspirational consumer, Rochon’s thesis provides a necessary anchor. It forces you to look past the immediate carnage and ask if the soul of the business is still healthy. For him, the answer is a resounding yes. It’s a bold bet on the persistence of luxury.

Has Arnault Lost the Midas Touch?

I recently encountered a comment in my investor community that stuck with me. A member asked whether the Arnault family might have forgotten how to run their business properly in recent years?

I’ve given this some thought – and while it’s easy to blame the captain when the ship hits choppy waters (remember how many investors called for Google CEO Pichai to step down during the tough quarters?), the reality is usually far more nuanced.

When a stock is underperforming and the chart looks like a mountain range in descent, our brains often default to System 1 thinking. Price starts affecting the narrative surrounding a stock. Humans’ intuitive, impulsive side of their psychology starts taking over; the part that seeks simple narratives. We see a drawdown and assume management has lost its edge. It is far harder to admit that the forces at play might be entirely outside of their control.

But let’s start by considering what the Arnault family could’ve done better in recent years. If we look at the case against the Arnault family, there are certainly some valid criticisms to be made regarding recent creative and strategic choices.

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In this part, we will:

• Explore Grab’s historical growth

• Dissect the trends that will fuel Grab’s future growth, which collectively create a fertile ground for Grab’s sustained success.

• Provide insights into Grab’s market valuation using different approaches, offering a clearer picture of its true attractiveness at the current share price.

What really sets Grab apart is its strategic vision for the future. The company isn’t just looking at incremental growth; it’s investing in next-gen innovations like autonomous vehicles and AI-driven solutions, making bold moves that signal Grab’s ambition to become the backbone of Southeast Asia’s digital economy. As you’ll see, the runway for growth is vast – and Grab is showing signs of a “spawner DNA” – making this valuation assessment not only relevant but a pivotal guide for anyone looking to understand Grab’s position in the evolving tech landscape.

Part 4 – Valuation

4.1. Past Growth

Grab has managed to scale its revenue significantly in recent years. As discussed in the previous parts, from its humble beginnings as a ride-hailing service, the company evolved into a multi-service “Superapp” offering mobility, delivery services, and financial services. The historical data indicates strong revenue growth fueled by increasing demand across these segments.

Looking at the revenue CAGRs, it’s clear that Grab achieved substantial revenue growth in recent years, with a 3.75-year revenue/share CAGR exceeding >50%.

More recently, topline growth rates have naturally slowed – as Grab matures – to more sustainable levels, but if Grab can continue compounding in the mid- to high-teens, investors are looking at an interesting setup at current price levels (to be discussed further below).

As suggested, I don’t think the slowing growth rates should be of concern – especially as Grab’s management team has deliberately moved into a phase more focused on profitability and self-funded growth, where growth is naturally more measured, but as I said, more sustainable, compared to a high-flying growth-at-all-costs model.

When comparing Grab’s performance against the S&P 500 over the past few years, Grab has underperformed significantly. Since its public listing in 2021, the stock has seen a sharp decline, down about 69.55% as of 2026. Over the past 5 years, Grab’s stock performance translates into a CAGR of -19.94%.

This stark contrast to the S&P 500, which has increased by 81.59% over the same period, highlights how poorly Grab’s stock has performed relative to the broader market, which can largely be attributed to the timing of the IPO (during the Covid and SPAC craze) – as a reminder Grab went public on the Nasdaq on December 2, 2021, via a SPAC merger with Altimeter Growth Corp at a valuation of nearly $40 billion… I’d argue Grab’s case study serves as a stark reminder that IPO actually stands for “it’s probably overpriced” – you can’t really blame management for the listing price (quite the opposite as they did a good job timing the IPO as the IPO raised gross proceeds of $4.5 billion in the largest-ever U.S. public market debut by a Southeast Asian company).

Disclaimer:

I own Grab shares. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

4.2. Future Growth

Total Addressable Market Analysis

To understand the future growth potential of Grab, we need to first examine its Total Addressable Market (TAM).

Grab is operating in rapidly expanding sectors, including online food delivery, ride-hailing, and digital banking, which collectively form a massive opportunity. Before its IPO, management estimated in the F1 filing that its core TAM – encompassing these services – will exceed $180 billion by 2025.

“There is a tremendous amount of headroom to grow, and Euromonitor estimates our addressable market to be over $180 billion by 2025, consisting of online food delivery, ride-hailing, and e-wallet markets. We are able to address these different market opportunities through our superapp and our Grab ecosystem.“ - F-1

This already represents a significant market, but if we broaden our scope, the numbers become even more impressive. The overall personal consumption expenditure (GMV) for land mobility back then was projected to reach $231.3 billion by 2025, while expenditure on prepared meals is expected to hit $170.5 billion (again GMV).

“Our Addressable Market and Growth Potential: We started out by providing a platform addressing the mobility opportunity in Southeast Asia, with the ride-hailing market estimated to be at $4.5 billion in 2020 according to Euromonitor. We have since expanded our platform to address food and other deliveries and e-wallet opportunities, estimated at $9.4 billion and $38.9 billion in 2020, for the online food delivery and e-wallet markets respectively.

According to Euromonitor, total personal consumption expenditure for prepared meals and land mobility, which includes operation of personal transport equipment, personal consumption expenditure on buses, coaches and taxis, are expected to reach $170.5 billion and $231.3 billion, respectively, by 2025. Cash payments transaction values are expected by Euromonitor to reach $1,356.1 billion by 2025. We expect that digital penetration rates will increase over time as digital alternatives become more popular.“ - F-1

Let me stress that those were the historical, pre-IPO projections. According to the e-Conomy SEA 2025 report by Google, Temasek, and Bain & Company, the region’s total digital economy Gross Merchandise Value (GMV) surpassed $300 billion in 2025.

This expansion was driven by a decisive shift toward deep digital participation, with over 60% of all transactions in the region now occurring digitally.

Here is a breakdown of what drove that expansion and the characteristics of it:

• Video Commerce: One of the biggest drivers has been the rise of “shoppertainment.” Video commerce (buying through live streams and social video apps) now accounts for roughly 25% of the region’s total e-commerce Gross Merchandise Value (GMV).

• Infrastructure & QR Codes: The expansion was largely fueled by national unified QR systems (like QRIS in Indonesia or PromptPay in Thailand) and cross-border QR interoperability between ASEAN nations.

• Depth of Adoption: It’s not just about more users; it’s about deeper usage. Roughly three out of five Southeast Asians now shop online, and the focus has shifted from acquiring new users to increasing the frequency and value of transactions from existing ones.

Similarly, within Grab’s core segments, the 2026 Mordor Intelligence Foodservice Market Analysis estimated the total Southeast Asian foodservice market reached $223.8 billion in 2025, well ahead of the $170.5 billion initially expected. The Analysis is projecting a market growth CAGR of 13% throughout 2031.

In the slide deck below, which Grab shared recently after the foodpanda acquisition, Grab itself estimates the current size of the foodservice serviceable market in SEA to be $200 billion+.

Looking ahead, the addressable opportunity is shifting from a “digital decade” of user acquisition to a $1 trillion “intelligent economy.” Analysts from HSBC’s Digital Frontiers 2030 and the e-Conomy SEA 2025 report now project the ASEAN digital economy GMV could reach $1 trillion by 2030, fueled by the integration of AI-driven logistics and the maturation of digital financial services.

“By 2030, Southeast Asia’s digital economy will reach $1 trillion, with the potential to hit $2 trillion as ASEAN implements its Digital Economy Framework Agreement. Growing at double the global rate, GDP in Southeast Asia hit $4.25 trillion in 2025, making it the world’s fourth-largest economy after the US, China, and Germany. With a young, digitally engaged population and pro-innovation policies, Southeast Asia is quickly becoming a global economic powerhouse, leaving its former identity as a modest, developing region decidedly in the past.“ - HSBC

Grab is well-positioned for this next phase. As you should know by now, the company announced its first full year of net profit recently and record Monthly Transacting Users (MTUs) today exceed 50 million.

Moving into 2026, S&P Global Ratings and internal guidance forecast continued momentum, with Grab’s total revenue expected to grow by approximately 20% to $4.1 billion in 2026, supported by a projected 15.8% CAGR in the broader Asia-Pacific fintech market through 2031.

Koyfin’s consensus estimates (consensus earnings estimates compile individual projections from various analysts into an averaged figure) project similar topline growth rates for the next three years.

Looking Ahead!

Over the years, Grab has consistently expanded its TAM, demonstrating its ability to adapt and evolve. What started as a taxi-booking app in 2012 has transformed into a multi-modal platform, adding food delivery and, more recently, digital banking. The company has expanded geographically, with the acquisition of Foodpanda Taiwan marking its first major step out of Southeast Asia. Similarly, its acquisition of Stash signals Grab’s entry into the digital investing space, which could tap into the $5 billion+ AUM market.

The key takeaway here so far shouldn’t really be an exact number of the TAM’s size – most TAM estimates turn out to be wildly off and while I’m referencing some numbers to provide context, there’s really no way to have an informed opinion on the accuracy of any of them – but rather that the runway is significant. But just using common sense suggests that Grab, and the entire SEA region, are early in their respective growth stories.

Grab, for instance, stands to benefit from several secular tailwinds in Southeast Asia that will continue to fuel the expansion of its TAM. These trends include:

1. Accelerated Urbanization: According to the United Nations’ World Urbanization Prospects 2025, the majority of the world’s population now resides in urban areas, with Southeast Asia remaining a primary engine of this growth. Jakarta has emerged as the world’s most populous city-region with nearly 42 million inhabitants, and the broader Asian urban population is projected to exceed 55% by 2030. This densification directly scales the demand for Grab’s localized mobility and delivery infrastructure.

   

2. Near-Universal Mobile Connectivity: The GSMA Intelligence Mobile Economy 2026 report indicates that smartphone penetration in the region has successfully reached the previously forecast 84% benchmark. With a growing number of connections operating on high-speed 3G/4G/5G broadband, the “mobile-first” population has matured into a “mobile-only” consumer base that relies on superapps for daily survival.

   

3. The Persistent “Underbanked” Gap: While the 2024/2025 ASEAN Monitoring Progress Report by the UNCDF highlights that pure financial exclusion (unbanked) has dropped significantly to approximately 20.8%, a massive opportunity remains in the “underbanked” segment. The World Bank’s Global Findex 2025 and the e-Conomy SEA 2025 report note that nearly 70% of adults in Southeast Asia still lack access to credit, insurance, or wealth management tools. This provides Grab’s digital banking and lending arms with a vast, underserved market as the region transitions toward a $1 trillion digital economy.

These trends will provide long-term secular support for Grab’s services, ensuring that the market it operates in continues to expand rapidly.

Historical TAM Expansion

Also, the ability of management to “manufacture” new TAM is often a more reliable predictor of long-term value than the initial size of the market they enter.

Over the years, Grab has consistently expanded its TAM, demonstrating its ability to adapt and evolve. What started as a taxi-booking app in 2012 has transformed into a multi-modal platform, adding food delivery and, more recently, digital banking. The company has expanded geographically, with the acquisition of Foodpanda Taiwan marking its first major step out of Southeast Asia. Similarly, its acquisition of Stash signals Grab’s entry into the digital investing space, which could tap into the $5 billion+ AUM market.

(Almost) Just as Steve Jobs transformed the $91 billion cell phone industry into a multitrillion-dollar mobile economy by redefining the device as a software platform, Grab’s leadership has consistently demonstrated an operational reflex for market creation rather than just market capture.

This “optionality” was embedded in their DNA as far back as the F-1 filing, where they identified the “informal economy” not as a static segment, but as a massive, underserved opportunity for digital infrastructure.

“As we continue to expand our platform and increase the breadth of our offerings over time, our platform is able to address additional consumer and business needs, and grow our addressable market. For example, given the importance of small businesses and the informal economy, we believe there is a large and important opportunity to help such businesses and participants in the informal economy to navigate an increasingly digital world. We leverage our existing reach with our driver- and merchant-partners to provide digital tools and training that are critical to thriving in the increasingly digital economy, helping to lay the foundations for more inclusive growth across the region. With our scale, ecosystem and platform advantages, we believe that we are well-positioned to navigate the complexity of Southeast Asia and address certain key challenges in the region.“ – F-1

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But who are the individuals actually sitting in the cockpit, and can they be trusted with your capital? In this section, we pull back the curtain on the leaders behind the “Superapp” to explore the stories and strategies that most analysts miss:

• The Inheritance Gamble: Why the CEO walked away from a multi-billion dollar family empire – and the personal rift that forced him to build Grab with everything on the line.

• The “Street Fighter” vs. The Giant: The inside story of how local grit outmaneuvered Silicon Valley’s deepest pockets, and why that same mentality is being tested again today.

• The Secret Cultural Code: We look at “The Grab Way” – a rigorous internal framework that dictates who stays and who goes. Is it a visionary philosophy or a high-pressure trap?

• The $1.2 Billion FCF Roadmap: Management has set a massive target for 2028. We break down whether this is a realistic promise to shareholders or a calculated projection to keep the stock afloat.

• The Watcher on the Board: Why the CEO of their biggest former rival is now sitting in their boardroom, and what that means for Grab’s ultimate endgame.

• Founder vs. Professional: We examine the tension between a founder’s vision and the need for corporate discipline. Is the current leadership team a well-oiled machine or a one-man show?

• … and more!

Is the “Street Fighter” at the top still hungry, or has he finally become part of the establishment he once disrupted?

Part 3 – Management

3.1. Management Background

When evaluating a company’s management, understanding the background and operational track record of the leadership team is critical.

For Grab, the company is led by its co-founder, Anthony Tan, who has served as the Group CEO since its inception in 2012. His 14-year tenure provides significant institutional memory and ensures a long-term vision for the company. His journey from Harvard Business School to building Grab from the ground up offers insights into his leadership style and capital allocation approach.

CEO Tenure and Path to Leadership: The Billionaire Heir Who Chose the Trenches

Anthony Tan’s path to leadership is both foundational and experience–driven. He did not rise through the ranks of an unrelated corporation. Instead, he built Grab from scratch to address local challenges – most notably, the safety and reliability issues in Malaysia’s taxi industry.

Tan’s prior experience in his family’s business, Tan Chong Motor, where he worked in supply chain and marketing, gave him a strong operational foundation. He served as the Head of Supply Chain and Marketing, which meant he was responsible for the logistical moving parts and brand positioning of Nissan across Malaysia. This was no vanity role. It gave him a front–row seat to the inefficiencies of regional logistics. However, the move from the family empire to the startup world was far more contentious than a simple career change.

The Patriarch’s Shadow and a Mother’s Silent Rebellion

When you look closer at the early days of MyTeksi, the funding story serves as a window into a massive family rift. You might assume the Tan family wealth simply flowed into the new venture. The opposite is true. Anthony’s father, Tan Heng Chew, was a staunch opponent of the idea. He viewed the taxi booking concept as a distraction. He essentially told Anthony that if he left the family business for this “hobby,” he would be on his own financially. It was a “stay in line or lose the legacy” ultimatum.

The tension was palpable. Anthony chose the exit. The funding did not come from the patriarch. It came from his mother, Rosie Tan. She provided the initial angel investment that allowed him to ignore his father’s warnings.

This internal power struggle is key to understanding his drive. He wasn’t just building an app. He was proving a point to the head of the family.

To really understand the man, you have to look past the wealth and toward the “street fighter” persona he frequently references. Because he was essentially cut off by his father, the safety net was gone. He had to win. I find it fascinating that he often points to his great–grandfather, who started as a humble taxi driver. By launching Grab, Anthony was effectively bypassing his father’s corporate structure to reconnect with those working–class roots. I’m exaggerating a little, but you get the point.

This psychological break created a founder who was willing to spend his nights at taxi stands pitching to drivers in the rain. He had to shed the “silver spoon” stigma. He did it by outworking everyone in the trenches. It worked. The result is a leader who combines high–level supply chain expertise with the desperate urgency of someone who has everything to lose.

Does an Emotional Stake Outperform Financial Skin?

This leads me to a question I asked myself when studying Grab. What is the more powerful force for a CEO: financial skin in the game or an emotional stake in the business?

Often, they overlap. As a founder, your net worth is tied to the stock. Your heart is tied to the mission. But if you have to choose which one keeps you awake at 3 a.m., I’d argue the emotional component wins every time.

What struck me while watching a recent interview (see below; starts at 11:55) was a moment of unexpected vulnerability. Anthony shared that his father still does not speak to him after his decision to leave the family business. It is a remarkable admission. This is especially true in a culture where family harmony and filial piety are often paramount. This is more than a career disagreement. It represents a fundamental break from a legacy that expected him to follow a pre–written script. To me, this openness says a lot about his character. He avoids the trap of projecting a perfect image, choosing instead to acknowledge the scars that came with his independence.

I suspect that proving his father wrong is a significantly more potent motivator than any monetary incentive coming from his compensation packages or his ownership stake in Grab. When you are essentially disowned for your ambitions, the business becomes more than a company. It becomes your identity and your vindication. Subconsciously, every new market Grab enters or every milestone reached, serves as a message sent back to that dinner table in Malaysia. Money is a scoreboard. However, the desire to be seen and validated by a parent is a primal engine. It drives a level of intensity that simple financial gain cannot touch.

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Before we dive in, let me share the 2026 product day, Grab X, below, which introduced a couple of very fascinating products and features, including …

• GrabMaps for Consumers: Enhanced maps featuring indoor mall navigation, real-time parking, EV charger locations, and AI voice cloning for navigation.

• Grab More: Enables users to order from two different nearby merchants in a single delivery order without extra fees.

• Grab Shopping Agent: Allows users to build checkout carts across multiple merchants using photos, voice notes, or text.

• Cash Loan: In-app AI-powered lending for all Grab users with instant approval and customized repayment for users with limited credit history.

• Discover by Grab: An AI-curated feed for local dining recommendations and community-driven content.

• Group Ride: Allows up to four passengers to share a single vehicle with multiple pickups/drop-offs and split fares (up to 40% cheaper).

• Personalised Travel Experience: A centralized travel portal with airport guides, check-in reminders, and baggage belt navigation.

• GrabStays: An in-app hotel booking service offering same-day rates and GrabCoin rewards.

• GrabPay for Travel: Seamless cross-border QR payments using existing saved cards without needing local wallet top-ups.

• Driver AI Assistant: A hands-free voice chatbot to assist drivers with navigation, messaging, and policy queries.

• Tap to Pay: Converts any smartphone into a contactless payment terminal via the GrabMerchant app.

• Carri: A prototype AI robot designed to assist delivery partners by navigating “the last mile” inside malls and office towers.

And this is just my personal selection of highlights. There’s more.

Disclaimer: I own Grab shares. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

Part 2 – Business Quality

Competitive Advantages Analysis

Grab’s competitive advantages are built on a multi-layered moat that combines digital network effects, physical infrastructure, and regulatory barriers. These advantages make it difficult for competitors to replicate Grab’s success in Southeast Asia.

Brand Moat: Trusted and Embedded in Daily Life

Grab’s brand is one of its most powerful advantages. It has become a household name and trusted brand in Southeast Asia, so much so that in some countries, “Grab” is used as a verb for hailing rides or ordering food. Its strength lies in being the category leader across multiple sectors, from mobility to deliveries to e-wallets. This brand dominance is not about prestige (the type of brand moat companies like Hermés, Ferari, or LVMH lean into) – it’s about trust and reducing search costs.

Grab has positioned itself as a utility-based brand, essential for everyday tasks like commuting and eating.

The company’s brand is also highly habit-driven. For millions, Grab is deeply integrated into the daily rhythm of middle-class life, making it a go-to solution for transportation and food delivery. Customers associate Grab with quality, reliability, safety, and convenience, which, as mentioned, reduces search costs – customers don’t need to look elsewhere for alternative services; it becomes habitual.

Over time, this deep brand loyalty is expected to endure for decades as Grab continues to evolve from a startup into a key part of regional digital infrastructure.

Network Effects: The Grab Ecosystem Flywheel

Arguably, the most powerful competitive advantage Grab possesses is its network effects. As the company expands, its platform becomes increasingly valuable. This is known as the “Grab ecosystem flywheel”.

Here’s how it works: as more drivers join, wait times drop, attracting more consumers. As more merchants join, a wider selection of products and services becomes available. And the more consumers there are, the more orders are placed, which attracts even more drivers and merchants. This virtuous cycle makes the platform increasingly difficult for competitors to disrupt.

The power of Grab’s network is also fueled by data loops. With billions of transactions occurring on the platform, Grab is able to continuously improve its services through AI, driving better routing for drivers and more efficient credit scoring for financial services.

What’s more, because Grab serves daily needs – transportation, food delivery, payments – the frequency of interaction strengthens the network far more than platforms offering less frequent services. There are 50 million MTUs. As of early 2025, Grab recorded 7.8 million DTUs. These daily users represented approximately 16% to 17% of the total Monthly Transacting User (MTU) base at that time. Customers who utilize both GrabFood and GrabMart (groceries) have order frequencies 1.8x higher than those who only use food delivery. And members of the GrabUnlimited paid loyalty program interact far more often, showing 3x to 4x higher order frequency in the food segment compared to non-subscribers

So it seems like once onboarded, users remain on the platform, and over time, increase their purchase frequency and spend more, continuing to contribute to the growth of the flywheel.

The Hyperlocal Nature of the Network

When studying Grab, most investors probably see a regional giant spanning eight (soon nine) countries, but the reality is much more granular. A driver in Bangkok provides zero utility to a commuter in Ho Chi Minh City. This places Grab firmly in the hyperlocal quadrant of the marketplace matrix I always come back to when studying network effect marketplaces and platforms.

Every time Grab enters a new city or even a new neighborhood, they essentially have to restart the flywheel from scratch. They must spend heavily on driver incentives and passenger promos just to reach that critical mass where the wait time drops enough to make the service viable. It can be a grueling, capital–intensive process – especially early on – and it was for Grab, battling for market share with behemoth Uber and local peers. You can see this reflected in their historical burn rates.

Unlike a global network like Airbnb where one listing can attract a traveler from anywhere on Earth, Grab is forced to win thousands of tiny, isolated battles against regional competitors. The network effects don’t cross borders easily. Success in Singapore does not guarantee a win in Jakarta. It never has.

If the geographic limitations weren’t enough of a hurdle, we have to talk about the supply side of the equation. In the ride–hailing and food delivery segments, Grab deals almost exclusively in commoditized supply. A car is a car. A delivery rider is a delivery rider. From your perspective as a user, you likely don’t care who is behind the wheel as long as they arrive in five minutes and don’t overcharge you. This lack of differentiation is a nightmare for defensibility. It leads to the “multi–tenanting” problem where consumers may use multiple apps, opting for the best offer available at any given point in time – price comparison. This may create a permanent ceiling on margins.

The real question for any Grab shareholder is whether the “super–app” strategy can actually move the company up the matrix into a more defensible tier. Grab isn’t just trying to be a taxi service. They want to be your digital wallet, your insurer, and your bank. Your everything app. This is an attempt to create a differentiated supply combined with a strong lock-in effect (as to be discussed below). Financial services and loyalty programs like GrabRewards are designed to create this exact “lock–in” that transcends the commoditized nature of a car ride. If you have all your wealth and points stored in one ecosystem, you are far less likely to switch to a competitor for a fifty–cent discount on a laksa delivery. It’s similar to ordering on Amazon: you may know that there may be a cheaper offer available on another ecommerce website, bit Amazon just works, you know the return policy is incredibly consumer oriented, and that the parcel may be at your doorstep in 24 hours.

By layering multiple services, Grab is attempting to build a “horizontal” network effect where the frequency of ride–hailing feeds the data for credit scoring, which in turn fuels the fintech arm. It is an ambitious goals. I believe the success of this determines whether Grab remains a lower-tier utility or becomes a tier–1 powerhouse. They are trying to build a moat where none naturally exists. It’s a bold bet. The jury is still out.

The full story starts here:

The rest of this post covers the remaining pillars of Grab’s moat stack and the trajectory the business is on. If you’re serious about sharpening your investing edge, the full post (and all my previous premium content, including valuation spreadsheets, deep dives (e.g. well-known mid- and large caps such as LVMH, Duolingo, Meta, Edenred as well as more hidden gems such as Tiger Brokers, Digital Ocean, Ashtead Technologies, InPost, Timee, and MANY more) and powerful investing frameworks. is just a click away. Upgrade your subscription, support my work, and keep learning.

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In 2012, Grab was born from a simple, but ambitious business plan aimed at tackling one of the most unreliable and unsafe taxi systems in the world – Malaysia’s. Fast forward to today, and Grab has evolved from that small idea into effectively the “operating system” for daily life in (most of) Southeast Asia.

And Grab is not just another app. In Southeast Asia, Grab is more than a name – it’s become a verb for many. People say, “It’s raining; let’s just Grab to the mall instead of walking” or “I’m too tired to cook, should we Grab some Thai food?” without thinking twice. And it doesn’t stop there – Grab has mastered the art of creating habits, seamlessly integrating itself into the daily lives of millions of people who now rely on it for everything from getting from point A to point B to paying bills to online shopping.

Grab’s story is also a survival narrative that most tech companies would envy. In 2018, Grab managed to outmaneuver the global giant Uber in its home region and, eventually, when Uber basically gave up, acquired Uber’s Southeast Asian operations in a unique deal. That was a pivotal moment in Grab’s history, solidifying Grab’s dominance and ensuring that Uber’s exit from Southeast Asia would make Grab the undisputed leader in ride-hailing and delivery services.

Fast forward to 2025, and Grab hit a major milestone: profitability. After years of burning through capital in pursuit of growth, Grab reached its first full year of net profit in 2025 – $200 million in the black. This marks a significant inflection point, where the company is transforming from a “growth-at-all-costs” startup-like-business into a more disciplined, profitable growth powerhouse with a clear path to long-term value creation.

But here’s the thing: Grab’s story is far from over. In fact, despite its massive scale already – Grab is a multi-billion-dollar company today –, the company is still just scratching the surface. Grab’s Monthly Transacting Users (MTUs) currently represent just 6% to 7% of the Southeast Asian population. That means there’s a huge growth runway ahead – roughly 94% of the market is still untapped.

What’s even more exciting is Grab’s ecosystem flywheel. About two-thirds of Grab’s users engage with two or more services, and for those using three or more services, the one-year retention rate is an impressive 88%. When customers stay, they not only use more services, but they spend more, too. This is a growth driver that keeps feeding itself.

And then there’s Grab’s cutting-edge use of AI-driven efficiency. By utilizing proprietary AI models, Grab has been able to double its revenue from 2022 to 2024, all while keeping headcount flat. Over 90% of mobility rides are now dispatched using AI, showcasing just how much the company has automated its operations.

On the financial side, Grab has successfully expanded into digital banking. In just three years, Grab amassed 7.4 million deposit customers across its three digital banks, and its loan portfolio crossed the $1 billion mark in 2025 and is expected to exceed $2 billion by 2026 year-end.

And as if all of this wasn’t enough, Grab is setting its sights on global expansion. In early 2026, it completed the $600 million acquisition of foodpanda Taiwan, signaling the company’s intention to push beyond Southeast Asia and tap into new, high-value markets. This marks the first major step in Grab’s journey toward becoming a truly global player.

Of course, this is just the tip of the iceberg. Grab is positioning itself for the future with ambitious plans around autonomous vehicles (AVs) and scaling its financial services. The company is constantly innovating, finding new ways to integrate its services and make the lives of its users easier and more connected.

But what does this mean for investors? Can Grab sustain its growth? What challenges lie ahead? And most importantly, what kind of valuation can you expect as this story unfolds?

As you can tell, Grab is a fascinating business to dive into. So let’s do exactly that and dive deeper into Grab’s history, business model, management team, moat stack, its future, and the growth drivers that will continue to propel this Southeast Asian juggernaut forward.

Are you excited yet? Let’s dive into the first part (11,500 words) of this deep dive.

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Disclaimer: I own Grab shares. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

High-Level Thesis: “Bam Bam Bam Bam Bam”-90 Second-Hypothesis

As always, in the style of legendary investors like Bill Miller and Peter Lynch, I’m attempting to give you the quick 90-second rundown on Grab Holdings (GRAB) – what’s the investment hypothesis (which we are then going to test throughout this deep dive?

Right now, the stock trades around $3.6, a significant pullback from its 2021 debut. While that might sound concerning, the real story lies in the business transformation that’s been happening under the hood (i.e. not reflected in the share price).

Here are the five reasons why I think Grab is an interesting opportunity:

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You likely think of global ubiquity in terms of the technology in your pocket or the way we travel across borders. But there is a silent sovereign in the American economy that moves more volume than the tech icons we obsess over, and it does so without a single retail storefront.

Every year, Fair Isaac Corporation – better known as FICO – sells over 10 billion scores (which translates to approximately 27 million scores purchased daily).. To put that in perspective, that is roughly 40 times the number of iPhones Apple ships to the entire world in a year and nearly double the total number of passengers who board a commercial flight globally.

It is the de facto passport for financial mobility, used in 90% of all top U.S. lending decisions and serving as the primary measure of risk for over 12 trillion dollars in U.S. mortgage debt.

If you want a mortgage, an auto loan, or even to rent an apartment, you aren’t just a person – you are a three-digit number owned by a company that started in a studio apartment in 1956 with 400 dollars and a radical dream of replacing “handshake-and-vibes” lending with objective algorithms.

In this multi-part deep dive, I want to pull back the curtain on the most efficient toll-bridge in global finance (88% EBIT margins in the Scores segment), and why its supposedly certain downfall was just derailed by a massive regulatory reversal.

I find it fascinating how few people realize the sheer, unchecked pricing power FICO wields. Between 2022 and 2025, the company did something that would be a death sentence for almost any other business – and it brought its fair set of challenges to FICO too, to be fair. It raised the price of its mortgage scores from roughly 0.60 to 4.95 dollars by 2025. That is an 800% increase in just three years. And then again to $10.00 (or $4.95 + $33 Success Fee) for 2026 – another 2x increase.

Imagine your internet provider or utility company jacking up rates by eight times; there would be a congressional inquiry by sunset.

Yet, because FICO is the “universal language” of the mortgage market – cited in 98.8% of all securitizations – lenders simply paid the toll. The financials are the stuff of legend. The company’s core Scores segment operates with 88% operating margins. Even more staggering is the “95% Rule” – for every new dollar of revenue FICO generates through these price hikes, nearly 95 cents drop straight to the bottom line.

As of FY2024, the company turned 1.72 billion dollars in revenue into more 600 million dollars of free cash flow. It is a capital-light compounding machine that requires no factories. It is pure risk math.

For the last 1-2 years, the primary “bear case” for FICO was built on the threat of “Lender Choice” – a regulatory push to break the monopoly by allowing competitors like VantageScore into the ecosystem. The plan was to move from a “tri-merge” (where lenders pull scores from all three bureaus) to a “bi-merge” (where they only pull two). This would have effectively stripped FICO of its guaranteed seat at the table. But everything changed in July 2025. In what some have dubbed the “Pulte Pivot,” FHFA Director Bill Pulte unexpectedly maintained the tri-merge requirement, effectively pulling all three bureaus and slamming the door on the bi-merge transition. This move preserved the existing plumbing of the mortgage market and cemented FICO’s dominance just as the market thought the “invisible engine” was about to be dismantled.

Given the excessive price hikes, this doesn’t mean the regulatory risk is “done” though.

Is the Largest Drawdown Since 2008 an Opportunity?

The world looks significantly more volatile than it did even a few months ago. The ongoing war with Iran has sent geopolitical shockwaves through every asset class, and we are now staring down a macro environment where inflation is expected to skyrocket.

Market sentiment has turned decidedly cold. FICO is currently experiencing its largest drawdown since the Great Financial Crisis, with the stock falling 52.67% from its peak.

I see a market growing increasingly cautious around credit risk, fueled by concerns over debt exposure at firms like Blue Owl ($OWL) and Oracle ($ORCL). This anxiety may have contributed to the drag on FICO’s valuation, down to 25.1x NTM P/E and 18.8x EV/EBIT – well below its five-year mean of 31.5x.

You have to ask yourself: is this a warning of a broader credit event, or a generational buying opportunity for a monopoly?

So in this deep dive series, I’ll explore how FICO is positioned to navigate this era of stagflation and war, and whether the “high beams” of federal regulators are still a threat after the Pulte Pivot.

In this first part, we cover the business’s history, the business model, its products, and competitive environment (11,000 words in total).

Here’s what I will cover in this deep dive series:

• “BAM BAM BAM BAM BAM” 90-Second Pitch – Why Fair Isaac and Why Now?

• 1) Understanding the Business

  • 1.1. Business History

  • 1.2. Product

  • 1.3. Business Operations

  • 1.4. Customers

  • 1.5. Industry & Competitive Landscape

• 2) Business Quality

  • 2.1. Competitive Advantages Analysis

  • 2.2. Other Thoughts on Business Quality

• 3) Management and Governance

  • 3.1. Management Background

  • 3.2. Integrity, Incentives, and Compensation

  • 3.3. Capital Allocation

  • 3.4. Management Roasting

• 4) Financial Health

  • 4.1. Balance Sheet Health

  • 4.2. Operating Perspective

  • 4.3. Off-Balance Sheet Items & Hidden Risks

• 5) Risks

  • 5.1. Inversion

  • 5.2. VantageScore vs. FICO: Is the Credit Scoring Giant Losing Its Grip?

• 6) Other Items

• 7) Valuation

  • 7.1. Past Growth

  • 7.2. Future Growth (including a TAM analysis and identifying key growth drivers)

  • 7.3. Valuation Work

• Fun Fact

• Appendix

Disclaimer: The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.

High-Level Thesis: “Bam Bam Bam Bam Bam”-90 Second-Hypothesis

When you think of the stock market, one of the biggest challenges is quickly determining whether a business truly has potential. As my regular readers know, Bill Miller, legendary investor, is known for his “Bam Bam Bam Bam Bam” approach to pitching stocks – which I’ve shamelessly copied.

In essence, it’s a quick pitch that gets straight to the point: Why is this a great business? Miller’s style demands clarity and precision, with just five reasons why an investment could make sense. So, let’s apply this framework to Fair Isaac Corporation (FICO), a company that may not be on everyone’s radar, but absolutely should be.

Here we go …

• BAM #1 – Indispensable Industry Standard: FICO’s scores are the industry standard. In fact, 90% of top U.S. lending decisions use FICO scores. Beyond that, FICO scores dominate the secondary market for securitizations, with 98.8% of U.S. securitizations – a financial process that pools income-generating assets (such as mortgages, auto loans, or credit card debt) and converts them into marketable securities – using FICO to communicate credit risk to investors. This is a business that has become synonymous with credit risk, and replacing FICO would be like changing the engine of a plane mid-flight – a daunting task.

• BAM #2 – Unmatched Pricing Power & Value Gap: FICO is in the midst of a remarkable pricing transformation. After decades of keeping prices flat, FICO raised its wholesale mortgage score price from about $0.60 to $4.95 by 2025 – an eye-popping 800% increase –, and $10 by 2026. Despite this hike, FICO’s fee still represents a negligible 0.2% of average mortgage closing costs. This leaves ample room for further price hikes – at least if you have a long-term view (less so in the near term) – without significantly impacting volume.

• BAM #3 – Elite Margin Profile: FICO’s Scores segment boasts near-monopoly margins, with 88% – yes, you read that right! – operating margins in Q1 2026. The key here is the low incremental cost structure: the core algorithms, developed decades ago (but frequently updated), require minimal investment to scale. That means when FICO raises prices or increases volume, almost every new dollar drops straight to the bottom line.

• BAM #4 – Strategic SaaS Transformation: FICO is transitioning its Software business from legacy on-premises applications to a cloud-native platform. This transformation is paying off, with platform-specific Annual Recurring Revenue (ARR) growing at over 30% in Q1. The company’s “land and expand” strategy is also working well, with existing customers spending significantly more as they adopt new decision-making use cases. This positions FICO for long-term growth in the SaaS space.

• BAM #5 – Aggressive, Shareholder-Aligned Capital Return: FICO has used its cash flows to buy back stock aggressively, reducing its share count by 30% over the past decade, leading to incredibly fast profit per share growth. In fiscal 2025 alone, the company returned $1.4 billion to shareholders via buybacks.

This strategy has led to a stellar 18% EPS CAGR over the last 13 years, far outpacing its 8-9% revenue growth (not per share revenue growth as displayed in the chart below). Simply put, FICO is showing its commitment to delivering value to shareholders.

As we enter 2026, FICO finds itself at a rare entry point. The stock has experienced a 52% price drop from its highs, making it a possibly attractive buy for long-term investors.

So why the drop?

What Went Wrong?

Despite FICO’s strong business fundamentals, the company hasn’t been immune to challenges. The key issues that have weighed on the stock recently are:

• Regulatory Breach of the Monopoly: The FHFA’s formal transition to a “Lender Choice” model has opened the door for VantageScore 4.0 to compete directly with FICO in the market for Fannie Mae and Freddie Mac loans. While this introduces competition and substitution risk, it’s not an existential threat to FICO’s dominance – yet.

• Volume and Revenue Contraction Risks: The potential shift from a “tri-merge” model, requiring three credit scores, to a “bi-merge” model, requiring only two, has the potential to reduce FICO’s score volume by as much as one-third per application. This could directly impact revenue growth in the short term.

• Intensifying Antitrust Scrutiny: FICO is currently defending itself in the “In re FICO Antitrust Litigation” case, which addresses its distribution practices and “transmission fees.” While it’s early in the legal process, the outcome could have implications for FICO’s cost structure.

“On November 24, 2024, the court ruled on FICO’s and the credit bureaus’ motions to dismiss the plaintiffs’ amended complaints. The court dismissed with prejudice all claims in the lawsuit other than a Sherman Act Section 2 claim and accompanying state law claims against FICO, which were allowed to proceed through the discovery stage of the litigation. FICO intends to vigorously defend against the remaining claims in this proceeding.“ - FY25 Annual Report

• Software Segment Growing Pains: FICO’s transition to a SaaS model has not been entirely smooth. Despite strong growth in its Scores business, its Software segment grew a mere 2% in Q1 2026, possibly raising concerns among investors about the potential monetization lag this segment.

Part 1 – Understanding the Business

1.1. History: The Evolution of a Global Risk Standard

The story of Fair Isaac Corporation (FICO) is one of innovation, adaptation, and an unwavering commitment to shaping how credit risk is understood and quantified. From its humble beginnings in a small apartment to becoming a critical part of the global financial ecosystem, FICO has grown into the architect of the pervasive credit risk standard in the United States, serving thousands of businesses across over 100 countries. Let’s take a look at how this company evolved over the years to become a cornerstone of modern financial systems.

Founding and Early Innovations (1956–1980s)

Before we start with FICO itself, it’s worth highlighting how lending decisions were made historically – way back in the day! For most of the twentieth century, the world of credit was remarkably small, intimate, and – by today’s quantitative standards – frustratingly arbitrary. If you needed a loan to buy a home or expand a storefront, you didn’t appeal to an abstract score. You appealed to a person. Usually, this meant sitting across from a local bank manager who, at best, knew your family, your reputation, and perhaps even where you went to church. Decisions were built on a foundation of trust and familiarity that simply doesn’t scale in a modern economy. I find it fascinating how much weight was placed on a simple handshake.

If the manager liked your story, you were in. If he didn’t? You were out.

It was a gatekeeper’s paradise. There was no recourse and no objective data to prove him wrong.

This extreme subjectivity created a massive efficiency problem for the financial system. And because there was no standardized way to measure risk, lending was essentially a binary outcome. You either qualified for the prevailing interest rate or you were rejected entirely.

The concept of risk-based pricing – where you might pay a slightly higher rate because your profile is a bit thinner – simply didn’t exist yet. Everyone who was approved essentially paid the same price for capital. Think about that for a second. A doctor with twenty years of practice and a young baker starting her first shop would receive the same terms, provided they both cleared the manager’s subjective “trust” hurdle. This lack of nuance meant that banks were constantly leaving money on the table. They couldn’t comfortably lend to anyone outside their immediate social or geographic circle because they had no way to price that uncertainty. You were either a known quantity or a total mystery. There was no middle ground. It was an incredibly rigid way to run a national economy.

This brings us to Fair Isaac.

FICO’s journey began in 1956 when engineer Bill Fair and mathematician Earl Isaac – do you see where today’s name is coming from? –, both visionary thinkers, founded the company with a simple but powerful idea: to apply mathematical algorithms to make lending decisions more objective and standardized. The duo met at the Stanford Research Institute, and based on just $400 in personal investments (equivalent to approximately $5,000 today), they set up shop in a studio apartment in San Rafael, California.

In 1958, FICO achieved its first major milestone by selling its first credit scoring system to the American Investment Company (AIC). This was the beginning of a long journey toward mainstream adoption. Early on, these scoring systems were tailored to individual needs and were labor-intensive, often relying on physical paperwork and borrowed computers to process the data. Despite these challenges, it marked the birth of a product that would eventually reshape the credit industry.

The Equal Credit Opportunity Act of 1974 proved to be a pivotal moment in FICO’s growth. The legislation made it illegal to discriminate against applicants based on factors like gender or marital status, creating a powerful incentive for lenders to adopt more objective, data-driven methods of credit evaluation. FICO’s algorithmic scoring models provided a solution, helping lenders demonstrate that their decisions were merit-based and unbiased, thus propelling the company’s growth.

In the 1970s and 1980s, FICO expanded its reach as credit bureaus (nowadays officially known as Consumer Reporting Agencies or CRAs) – essentially, private companies that collect and manage data about your financial behavior – began consolidating. For context, by 1965, at the peak, the trade association for these companies (now known as the Consumer Data Industry Association) had over 2,200 members.

FICO recognized an opportunity to develop models that could be applied universally across different datasets. In 1981, they introduced “PreScore,” the first standardized credit bureau risk score, which laid the groundwork for the universally recognized FICO Score.

The company also went public in 1987 on the NYSE, marking a new chapter in its evolution.

Establishing the “Industry Standard” (1989–2011)

FICO’s true breakthrough came in 1989 with the introduction of the now-famous FICO Score, ranging from 300 to 850.

When researching FICO, I was asking myself why the score doesn’t start at zero. So I’ve looked into the origins of the FICO scale and realized that starting at zero would be a mathematical nightmare for lenders because it implies an absolute certainty of default. Bill Fair and Earl Isaac chose the 300–850 range to provide enough “ticks” on the scale for high–resolution risk assessment. This spread allows for a concept called log–odds, where small point increases represent a doubling of your creditworthiness.

As we’ve learned, before 1989, determining creditworthiness was essentially a Wild West of subjective judgment calls. When FICO finally introduced its standardized 300 – 850 range, it fundamentally rewired the plumbing of the American financial system. FICO’s algorithm effectively turned personal behavior into a quantifiable asset class. It relies on five distinct variables, but the heavy lifting comes from your payment history and total debt levels – accounting for 65% of the total weight. You see, the model prioritizes consistency over sheer net worth. It functions as a track record. One slip-up on a mortgage payment carries more weight than a decade of on-time utility bills.

The remaining fragments of the score – length of history, credit mix, and new inquiries – serve as the fine-tuning for risk assessment. I find it fascinating that the algorithm rewards complexity. If you only hold a single credit card, the system views you as an unproven entity. It wants to see you juggle different types of debt, like an installment loan alongside revolving credit, to prove you can handle diverse financial obligations. Applying for a flurry of new accounts usually triggers a red flag because it signals a sudden, desperate thirst for liquidity. Keep it steady. This balance between the age of your oldest accounts and the freshness of your new ones creates a profile that lenders can actually trade against. It changed everything.

FICO’s standardized score quickly became the go-to method for assessing credit risk. Lenders embraced the simplicity and reliability of this scoring system, and it became a key part of their decision-making process.

Then, FICO reached a watershed moment in 1995 when Fannie Mae and Freddie Mac, the U.S. government-sponsored entities (GSEs), required the use of the FICO Score for all conforming mortgage originations. This move solidified FICO’s position as the industry standard, as it became the “lingua franca” of credit risk, enabling the mass securitization of debt. Investors demanded a consistent and reliable benchmark to assess loan pools, and FICO’s scoring system met that need.

Throughout the 1990s and 2000s, FICO diversified its offerings beyond credit scoring. The company expanded into decision software with the launch of products like Falcon Fraud Manager, a tool that now protects around two-thirds of all credit card transactions worldwide. This diversification helped FICO cement its reputation as not just a score provider, but as a comprehensive risk management partner for businesses.

Leadership Change and Strategic Pivot (2012–Present)

A significant shift occurred in 2012 when William J. Lansing was appointed CEO. Under Lansing’s leadership, FICO embarked on a path of modernization and aggressive monetization. This shift paid off in a big way: by 2023, the company’s stock price had increased approximately sixteen-fold. Lansing’s strategic vision positioned FICO to capitalize on both its legacy business and new growth opportunities in cloud-based software.

Importantly, for nearly three decades, FICO kept its prices largely unchanged, prioritizing widespread adoption. However, in 2018, the company began a strategic pricing shift, particularly in the mortgage sector. The price of wholesale mortgage scores jumped from around $0.60 to nearly $5.00 by 2025 – an 800% increase! This dramatic pricing move, although controversial, is a reflection of FICO’s growing recognition of the immense value it provides in the financial ecosystem.

FICO’s leadership recognized the growing importance of cloud-based technologies and embarked on a massive, multi-year investment to transition from legacy on-premises solutions to the cloud-native FICO Platform. As part of this transformation, FICO also divested non-strategic businesses such as its Cyber Risk Score (2020), Collections and Recovery (2021), and Siron compliance (2023).

This focus on cloud-based software has set the stage for FICO’s future growth, with Annual Recurring Revenue (ARR) from platform-specific offerings growing at over 30% annually.

To align its operations with the new platform-first strategy, FICO merged its Applications and Decision Management Software segments into a unified Software segment in 2021.

This consolidation aimed to streamline operations and improve the company’s focus on its evolving cloud-based platform. In 2022, Stephanie Covert was appointed as the first leader of the newly unified software group, bringing fresh leadership to an increasingly complex and global business.

Challenges and Strategic Controversies

The 2008–2009 financial crisis was a difficult period for FICO, as lenders pulled back on extending credit in the wake of the housing crash. This resulted in a nearly 27% drop in Scores revenue, highlighting the company’s sensitivity to economic downturns. However, FICO’s adaptability and position in the credit risk ecosystem allowed it to rebound in the years following the crisis.

In 2022, the Federal Housing Finance Agency (FHFA) approved the use of VantageScore 4.0 for GSE mortgages, ending FICO’s long-standing monopoly on GSE-originated loans.

This regulatory change, which introduced a “Lender Choice” model, has posed a significant challenge to FICO’s traditional business model. The company has responded by promoting its more predictive FICO 10T model and introducing the Mortgage Direct License Program in 2025 to circumvent traditional credit bureau distribution channels.

FICO’s pricing model has come under increasing scrutiny in recent years. The company’s aggressive price hikes and “transmission fees” – charges imposed on credit bureaus for delivering FICO scores – have led to legal battles, including the ongoing “In re FICO Antitrust Litigation.” Additionally, U.S. lawmakers have raised concerns about potential price gouging in the mortgage market. These legal and regulatory challenges could pose risks to FICO’s growth and profitability.

There’s, of course, more to all of this, and we will discuss the FHFA’s shift and the risk it presents to FICO in depth in part 5 (risks).

Finally, FICO has faced criticism for its models, which some argue may disadvantage groups with limited credit histories. In response, the company has focused on broadening financial inclusion by investing more than 50% of its Scores R&D into products designed to include individuals with limited credit history, such as UltraFICO and FICO Score XD.

1.2. Product

FICO, a leader in credit risk management, operates through two primary reportable segments:

• Scores and

• Software

Both of which can be further subdivided.

These segments, though distinct, are deeply interconnected, with each contributing significantly to the company’s overall growth and profitability.

Below you find the overall revenue contribution of each segment for the last seven fiscal years and the respective YoY growth rates.

Let’s explore the products and services FICO offers, and how they stand out in a competitive market.

The full analysis starts here:

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Scores Segment: The Economic Engine

FICO’s Scores segment (59% of FY25 revenue) is the company’s “economic engine” and the backbone of its business. This segment provides Business-to-Business (B2B) scoring solutions to lenders …

… and Business-to-Consumer (B2C) services through platforms like myFICO.com.

Here’s a breakdown of the contribution of each sub-segment (the B2B segment has been growing more rapidly):

In fact, FICO’s B2C (Business-to-Consumer) business is divided into two primary distribution channels:

• Direct sales through myFICO.com and

• indirect sales via partnership licenses.

The indirect channel is the larger contributor, estimated to make up about 55% to 60% of total B2C revenue. In this model, FICO earns royalties from partners – mainly the three major credit bureaus – who integrate FICO scores into their own consumer-facing products. A key example is the five-year partnership with Experian, where FICO scores are provided through services like Experian Boost.

Additionally, the FICO Score Open Access program allows over 200 financial institutions, such as Wells Fargo, to offer scores for free to their customers, reinforcing the FICO brand as the standard for credit scores.

On the other hand, myFICO.com, which directly sells scores, subscriptions for credit monitoring, identity theft protection, and educational reports, represents around 40% to 45% of the B2C segment. However, this channel has experienced a decline in revenue over the past few years, largely due to the increasing availability of free scores through Open Access programs offered by banks.

Despite this decline, B2C remains a high-margin and less cyclical component of FICO’s business, playing an essential role in maintaining the company’s standing as the “common language” of credit; it continues to be a key element in ensuring that consumers remain aligned with FICO’s trusted scoring model rather than turning to competitors.

With the B2C vs. B2B distinction out of the way, let’s get back to the actual product.

The FICO Score is deeply integrated into the U.S. lending landscape, playing a crucial role in over 90% of top lending decisions and in over 99% of credit securitizations (as a reminder, securitization describes the financial process that pools income-generating assets (such as mortgages, auto loans, or credit card debt) and converts them into marketable securities), making it an indispensable tool for financial institutions and investors.

It serves as the industry standard for assessing and monitoring consumer credit risk, used across a variety of lending products.

• In the mortgage sector, it is a requirement for all conforming loans guaranteed by Fannie Mae and Freddie Mac, and also widely used in non-conforming markets.

• The FICO Score is similarly essential in other lending categories, such as auto loans, credit cards, and personal loans, where it determines approval rates, interest rates, and credit limits.

• Beyond lending, the FICO Score is used in non-lending decisions, including apartment applications, job interviews, and by over 700 insurers to predict risk for auto or homeowners’ coverage.

• As mentioned before, the score is also indispensable in downstream markets like securitization, where it is cited in over 98.8% of U.S. mortgage-backed securities to communicate risk to global investors.

In terms of revenue contribution, the mortgage origination market has become the largest driver of FICO’s business, accounting for 51% of B2B revenue and 42% of total Scores revenue as of Q1 2026.

As mentioned in the history segment, FICO Score itself ranges from 300 to 850, with a higher score indicating lower risk and making borrowers eligible for better loan terms. A “good” score acts as a seal of approval, enabling borrowers to secure more favorable loan options and lower monthly payments. On the flip side, a lower score signals higher risk, resulting in either loan rejection or significantly higher interest rates to compensate for the default risk.

Importantly, Fair Isaac has also entered adjacent markets with more tailored products:

“In addition to the FICO® Score, we offer several other broad-based scores, including specific FICO® Industry Scores. For example, in 2021 we introduced Bankcard and Auto Industry versions of FICO® Score 10. We also develop various custom scores for our financial services clients.

The FICO® Resilience Index offering is designed to complement FICO® Score models by identifying those consumers who are more resilient to economic stress relative to other consumers within the same FICO Score bands. The FICO Resilience Index is designed to enable lenders to continue to lend and better manage risk by providing a more precise assessment of loan default risk during periods of economic stress.“ - FY 2025 Annual Report

Finally, Recent expansion, particularly in the mortgage sector, has driven B2B revenues to surge by 36% year-over-year in early 2026.

This highlights the pricing power and demand FICO continues to command in the marketplace.

Software Segment

FICO’s Software segment includes a variety of industry-leading tools for credit risk management, fraud detection, and decision-making. The software segment includes pre-configured analytic solutions and the cloud-native FICO Platform, which is central to the company’s transition toward a Software-as-a-Service (SaaS) model.

Importantly, the software segment of Fair Isaac is designed to operate independently from its core Scores business, with management even open to the possibility of eventually selling it. While both segments serve the financial services industry, the software solutions are typically sold to different departments within banks than the credit scoring products. Historically, the Scores segment has acted as a “cash cow,” funding the heavy investments required to develop FICO’s software platform. This strategic separation allows the software business to stand on its own while still benefiting from the financial support of the more established Scores business.

FICO’s software offerings are divided into six primary buckets:

• fraud detection,

• customer management,

• originations,

• financial crimes compliance,

• customer engagement, and

• marketing.

Fraud detection and customer management are the most significant contributors to software revenue, accounting for nearly 50% of the total. Among these, Falcon Fraud Manager stands out as a flagship product, protecting two-thirds of all credit card transactions worldwide and identifying fraud in just 15 milliseconds.

TRIAD Customer Manager, another key solution, manages 65% of global credit card accounts and automates critical account-level decisions. These products showcase FICO’s leadership in fraud detection and customer management, with Gartner recognizing the company as a leader in its Magic Quadrant for Decision Intelligence Platforms in January 2026.

The FICO Platform represents a shift to cloud-based analytics, where FICO enables companies to develop custom decisioning workflows with AI and machine learning tools. This move to a more flexible and scalable platform is key to the company’s future growth strategy. Put differently, FICO’s goal with its platform-first strategy is to streamline these diverse software offerings into a unified, cloud-native platform, providing faster time-to-market and connecting various use cases – like origination and fraud detection – to offer a comprehensive, 360-degree view of the customer journey.

The transition to this platform began in 2016, with a series of strategic investments and reorganizations. After several years of heavy investment, including leadership changes in 2019 and divestitures of non-platform-based businesses starting in 2021, FICO reached a critical milestone by fiscal 2025. By then, over 150 Tier 1 financial institutions had adopted the platform, and FICO was ready for the general availability of its next-generation enterprise fraud solutions natively built for the platform.

The Platform has experienced substantial growth, with Annual Recurring Revenue (ARR) growing by 37% in Q1 2026, indicating a strong trajectory for the SaaS business. At the same time, legacy non-platform revenue has started to decline, signifying that FICO is successfully transitioning toward its cloud-first strategy.

Product Classification and Differentiation

FICO’s products and services fall into two primary categories: consumable and non-consumable goods.

The Scores products are effectively consumable in the B2B context, as their revenue is usage-based – each time a lender pulls a score, FICO generates revenue. This model allows FICO to capture recurring revenues while providing an essential service to lenders.

On the other hand, Software products, including the FICO Platform, are sold as subscriptions, with multi-year agreements and recurring fees based on usage metrics.

In terms of product differentiation, FICO’s offerings are far from commoditized. While competitors have emerged in the credit scoring space, FICO’s products are deeply embedded in the financial system and have become an industry standard.

The FICO Score is differentiated not just by its predictive power, but by its role as the “common language” in the secondary market for securitization.

FICO’s products are positioned as high-tier, mission-critical tools for regulated financial institutions. The company serves 92 of the 100 largest U.S. financial institutions and three-quarters of the largest 100 banks worldwide, highlighting its strong foothold in the industry. Its products are designed for businesses that require reliable, scalable, and accurate decision-making tools, making them essential to banks, credit card companies, and mortgage lenders.

On the B2C side, FICO’s offerings are positioned as premium subscriptions, appealing to consumers who are willing to pay for more comprehensive and trustworthy credit monitoring. These services are marketed as a step up from free alternatives, leveraging the longstanding credibility of the FICO brand.

Plans for New Products and Services

Software Segment

FICO continues to innovate and expand its product portfolio. The company is deeply focused on the SaaS transition, with plans to move most of its software products onto the cloud-native FICO Platform. The transition of FICO’s Software segment to its unified, cloud-native FICO Platform is still very much an ongoing strategic initiative. While the company has made significant progress, management explicitly stated that their goal is to move “substantially all” of their software products onto the platform, a process that remains a “work in progress.”

This transition is key to FICO’s long-term strategy of enabling “land and expand” sales, where initial product sales are expanded as customers add more decisioning use cases to their platforms.

Additionally, FICO launched the FICO Marketplace in fiscal 2025, providing customers with easy access to AI models, decision rulesets, and machine learning tools to operationalize analytics. This platform is designed to help organizations quickly implement and deploy predictive analytics, further enhancing FICO’s value proposition.

Scores Segment

FICO has built a reputation over the years for continually updating its proprietary scoring algorithms, ensuring that its models remain the most predictive and reliable measure of credit risk. The company’s ability to innovate has allowed it to stay ahead of the curve, incorporating newly available data and advanced analytics into its scoring system. This focus on product innovation is evident in the timeline of major updates to its scoring models, which have evolved over the decades to meet the changing needs of both consumers and lenders.

As we learned, FICO’s journey began in 1956, when the company was founded with the vision of improving business decisions through data. By 1981, FICO had introduced PreScore, the first standardized credit bureau risk score, which integrated its mathematical models with raw consumer data from the credit bureaus. A major milestone came in 1989 with the introduction of the FICO Score. The FICO Score gained even more prominence in 1995 when Fannie Mae and Freddie Mac mandated its use for conforming mortgages.

Over the years, FICO continued to refine its models:

• In 2009, FICO launched Score 8, and later, Score 9 and FICO Score XD, which incorporated alternative data such as rental payment history and utility bill payments. These advancements allowed FICO to expand its addressable population, helping consumers with little or no traditional credit history.

• The most significant recent update came with the launch of the FICO Score 10 Suite in 2020, which introduced FICO 10T, a model that uses trended credit data (yes, the “T” stands for “Trended Data”), offering a more comprehensive view of borrower behavior. Unlike Classic FICO, which looks at a “snapshot” of your debt today, 10T looks back at the last 24+ months to see if you are paying down your balances or if you are habitually carrying more debt. This update significantly improved predictive power, with FICO 10T capable of identifying 18% more defaulters compared to its predecessors, potentially increasing loan approval volumes by 5% without taking on additional risk. By early 2026, nine of the top fifteen mortgage lenders had adopted FICO 10T, and the model was in the testing phase for Government-Sponsored Enterprises (GSEs). Effectively, Government-Sponsored Enterprises (GSEs) – Fannie Mae and Freddie Mac – are transitioning to new credit score requirements mandated by the FHFA, shifting from older FICO models to FICO Score 10T and refined data sets.

• Looking ahead, FICO is exploring further innovations, including the launch of FICO 11, the integration of Plaid’s open finance network with UltraFICO for real-time cash flow data, and BNPL (Buy Now, Pay Later) data integration in FICO Score 10T BNPL. With models like UltraFICO and FICO Score XD, which use utility and rental data to provide credit scores for consumers with limited traditional credit histories, FICO not only broadens access to financial services but also reinforces FICO’s commitment to inclusivity.

These ongoing innovations show FICO’s commitment to staying at the forefront of the credit scoring industry, with the company continuously striving to broaden its reach while maintaining backward compatibility with past models.

This focus on product evolution ensures that FICO remains indispensable to lenders and consumers alike, maintaining its position as the gold standard of credit risk evaluation.

1.3. Business Operations & How FICO Makes Money

FICO generates revenue through a combination of licensing, subscriptions, and transaction-based fees, creating a diverse and scalable business model.

1) Scores (B2B)

Let’s maybe start with pricing. FICO’s pricing varies widely across different channels, with the B2B mortgage score priced at a flat $4.95 per score back in 2025, while other non-mortgage products like credit cards can cost mere pennies.

“… and scores are very inexpensive generally less than a dollar each and some scores are even a penny or a fraction of a penny depending on the use case“ - Dev Kantesaria on Business Breakdowns

Importantly, for 2026, FICO moved away from a simple flat fee of $4.95. Lenders now typically face one of two paths:

• The “Standard” Model: Under this model, FICO generates revenue in the Scores segment by licensing its proprietary algorithms to the three major credit bureaus: Experian, TransUnion, and Equifax. These bureaus run the algorithms on their data to generate credit scores for lenders, who then use these scores in their decision-making processes. For those not using FICO’s direct licensing program, the wholesale royalty fee has doubled to $10.00 per score.

  • It’s a per-pull pricing structure where a lender pays a flat fee every time they check a borrower’s credit score. In this scenario, the bureaus pass through that $10.00 fee, often adding their own data service fees on top (making it a highly lucrative business for the bureaus themselves!), which is why some tri-merge reports are hitting $150–$220 this year.

“Users of our scores generally pay the 3 consumer reporting agencies a fee for each individual score generated by our algorithms, and the consumer reporting agencies pay an associated fee to us.“ - Annual report

“… it’s important to mention again that FICO only produces the mathematic models and these are then combined with the credit bureau data to create this course so fair Isaac does not gather or retain any consumer data of its own so the direct revenue for scores comes from the credit bureaus which represent about 75 percent of scores revenues but the End customer is in fact the banks and financial institutions which are making the credit decisions the credit bureaus sell consumer credit reports to these Banks and financial institutions the fight goes forward generally represents less than five percent of what is called a try merge report that is generally about fifty dollars so a try merge report is simply all three credit bureau reports combined together in one Consolidated report.“ - Dev Kantesaria on Business Breakdowns

• • Also, the mortgage application isn’t a single, binary event where one loan equals one unit of revenue. If you look under the hood of the 2026 credit landscape, you will see that the reality is far more lucrative for FICO due to the multiplier effect of the “tri-merge” system. When a couple, for instance, applies for a home loan – which accounts for roughly two-thirds of all buyers – the lender pulls a full credit profile for both individuals from all three major bureaus. That is three bureaus times two people. Six scores. Because FICO successfully pushed its royalty to $10 per score at the start of this year, that initial inquiry now generates a cool $60 in high-margin revenue before the lender even reviews the file. It is a mandatory toll booth. You might assume this is a one-time cost, but the math gets even more aggressive as the calendar turns. The clock is your enemy but FICO’s best friend. Most credit reports in the mortgage world carry an expiration date of roughly 120 days. If you are waiting for a new construction home to be finished or simply struggling to find a winning bid in a tight market, your data will inevitably go stale. The lender is then forced to refresh the file. They pull all six scores again. Now we are at twelve pulls. In this scenario, a single couple has generated $120 in royalties for a house they haven’t even moved into yet.

  • The revenue stream continues through “soft pulls” used for undisclosed debt monitoring during the underwriting phase. FICO effectively watches your behavior until the very moment the loan funds. By the time you finally receive your keys, a single transaction might have funneled $150 or more into FICO’s pockets. This goes far beyond a simple scoring service – think of it as a high-frequency data tax on the mortgage lifecycle.

• The “Performance” Model (Direct License): Lenders or their “resellers” (the companies that bundle the reports) sign a contract directly with FICO. This allows them to calculate the score themselves using bureau data, technically “bypassing” the bureau’s markup on the score itself. This is where the 2025 $4.95 figure still exists, but with a major catch. Lenders pay $4.95 per score for the initial pull, but they are also hit with a $33.00 “funded loan fee” per borrower (basically a “success fee”) for every loan that successfully closes.

  • It took me a while to fully grasp this new “plumbing” of the mortgage industry. So let me try to explain it further: In the past, the three big credit bureaus (Equifax, Experian, and TransUnion) were the only ones who could calculate a FICO score. They owned the data and the “calculator.” Now, under the Direct License Program (DLP), FICO has given its “calculator” (the algorithm code) to independent technology platforms. These platforms – which the resellers use to generate reports for lenders – now host the FICO engine themselves.

“The FICO Mortgage Direct Licensing Program allows resellers the ability to streamline Score access, enhance price transparency and provide cost savings to lenders through reduced breakage fees. This quarter, we announced the addition of 4 new strategic reseller participants to the FICO Mortgage Direct Licensing Program, Xactus, Cotality, Ascend Companies and CIC Credit. Additionally, we signed a DLP agreement to add another participant, MeridianLink, a key platform provider to the mortgage industry. We’ll be releasing a press release on that soon. With strong demand from lenders, FICO is actively working alongside participants to support testing. One large reseller is close to completing production integration testing. Another large reseller has completed that testing and is now testing system integration downstream. While we expect to go live soon with multiple partners, we also continue to work on finalizing agreements with additional reseller participants. The direct license program currently supports classic FICO. While the conforming market is anticipating the general availability of FICO Score 10T, we expect FICO Score 10T to be available for Direct Licensing in both conforming and nonconforming in the first half of calendar ‘26.“ - Earnings Call

What was driving this shift? We’ll discuss this at length in part 5 (risks), but put in a nutshell, the Federal Housing Finance Agency (FHFA) was intending to transition the mortgage industry from a “tri-merge” requirement (3 reports/scores) to a “bi-merge” model (only 2 reports/scores).

To better understand this model, below, I’ve attached a visualization of the credit score generation process under the standard model – the visual was shared by George Hadjia from Bristlemoon Capital on X (based on data from Jefferies):

Here’s another great visual by Michael:

But back to the transition from a “tri-merge” to a “bi-merge” model. This shift would have meant FICO would lose 33% of its volume per loan application. Hence the shift to higher prices or direct licensing! To offset this massive loss in volume, FICO effectively doubled the price per score (from $4.95 to $10.00) to ensure its revenue remains stable (or grows) even as fewer scores are pulled.

The FHFA’s initial plan to move from a “tri-merge” (three credit reports) to a “bi-merge” (two credit reports) model has had a rocky timeline – here’s a quick AI-generated overview:

1. The Original Announcement (October 2022)

• The FHFA first announced the transition on October 24, 2022. The goal was to reduce costs for borrowers and encourage competition among the three major bureaus (Equifax, Experian, and TransUnion) by only requiring reports from two of them.

2. The Initial Implementation Goal (2023–2024)

March 2023: The FHFA released a proposed timeline that suggested the bi-merge requirement could be implemented as early as the first quarter of 2024.

September 2023: After significant pushback from stakeholders (lenders, mortgage insurers, and the bureaus themselves), the FHFA pushed the date back, stating implementation would happen “later than Q1 2024.”

3. The “Final” Deadline (February 2024)

On February 29, 2024, the FHFA announced a supposedly firm implementation date of Q4 2025. They aligned the bi-merge shift with the transition to the new credit score models (FICO 10T and VantageScore 4.0) to simplify the technical overhaul for lenders.

4. The Delay and Reversal (2025)

The plan began to unravel at the start of last year:

• January 2025: Facing mounting pressure from Congress and the Mortgage Bankers Association (MBA) over “data integrity” concerns, the FHFA “paused” the transition, moving the Q4 2025 date to “To-Be-Determined.”

• July 2025: Under new leadership (Director Bill Pulte), the FHFA officially reverted the policy. It was announced that Fannie Mae and Freddie Mac would maintain the tri-merge requirement permanently. The bi-merge was downgraded to an “optional” path that few lenders have taken due to the “once a tri-merge, always a tri-merge” rule (which requires a full 3-bureau pull if the initial 2-bureau pull is inconclusive).

As highlighted, interestingly, while in July 2025, the FHFA (Federal Housing Finance Agency) pulled a U-turn and announced that Fannie Mae and Freddie Mac would stick with the traditional tri-merge requirement (reports from all three bureaus), they kept the “Lender Choice” initiative, which allows lenders to choose between Classic FICO and VantageScore 4.0.

But that’s to be discussed later. The other interesting takeaway here is that even though the bi-merge shift didn’t happen, the $10.00 FICO pricing still went live.

What’s important to understand is that even at this higher price, a FICO score remains a negligible cost in comparison to the overall price of a mortgage:

2) Subscriptions (Software & B2C):

In the Software segment and in the Scores’ B2B business, FICO operates (primarily) on a subscription model.

“We also provide FICO® Scores to consumers in the U.S. through our B2C scoring solutions. These Scores are distributed directly by us through our myFICO.com subscription offering and indirectly through our licensed distribution partners, including Experian and certain lenders through the FICO® Score Open Access Program“

In Software, as discussed, FICO is providing pre-configured analytic solutions, decisioning workflows, and the FICO Platform to businesses via multi-year agreements. Subscriptions in this area are typically based on usage metrics such as the number of accounts, transactions, or the scale of the cloud infrastructure being used.

In addition to its core products, FICO generates revenue from professional services such as implementation, consulting, and custom model development. These services are typically billed on an hourly or project basis, adding another revenue stream to the business.

Unit Economics

The most critical unit of analysis for FICO’s Scores segment is the “score generated” in the B2B context. Understanding the revenue and costs associated with this unit gives insight into the company’s high margins and efficient business model.

• Revenue per Unit: As discussed above, in the mortgage sector, the price per score has increased dramatically over the past few years. For lenders using the direct model in 2026, they will have the option to choose a fee of $10 per score or $4.95 plus a funding fee upon loan closing.

• Costs per Unit: For the B2B Scores business, incremental costs are negligible. Since the core algorithms were developed decades ago, each additional score generated involves minimal cost. Most of the cost structure for FICO lies in sales, marketing, and support, rather than in the production or delivery of scores themselves. In contrast, B2C units carry higher costs because FICO must pay credit bureaus for the data necessary to generate consumer credit scores.

• Margins: FICO’s gross margin across the entire business is approximately 83%, with the Scores segment operating at an impressive 88% operating margin.

• The company’s incremental margins in this segment are particularly strong, averaging 95%+ over the last several years.

• This high margin is a result of the relatively fixed cost structure of FICO’s scoring models – once the models are built, generating additional scores doesn’t require significant incremental investment.

“I mean we still think there’s a lot of long-term margin. Frankly, we’re focused on growth right now, and we could easily drive more margin, but I think it would cost us in growth. And frankly, what we’re doing today in terms of investments that we’re making, like I said before, it’s really -- a lot of -- we’re making investments now in the short term to pull long-term costs out. And we’ll start to see that even as soon as next year that we’ll be able to pull a lot of costs out and that the cost of running these -- we should be able to inflate our gross margins just by doing some of the structural work we’re doing today.“ - March 2025 Call

Operating margins for the software segment are somewhat lower than the Scores segment, at 28%–30%, but it represents a promising growth vector for the company.

Software margins have also followed a long-term uptrend in this segment, but that margin expansion has slowed/stopped in the last two years.

“We continue to invest in our software business. We’re really bullish on it. It’s growing really nicely. We do anticipate margin expansion because our new platform is built for scaling profitably. And so the improvements to profitability of our software business will come more from additional volume and additional customers on the new platform versus reduced R&D spending, which, of course, is a lever and someday it will go down.“ - Q1 Call

Geographic Distribution

FICO’s primary operations are heavily U.S.-centric. In fiscal 2025, the Americas region accounted for 87% of the company’s total revenue, reflecting the company’s dominance in the U.S. credit system.

However, FICO operates in over 100 countries, with significant markets in the UK and Canada. In total, its Scores products are available in 40+ countries across five continents.

Legal and Operational Form

Fair Isaac Corporation (FICO) is a Delaware corporation, a structure that offers operational flexibility and access to robust legal frameworks. The company is headquartered in Bozeman, Montana, where it oversees its two main operational segments: Scores and Software.

Cyclicality and Recession Performance

FICO operates in a cyclical business, particularly dependent on the U.S. credit market and mortgage origination volumes. This makes the company vulnerable to fluctuations in economic cycles, especially when lenders tighten credit during recessions.

During the 2008–2009 financial crisis, FICO faced a significant downturn, with Scores revenue declining by approximately 27% to 29% as lenders pulled back on issuing credit. Despite the reduced demand for credit, FICO remained resilient, continuing to generate substantial positive operating cash flow. This demonstrates that while the company is exposed to cyclicality, its business model can still operate profitably during downturns, especially given the inherent demand for credit scoring.

Within FICO’s business, the B2B Scores segment is highly cyclical, as its revenue is directly tied to loan origination volumes. However, the B2C segment and Software segment, with their subscription-based models, offer more stability. In recent years, strategic price hikes since 2018 have helped offset fluctuations in volume, allowing FICO’s business to continue growing even during periods of depressed loan originations.

Key Performance Indicators (KPIs)

To gauge the performance of a company like FICO, it’s best focus on several key metrics that provide insight into growth, profitability, and long-term value creation.

• Annual Recurring Revenue (ARR): This is a key metric for the Software segment, tracking the annualized run-rate of both on-premises and SaaS agreements.

• Platform ARR Share: This tracks the percentage of software revenue coming from the FICO Platform versus legacy products. A growing share from the FICO Platform is a positive signal of the company’s success in its cloud transition.

• Annual Contract Value (ACV) Bookings: This measures the annualized value of new software contracts signed in a given period. It provides an early indicator of future revenue and growth potential.

• Dollar-Based Net Retention Rate (DBNRR): This metric measures the success of the company’s “land and expand” strategy. A higher DBNRR shows how well FICO is able to retain and grow spending from its existing customer base. For FICO, the DBNRR for Platform users is currently in the range of 122-146% – amazingly high!

Other primary factors that will drive FICO’s long-term value creation include:

• Scores Unit Pricing and Mortgage Volume: The ability to continue raising prices for its scores while maintaining volume in the mortgage sector is a key growth driver for the company.

• Revenue Concentration/Partner Mix: FICO’s dependency on the three national bureaus presents both an opportunity and a risk. Managing this concentration, the success of the direct licensing efforts, and successfully competing with/fndeing off VantageScore will be crucial for the company’s long-term success.

1.4. Customers

FICO solves a long-standing problem in the financial services industry: the need for predictive accuracy, model governance, regulatory comfort, and broad ecosystem acceptance when making high-stakes lending decisions.

As we learned, before FICO, lending decisions were often based on subjective or “vibes-based” judgments, which led to inefficiency, inconsistency, and even discrimination in credit approval processes. FICO introduced a standardized, objective three-digit score, which quickly became the universal language for risk in the financial world. This score allows a range of stakeholders – from borrowers, lenders, and investors to regulators – to communicate on common ground and make informed decisions based on data, not intuition.

If FICO were to disappear tomorrow, the impact on the U.S. financial system would be profound. The FICO Score is so ingrained in the infrastructure of modern credit that its absence would create significant operational disruption. Lenders would be forced to recalibrate their underwriting systems, while investors would lose a critical yardstick used to pool, slice, and price trillions of dollars in debt. In essence, FICO is the keystone that supports the arch of the U.S. credit system.

I believe, over the next decade, customers will continue to buy FICO’s product largely due to institutional inertia. Replacing FICO is not a simple task. As the saying goes, it’s like changing the engine of an airplane mid-flight. For the foreseeable future, FICO’s position as the trusted, standardized risk metric remains uncontested.

Customer Loyalty

FICO customers do not “love” the company or its products, but they most certainly need them. The FICO Score is seen as a regulated-utility-like necessity. It provides a standardized, defensible metric for lenders, ensuring that they have a reliable benchmark when approving loans. For many financial institutions, using FICO scores is more than just a choice – it’s part of a “Cover-Your-Assets” (CYA) strategy. If a loan goes bad, lenders can defend their decision by pointing to the FICO Score, which acts as a trusted, widely accepted measure of creditworthiness.

While FICO may not evoke the kind of passionate cult following that some consumer brands do, it has created a loyal customer base that relies on its products. This loyalty is less about emotional attachment and more about institutional trust and high switching costs. Entire workflows, compliance processes, and audit trails are embedded with FICO bands, making it difficult for customers to switch to other solutions without incurring significant costs and risks.

Core Customers

FICO’s core customers are corporations and financial institutions, rather than individual consumers.

“[Our score] is used in most U.S. credit decisions, by nearly all major banks, credit card issuers, mortgage lenders, and auto loan originators.“

FICO’s B2B products cater predominantly to institutions and lenders, which can range from large national banks to smaller credit unions. The company serves approximately 90% of the top U.S. lenders and three-quarters of the largest 100 banks worldwide, making its customer base both large and highly influential. This highlights FICO’s central role in the credit decisioning ecosystem and its ability to influence major financial players globally.

In addition to its corporate and institutional customers, FICO also serves approximately 200 million U.S. consumers through myFICO.com and its “Open Access” programs, where partner banks offer FICO scores for free to their customers.

The core customer base for FICO’s B2C products includes adults aged 35 and older, who are more likely to be managing significant credit relationships, such as mortgages, car loans, and credit cards.

1.5. Simplicity & Industry Analysis

FICO operates in the credit risk analytics and decisioning software industry. The core of FICO’s business, the Scores segment, can be described as a “toll-bridge monopoly.” FICO extracts a fee for nearly every credit decision made in the U.S. This monopolistic structure provides high operating margins; as discussed currently 88%, with incremental margins nearing 95%+.

The economics of this industry make it difficult to disrupt. This is due to institutional trust – lenders, regulators, and investors all rely on FICO as the common language of risk, which has become deeply embedded in the $12 trillion U.S. mortgage market. Given that FICO’s credit scores are so universally recognized and relied upon, it has become virtually indispensable in the financial ecosystem. This institutional entrenchment creates a high barrier to entry, ensuring FICO’s continued dominance for the foreseeable future.

Competitive Landscape

FICO has long been the undisputed leader in the credit scoring market, thanks to its entrenched position as the industry standard. However, the competitive landscape is shifting, with several emerging players attempting to capture a slice of the pie.

The most prominent competitor to FICO is VantageScore, a joint venture between the three major credit bureaus – Experian, TransUnion, and Equifax. VantageScore’s unique selling proposition is inclusivity, as it aims to score consumers with limited credit histories by using alternative data, such as rent and utility payments. This model has gained some traction, especially in the point-of-origination market. But despite VantageScore’s advances, FICO continues to maintain a dominant position, primarily due to its proven track record over economic cycles, including the Great Recession. Additionally, FICO’s stronghold in the secondary market – where 98.8% of U.S. mortgage-backed securities rely on its scores – remains unchallenged, allowing it to continue playing a critical role in global risk communication.

In July 2025, however, the Federal Housing Finance Agency (FHFA) approved VantageScore 4.0 for use in Government-Sponsored Enterprises (GSE) mortgages, marking a major challenge to FICO’s monopoly in the mortgage market. This approval allows lenders to use VantageScore alongside FICO, potentially reducing FICO’s market share in new mortgage originations. Additionally, the three credit bureaus, which once partnered with FICO to distribute its scores, are now actively competing with it by bundling VantageScore scores at a fraction of FICO’s price – $1–$4 compared to FICO’s $10. This pricing strategy aims to encourage lenders to switch to VantageScore, putting pressure on FICO’s dominant position and, by extension, its pricing power.

According to Fair Isaac’s management, this move, a move to a more competitive market structure, may, however, somewhat counterintuitively, elicit its own set of unintended detrimental consequences:

“As for lender choice, the FHFA has long rejected the practice because it undermines the safety and soundness of the enterprises and their counterparties, damaging liquidity in the $12 trillion mortgage industry. Lender choice encourages mortgage participants to shop for the most [ lax ] score, which drives unavoidable gaming and adverse selection for all risk holders. It creates a race to the bottom by incentivizing score providers to weaken their credit decision criteria to score more consumers and one more business with their score, which will lead to increased costs for consumers. Lender choice will result in higher capital requirements from regulators that the holders of mortgage risk will have to bear, and American taxpayers will bear significant additional risk. Any initiative to promote competition and ultimately lower cost should include the best Score, which is FICO Score 10 T.“ - FY25 Q3 Call

“here’s the real challenge with moving to bi-merge. It’s the same problem that we have with lender choice. When you get to choose between 2 credit Scores or when you get to choose your favorite 2 out of 3 credit bureaus, you’re going to have gaming, you’re going to have adverse selection. You’re going to have all of these -- all these problems occur. And there’s a cost to be paid for that. That cost ultimately gets paid by Fannie and Freddie and potentially the U.S. taxpayer. And so that is the biggest problem that has to be overcome. And frankly, I don’t know what kind of a solution there is to that. It’s structural.“ - FY26 Q1 call

Here’s one case study worth looking into: In 2021, Synchrony – the heavyweight champion of private-label credit cards – finally pulled the trigger and swapped FICO for VantageScore after years of testing. It was a move that sent shockwaves through the industry. However, the initial post-mortem was less than glowing. Dev Kantesaria provided a sobering perspective on this during his 2023 appearance on Business Breakdowns, arguing that the risk-reward profile of this shift seemed fundamentally skewed. He noted that while Synchrony is massive, the move only saved them roughly $2 million to $3 million a year. Against an $18 billion revenue base, that is a rounding error. Kantesaria’s thesis back then was simple. You trade away the gold standard for a cheaper model, but you lose the ability to securitize your debt at the most attractive rates. Investors want what they know. To him, VantageScore was relegated to the “marketing and lead generation” bin where being exactly right is less vital than being cheap. It was a compelling bear case for the challenger.

“Vantage score has significant share in areas like marketing and lead generation where you have the cheapest scores where it’s not as critical that the decision is Right importantly in 2021 a major company in the industry Synchrony which is the largest provider of private label credit cards in the U.S switched a vantage score from FICO after a three-year transition period and at the time this class is quite a stir but after the implementation process analysts estimate that synchrony will only save two to three million dollars a year on a revenue base of 18 billion what they lost by switching away from FICO scores was the ability to for example securitize their debt at attractive interest rates so given the limited risk reward of switching I see very few companies following Synchrony.“

But things move fast. There’s some evidence that the “marketing-only” label is not entirely accurate. VantageScore usage surged to a staggering 42 billion scores in 2024, representing a 55% year-over-year increase. That is not just marketing fluff. It represents real-world adoption in core credit decisions. The landscape shifted further in 2025 when the FHFA officially approved VantageScore 4.0 for GSE mortgages. This is a massive shift.

FICO’s software business – especially its FICO Platform – faces a different set of challenges. Here, competitors such as Pegasystems, SAS, and Zest AI are leveraging AI-driven solutions to offer advanced underwriting tools, fraud detection, and customer management solutions. However, these competitors lack the structural leverage to damage FICO in the short term, as they do not have the deep-rooted position FICO holds in both the consumer credit and institutional risk communication markets. As such, while FICO’s software business faces growing competition, it remains a high-growth segment with faster expansion compared to the more mature Scores business.

Looking ahead, FICO is in a pivotal position. Its ability to maintain its premium pricing in the mortgage sector depends on the continued superiority of its FICO 10T model. With its superior predictive accuracy, FICO hopes to justify the price premium over competitors. Meanwhile, FICO must continue to accelerate the Platform as part of a strategy to future-proof its growth. If FICO can successfully expand its Platform business and weather the storm of regulatory pressures, it will likely remain a leading player in the credit scoring and decision intelligence space. However, the next 18-24 months are crucial: FICO must prove its software business can scale and survive the potential commoditization threat to its traditional scoring model. If it cannot, the market may view its premium valuation as increasingly untenable. The market is lowering the assigned multiple is what’s already happening in fact.

TL;DR: FICO’s Business Model Summary

FICO is the universal language of risk in the U.S. economy. It acts as an essential toll-booth on nearly every loan or credit card application, making its products indispensable for financial institutions. FICO serves as critical infrastructure for the financial world, offering a near-monopoly with 90% profit margins and the ability to raise prices significantly without losing customers. Even as regulators try to introduce competition, the trust the global financial system has in the FICO Score creates a “solid gold” moat that should continue to deliver value and grow for years to come.

This concludes our overview of FICO’s business model – a uniquely dominant ‘toll-bridge’ with operating margins that most tech giants would envy. However, a world-class business model is only one piece of the investment puzzle. To determine if Fair Isaac remains a generational compounder or a value trap in the making, we must look deeper. In the upcoming parts of this series, we will move beyond the mechanics of the ‘toll-booth’ to analyze FICO’s competitive moat, the leadership team steering the ship, the health of the balance sheet, the critical risks of AI and regulation, and finally, a comprehensive valuation to see if the current 50%+ drawdown is a true entry point.

Part 2 – Business Quality

2.1. Competitive Advantage Analysis

The Tollbooth Model

Based on the understanding of FICO’s business model that we developed in part 1, I want to start this “competitive advantage discussion” with a more general observation:

The “financial tollbooth” model is a powerful and enduring business model that continues to create clear winner-takes-all or winner-takes-most dynamics in many industries. Companies like S&P Global, Wise, LSEG’s clearing business, Moody’s, MSCI, CME Group, and Mastercard/Visa are all prime examples of businesses that sit at the heart of the financial system, taking a small fee every time money moves or decisions are made. These tollbooths thrive because they are embedded into the system itself – they don’t manufacture physical goods or take on significant capital expenditures, yet they continue to enjoy exceptional margins and stable, recurring revenue streams.

Their fees, often a tiny percentage of a much larger transaction, are largely invisible to end-users, making them highly efficient revenue generators. And the best part? Once these tollbooths are in place, they benefit from tremendous scalability with minimal ongoing investment.

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For FICO, its tollbooth model is equally powerful. It’s embedded at the very heart of the U.S. credit and mortgage markets. In 2025, FICO scores were used in over 90% of top U.S. lending decisions. Each time a consumer applies for a loan, buys a car, or even rents an apartment, a FICO score is used to assess their creditworthiness. Just like Visa and Mastercard, FICO charges a small fee (typically only about 0.2% of the average mortgage closing cost) every time a transaction occurs. With its status as the de facto standard in U.S. credit risk assessment, FICO remains indispensable.

Similar to MSCI, FICO’s pricing power and dominance in the industry are underpinned by its cultural and regulatory embeddedness. FICO scores are so deeply woven into the financial fabric that they are the primary measure of risk in the U.S. mortgage industry, where 98.8% of all U.S. mortgage-backed securities rely on FICO scores for risk assessment.

Despite these advantages, FICO’s position in the financial tollbooth space is not without its risks. While VantageScore, a joint venture of the three major U.S. credit bureaus (Experian, TransUnion, and Equifax), has been working to challenge FICO’s dominance, the competitive dynamics in the industry – at least so far – are still structured in a way that benefits FICO. The credit scoring market, much like other financial tollbooths, exhibits clear winner-takes-all or winner-takes-most characteristics.

We embedded this FICO management comment from 2025 in part one, explaining the nature of this industry structure:

“As for lender choice, the FHFA has long rejected the practice because it undermines the safety and soundness of the enterprises and their counterparties, damaging liquidity in the $12 trillion mortgage industry. Lender choice encourages mortgage participants to shop for the most [ lax score, which drives unavoidable gaming and adverse selection for all risk holders“

And today I stumbled across this comment by Akre Capital (especially known to be a long-term Moody’s shareholder), who made a similar point:

“Allowing lenders to cherry-pick a single score creates “rating shopping,” selecting the highest score rather than the most accurate or most accepted. This leads to an adverse-selection problem for consumer-credit investors. FICO’s dominance is a market-driven outcome because it is the score demanded by investors.”

In short, once a standard is established, it is extremely difficult to get a competing standard off the ground.

The industry structure is worth noting, as FICO’s tollbooth model shares characteristics with other leading firms like S&P Global and Moody’s in debt markets or CME Group in futures and commodities trading. These companies, much like FICO, charge fees each time a decision is made, whether it’s through credit ratings, securitization, or trade execution. Their economic model is brilliant in its simplicity – asset-light, with virtually all revenue flowing to the bottom line. Unsuprisingly, their stocks crushed it over the last 20 years.

CME Group, for instance, benefits when market volatility increases, as more trading activity translates into higher revenues. MSCI, meanwhile, has a different spin on the tollbooth model. By charging a small fee on trillions of dollars tied to financial benchmarks, MSCI’s pricing power remains largely invisible to individual users, making it extremely durable and less sensitive to regulatory pushback.

In FICO’s case, the risk to its tollbooth model stems from growing competition within the Scores segment and its increasing vulnerability to pricing scrutiny. While it has successfully raised prices for mortgage scores by 1,600% between 2022 and 2026, the pressure from the credit bureaus, which now act as both partners and competitors in the space, is intensifying. The recent approval of VantageScore 4.0 for use in government-backed mortgages by the FHFA in July 2025 is a pivotal development, undermining FICO’s monopolistic pricing power. This move is significant as it potentially opens the door for lenders to diversify their score sources, potentially squeezing FICO’s ability to maintain its past pricing leverage.

Despite these threats, FICO’s business model remains incredibly resilient. Its “tollbridge” strategy, similar to that of companies like Verisk Analytics (which serves the insurance industry) continues to generate exceptional margins. These businesses all share a common trait: they operate as essential intermediaries in systems that are difficult to disrupt.

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What should’ve become clear by now is that FICO has built a strong and entrenched competitive advantage over decades, earning its position as a critical player in the credit risk ecosystem. The company’s moat isn’t just based on proprietary technology – its algorithm – or pricing power; no, it extends deeply into institutional and regulatory landscapes, making it difficult for competitors to disrupt.

FICO’s competitive advantage can be described as a “toll-booth monopoly” within the U.S. credit ecosystem. Its FICO scores are used in 90% of U.S. lending decisions and are cited in over 95% of the total dollars in U.S. securitizations. This wide adoption creates a common language for risk – a standard measure that allows borrowers, lenders, and investors to communicate effectively across the massive $12 trillion mortgage market. FICO’s reach is so broad that its score has truly become embedded in the DNA of the U.S. financial system.

The barriers to entry in the credit risk analytics industry are hence exceptionally high. It’s not just about the math behind FICO’s models; it’s about the institutional trust the company has built over decades. Lenders have hard-coded FICO algorithms into their credit policies, underwriting systems, and regulatory compliance workflows, making it difficult – if not impossible – for new competitors to replace FICO’s score. Changing a foundational element like this is often likened to “changing the engine of an airplane mid-flight” – it would require the simultaneous recalibration of thousands of financial institutions, regulators, and investors.

FICO’s Pricing Power: A Double-Edged Sword?

FICO’s pricing power is one of its most notable advantages. The company has demonstrated its ability to raise prices without significantly impacting volume, which is a remarkable feat in any business. Since 2018, FICO has implemented “special pricing hikes”, leading to the above-mentioned 16x price increases over less than a decade. We’ll discuss this further in the management segment, because the question you need to ask here is whether it has overplayed its hand here.

“FICO raised its prices for Fico scores something like 16x over 8 years. Common sense should tell you that this muscle cannot be flexed anywhere to the same extent going forward.“ - from a private DM I sent to a friend this week

Of course, this pricing power has (partly) contributed to the amazing stock performance over the last decade. It has allowed the company to maintain strong revenue growth, even amid fluctuations in loan origination volumes. But again, you got to wonder whether FICO will possess the same pricing power going forward.

More generally, the core reason FICO can raise prices is simple: its product is a “rounding error” in cost but mission-critical in consequence. The cost of a bad loan decision is far higher than the cost of a FICO score, so lenders have little incentive to switch to alternative models, even at a higher price.

Pricing Power – A Historical Perspective

FICO’s pricing strategy has undergone a dramatic shift over the past few decades, evolving from a period of stagnant prices to an aggressive “value recapture” approach that, as discussed above, has significantly impacted its revenue growth. For much of its history, though, particularly from the introduction of the modern FICO Score in 1989 until 2017, the company adhered to a “dormant” pricing model. During this time, FICO’s credit score royalty rates remained unchanged in real terms, and the company’s revenue was largely volume-dependent – relying on the number of mortgage, credit card, and other loan applications rather than on increasing its prices.

Between 2005 and 2018, FICO’s total earnings even contracted, with revenue growing at a modest compound annual growth rate (CAGR) of around 2%.

This period of lackluster performance was largely due to FICO’s focus on ensuring its score was widely adopted rather than increasing its price.

FICO’s strategy during this time can be characterized as a “low price” approach designed to lower friction and accelerate widespread adoption of its credit scoring system. By keeping the cost of a FICO Score low – pennies for credit cards and a few dollars for mortgages – the company ensured its algorithm became the “common language” of risk. This strategy helped FICO solidify its dominance but also limited its ability to generate higher margins from its core product. It wasn’t until 2018 that FICO made a significant pivot, shifting from this “low-price” model to a strategy focused on aggressively monetizing its position.

The change in strategy began in 2018 with FICO’s introduction of what it called “special price increases.” This marked the start of a significant transformation in its pricing model, beginning with a 30% hike for mortgage scores. Over the next few years, similar increases were applied to auto and credit card scores. The most staggering example of this shift occurred in the mortgage segment. The wholesale price of a FICO Score jumped from approximately $0.60 in 2022 to $4.95 in 2025 – an extraordinary 800% increase in just three (!) years – and to $10 in 2026. This bold pricing strategy dramatically improved FICO’s profitability. The company’s operating margins, which had struggled to surpass 25% for two decades, surged to 46% across the company and nearly 90% within the Scores segment, thanks to the highly scalable nature of its product – once the score’s algorithm was created, the cost of producing additional scores was nearly zero.

FICO justified these price hikes by highlighting a “very large value gap” between the cost of its scores and the immense value they provide to lenders. Even at the higher price point of today’s $10 per score, it represents only about a fraction of the average mortgage closing cost. In comparison, the cost of a mispriced loan – caused by using a less predictive competitor score – could result in thousands or even millions of dollars in losses for lenders.

You might ask, but what if VantageScore proves to be more accurate? Wouldn’t lenders switch to VantageScore, offering an alternative at a significantly lower price? Well, I’d argue that there is no way to tell in real-time whether one algorithm is superior to another. It’s best assessed on a multi-decade track record, that spans multiple economic cycles, and naturally, this cannot easily be replicated.

Here’s an interesting statistic I came across during my research:

Therefore, the incremental cost of using FICO’s more accurate scores is negligible in the context of the potential risk. However, this aggressive pricing strategy has not come without consequences. By shifting from its long-standing low-price model to a sharp increase in rates, FICO has attracted the attention of regulatory bodies like the DOJ, FHFA, and Congress. This scrutiny culminated in the FHFA’s decision to move toward a “Lender Choice” model in 2025, which for the first time allowed competitors like VantageScore to participate in the government-backed mortgage market. The regulatory response reflects the challenges FICO now faces as it seeks to balance its pricing power with the potential for increased competition in the mortgage sector.

“… but the End customer is in fact the banks and financial institutions which are making the credit decisions the credit bureaus sell consumer credit reports to these Banks and financial institutions the fight goes forward generally represents less than five percent of what is called a try merge report that is generally about fifty dollars so a try merge report is simply all three credit bureau reports combined together in one Consolidated report so the three credit bureaus are simply passing along any price increases that FICO makes and they often layer on their own markup at essentially 100 margins so the credit bureaus interestingly although they’re the customers like go they’re agnostic to fico’s price increases the financial institutions will usually take the costs of the credit reports and include those in the closing costs that consumers pay so if you go for a mortgage you know there’s a large list of closing costs well the credit reports are often part of the consumer pays so although FICO is increasing prices at a higher level you have to go many layers deep before you get to who actually pays for those price increases it’s worth mentioning that scores are extremely cheap relative to the loan sizes so you can imagine on a four hundred thousand dollar mortgage decision a flank was four is less than a dollar and if you look forward you could say well listen even if a FICO score costs 10 times more let’s say five dollars it still […] tremendous value to the ecosystem or the loan originator prior to 2016 FICO had not increased the prices of its scores for 25 years“ - Dev Kantesaria on Business Breakdowns

Brand Moat: A Trusted Standard

FICO has achieved what few financial services companies can claim – becoming a trusted brand that has become synonymous with creditworthiness.

The term “FICO” has permeated the U.S. cultural lexicon; it’s no longer just a company name but a measure of credit risk. For lenders, using FICO is essentially a “Cover-Your-Assets” (CYA) strategy. It provides a standardized, defensible metric that can be presented to regulators if a loan goes bad. The strength of FICO’s brand lies in its institutional trust. The company is viewed not as a prestige brand but as a “go-to” brand, the product of choice for any financial institution or consumer looking to make or monitor credit decisions. This brand loyalty is unlikely to erode anytime soon I think, particularly given that the company’s institutional inertia – where lenders and investors are reluctant to switch – only strengthens the brand’s position.

Consumers, too, actively track their “FICO score”, a habit reinforced by programs like FICO Open Access, which provides free access to scores through participating banks.

Switching Costs

Speaking of institutional inertia, one of the most critical factors in FICO’s moat is the exceptionally high switching costs in its B2B segment. The company’s algorithms are deeply embedded in Loan Origination Systems (LOS) and Automated Underwriting Systems (AUS), which means that replacing FICO with a new model, like VantageScore, is not only difficult but bureaucratically painful. It would require years of side-by-side validation and recalibration, creating a significant barrier to entry for any competitor.

Moreover, decision-makers face a not-to-be-underestimated career risk when switching to another scoring provider.

And even when newer, more predictive models become available, it takes a long time for lenders to adopt them. On average, it takes around four years for 50% of the market to switch to a new version of a FICO score, a fact that demonstrates the institutional inertia FICO benefits from.

Cost Advantages

FICO’s cost advantages stem from its economies of scale and the extremely low marginal cost of delivering an additional score; we discussed this at length in part 1. Once the underlying mathematical models are developed, the cost of delivering another credit score is virtually zero. FICO’s pricing power works in tandem with these cost advantages. Since the company can generate additional revenue at little to no incremental cost, nearly all of its price increases drop directly to the bottom line, further reinforcing its profitability.

The million-dollar question, I believe, is to what extent FICO can raise prices going forward.

Intangible Assets and Regulatory Moat

FICO’s competitive advantages are also protected by intangible assets such as intellectual property and regulatory endorsements. The company holds a portfolio of over 230 issued patents and nearly 80 pending applications, many of which focus on artificial intelligence and responsible machine learning. These patents protect FICO’s unique scoring models and ensure that competitors cannot easily replicate its technology.

While FICO’s dominance was historically cemented by a 1995 GSE mandate requiring its scores for conforming mortgages, this regulatory moat is currently evolving. In the already-mentioned landmark shift, the FHFA recently ended FICO’s exclusivity by approving VantageScore 4.0 alongside FICO for use by Fannie Mae and Freddie Mac. While FICO remains the deeply embedded industry standard due to decades of integration, it now operates in a multi-score regulatory environment, forcing the company to defend its market share through innovation and having a superior algorithm rather than mandate alone.

Network Effects

FICO benefits from network effects, where the value of its product increases as more stakeholders (borrowers, lenders, investors, and regulators) use it. The more ubiquitous FICO’s score becomes, the more valuable it is to the entire system. FICO serves over 10 billion scores annually, highlighting the scale and frequency of its usage.

Additionally, there are data network effect at play. In the world of credit risk, the value of a product scales directly with the volume and historical depth of the information feeding it. FICO is a massive data flywheel. Every time a lender uses a FICO score, they contribute to a feedback loop that makes the next iteration of the algorithm even more precise. I find that many investors overlook the sheer inertia of these datasets. FICO 10T, for instance, leverages “trended data” covering 24 months of payment history. By back-testing this against decades of proprietary default data, FICO has created a predictive tool that is incredibly difficult to replicate.

When thinking this through I was wondering whether Fair Isaac may, however, have reached a point of diminishing returns in terms of the value of added data points in credit scoring. If VantageScore 4.0 is “accurate enough” for most prime borrowers, does FICO’s deeper dataset still provide a competitive edge?

I’d argue that in the mortgage industry, “good enough” is a dangerous phrase. When a bank is managing a multi-billion dollar portfolio, a marginal increase in accuracy is the difference between a profitable quarter and a systemic headache. VantageScore has certainly crossed the threshold for thin-file borrowers – scoring millions of people who were previously invisible – but FICO remains the gold standard for high-stakes institutional lending.

Falcon and the Gravity of the Global Consortium

A data moat also exists in the Software segment. The FICO Falcon Fraud Manager is a masterclass in the “data network effect moat.” More than 10,000 global financial institutions contribute real-time, anonymized transaction data to the Falcon Intelligence Network. This creates a winner-take-most dynamic that is virtually impossible for a newcomer to disrupt.

Think about the mechanics: As more banks join the network, Falcon sees more fraud patterns. As it sees more patterns, its machine learning models become more accurate. Today, this single platform protects roughly two-thirds of all credit card transactions on the planet. I suspect that even the most well-funded tech disruptor would struggle to build a competing product. Without the data from those 10,000 institutions, a new algorithm is effectively blind. This software moat is arguably the most resilient part of the business because it relies on a voluntary, mutually beneficial network that grows stronger with every single transaction.

Is FICO’s Moat Eroding?

While FICO’s moat is undeniably strong, there are signs that it could be facing pressure. The Lender Choice model, along with ongoing antitrust litigation, represents the most significant challenges to FICO’s position. Regulatory disintermediation and the rise of alternative scoring models could gradually erode the monopoly FICO enjoys in the credit risk space.

However, FICO’s high switching costs, pricing power, and brand recognition still make it difficult for competitors to replace the company. The company’s tollbooth model, strong customer base, and institutional trust suggest that it will continue to dominate in the near term, though regulatory risks could alter this landscape over the long run.

2.2. Other Thoughts on Business Quality

FICO stands out as a high-quality business with exceptional free cash flow generation and a low capital intensity business model.

One of the key attributes of FICO’s business is its capital-light nature. The company operates with extremely low capital expenditures (capex), which is a hallmark of a high-quality business. In FY25, FICO generated roughly $780 million in operating cash flow, while its combined purchases of property and equipment, along with capitalized internal-use software costs, totaled just around $39 million.

This represents a capex-to-operating cash flow ratio of about 5%. This low capital requirement allows FICO to generate substantial free cash flow, which it can reinvest or return to shareholders.

FICO avoids the burden of heavy physical infrastructure. Its maintenance expenditures are focused on software refactoring, API reliability, and the integration of diverse data feeds. These ‘brain power’ costs ensure the scoring engine remains performant, secure, and legally compliant across varying international jurisdictions.

This efficient capital structure allows FICO to retain a significant portion of its operating cash flow as free cash flow.

Reinvestment and Growth Dynamics

FICO’s growth strategy involves a balance between price increases, volume increases, and strategic reinvestments in its business.

• Scores Growth: The Scores segment is able to grow without requiring large capital expenditures. This growth is primarily driven by price hikes and volume increases driven by macro credit cycles.

• Software Growth: Growth in the Software segment is more capital-intensive, especially as FICO focuses on migrating its offerings to the cloud-native FICO Platform. While these investments have weighed on margins in the short term, they are expected to lead to operating leverage and scale as the platform grows.

• Marketing and Onboarding: FICO does not rely on a “zero-marketing” approach. Recently, it has ramped up its marketing spend, particularly for its B2C Scores and Software offerings. However, onboarding new customers for its Software segment is costly and time-consuming, with sales cycles often exceeding a year. This slower pace of growth in the Software segment highlights the more challenging nature of cloud transition, but once critical mass is achieved, margins should improve significantly.

Part 3 – Management

3.1. Management Background

When analyzing the leadership of a company, the CEO’s background, experience, and track record in managing the business are crucial in determining whether the company is likely to continue delivering on its strategic goals. In the case of FICO, the leadership under William J. Lansing provides a solid foundation, with his tenure and operational decisions playing a significant role in the company’s long-term success.

William J. Lansing has served as Chief Executive Officer of FICO since January 2012, a role he has held for over 14 years. His long tenure is a key advantage, as it gives him a deep understanding of the company’s strategic shifts and challenges. Under Lansing’s leadership, FICO has undergone significant transformations, including the move toward cloud-based services and its bold pricing strategy implemented in 2018.

Lansing’s background prior to joining FICO wasn’t rooted in the company itself. While he didn’t rise through the internal ranks at FICO, he was far from an outsider when he took the helm. He had been a member of the company’s Board of Directors since 2006, so his transition into the role of CEO was more natural than if he were a complete external hire. His career also includes executive positions at several high-profile companies, including InfoSpace, ValueVision Media, NBC Internet, and as a General Partner at the private equity firm General Atlantic LLC. Additionally, Lansing’s time as a Vice President at General Electric shows that his leadership experience spans diverse sectors, particularly in technology and data businesses. This background made him well-suited to lead a company like FICO, which operates at the intersection of analytics and financial technology.

Lansing has a proven track record in the applied analytics and decision management space, which aligns perfectly with FICO’s core business. His operational decisions have driven remarkable performance during his tenure. Since Lansing took over as CEO, FICO’s stock price has increased nearly 10-fold, reflecting the success of his strategic decisions.

A defining moment of Lansing’s leadership was the 2018 strategic shift to “special pricing”. For nearly 30 years, FICO maintained flat royalty rates for its products, but Lansing recognized that the company’s value in the mortgage and credit markets had grown substantially. By raising prices, particularly in the mortgage sector, FICO effectively reflected the true value of its credit scoring system. This shift resulted in significant revenue AND profit growth, with minimal volume loss, proving that FICO had the pricing power to maintain its dominant position in the market.

Under Lansing, FICO has also maintained a lean operational profile. The company’s productivity is impressive, with almost $500,000 in revenue per employee and an even more impressive profit per employee if you consider FICO’s margin structure again.

These metrics are a testament to the operational efficiency and profitability that Lansing has fostered during his leadership. One of his key operational goals has been to shift the company’s focus toward higher-margin, recurring revenue by moving the Software segment to the cloud-native FICO Platform. This transition not only simplifies client infrastructure but also enhances FICO’s ability to “land and expand,” increasing its footprint within existing client bases.

The CFO, Steve Weber, has also been with the company for a long time, joining FICO in 2003 and being appointed as chief financial officer in 2023.

3.2. Integrity, Incentives, and Compensation

In assessing the integrity and alignment of FICO’s management with shareholders, it’s essential to focus on several key areas: ownership stakes, compensation structure, performance incentives, and management’s ability to communicate honestly and consistently. I’ll start by recommending reading some of the annual letters Lansing puts out, along with the annual report.

Let’s explore whether FICO’s leadership is genuinely motivated by long-term shareholder value, or whether its incentives might lean toward short-term personal gain.

Ownership and “Skin in the Game”

FICO’s management does have skin in the game, but it falls slightly short of the more stringent ownership requirements I like to see in my high-conviction bets. As of late 2025, CEO William J. Lansing held about 420,431 shares, representing roughly 1.77% roughly $460 million as of late March 2026).

Mark Scadina, Executive Vice President, owns around 120,000 shares.

While this stake is below the typical 5% threshold that I typically like to see as a strong indicator of alignment with shareholders’ interests, it is nonthetless substantial in absolute terms.

I consider the lack of substantial ownership among other exetutive team and board members a negative though. When you look at the ownership structure for the 14 current directors and executive officers, they only hold a collective 719,282 shares, or 3.02% of the company.

FICO’s ownership requirements are designed to ensure some kind of alignment. For instance, the CEO is required to own at least 100,000 shares, and Executive Vice Presidents must hold shares worth 5x their annual base salary. As of fiscal 2025, all executive officers have met or are at least making acceptable progress toward meeting these requirements, ensuring continued alignment between management and shareholders.

Executive Compensation & Incentive Alignment

FICO’s compensation structure is heavily performance-driven, particularly for CEO Lansing, whose compensation for fiscal 2025 was structured as 97.6% variable.

This means that almost all of Lansing’s pay depends on the company’s performance, with just 2.4% ($750,000) tied to base salary and short-term cash incentives. This aligns his interests closely with FICO’s long-term goals.

The rest of his pay is contingent upon meeting specific performance targets, which reflects FICO’s commitment to rewarding its leadership for driving consistent, sustainable growth.

The short-term component of Lansing’s compensation is driven by FICO’s Executive Incentive Plan (EIP), which is based on two key financial metrics: Adjusted Revenue and Adjusted EBITDA – somewhat suboptimal target metrics in my view; especially with a lack of ROIC component.

Long-term incentives (LTI), which make up the bulk of Lansing’s compensation are structured to incentivize sustained performance. These incentives are divided into three parts:

• Performance Share Units (PSUs)

  • PSUs are earned based on financial metrics similar to the short-term cash incentives

• Market Share Units (MSUs)

  • MSUs are tied to FICO’s relative total shareholder return (rTSR) compared to the S&P 500. Although Lansing achieved 150.2% of the target PSUs for fiscal 2025, his MSUs did not earn any payout due to FICO’s TSR of -19.87% during that period.

• Restricted Stock Units (RSUs).

  • RSUs are granted as time-based awards that vest in four equal annual installments, providing further long-term incentives for leadership retention and stock price performance.

Lansing’s total compensation in 2025 was approximately $36.05 million, with the majority coming from long-term equity incentives tied to stock performance. CFO Weber and the other leadership team members all earned around $7 million. The total 2025 compensation (see table below) adds up to about $72 million relative to roughly $740 million in FCF – again, this seems rather higher to me; certainly higher than I’d like it to be.

CEO’s Integrity and Communication

In terms of integrity and communication, CEO William Lansing has consistently been a clear and honest leader, though in his annual letters there are few direct signs of humility in terms of acknowledging mistakes. Lansing has been in charge during a period of significant transformation at FICO, including the shift to cloud-based services and aggressive pricing hikes. These moves were well communicated, and the strategy of “closing the value gap” through pricing is one that reflects a long-term focus on strengthening FICO’s market position.

Lansing has also shown a willingness to act independently, especially when FICO launched its Direct Licensing initiative for mortgage scores, disrupting established bureau economics. This move, while facing predictable resistance from powerful industry players, reflected a willingness to make bold decisions with long-term gains and positioning in mind, even if it meant upsetting the status quo.

Despite this, as I said, there is little indication that Lansing has publicly acknowledged mistakes – a point that some may consider a minor drawback in his leadership style. Nonetheless, FICO’s employee engagement scores for leadership and communication are notably above external benchmarks, indicating that the company’s staff believes in the CEO’s leadership and direction.

Finally, there are some concerns regarding insider selling. Lansing has sold approximately 64,495 shares over the last two years ($64 milion based on today’s share price; much more in actual value if you consider the time of sale), which some analysts interpret as a signal of tempered near-term expectations, particularly given the current regulatory climate. While these transactions occurred under established trading plans, the absence of recent insider buying raises questions about Lansing’s confidence in the company’s short-term outlook.

3.3. Capital Allocation and Management Talent

The strength of a company often lies in how well its leadership allocates capital. In the case of Fair Isaac Corporation (FICO), CEO William J. Lansing has led the company through a series of pivotal transformations to improve its business economics. From shifting its pricing strategy to investing in high-growth areas like SaaS, Lansing has shown a clear focus on improving returns on invested capital (ROIC) and making smart growth investments.

Improving Core Business Economics

Since Lansing took the helm in 2012, FICO has undergone significant changes aimed at improving its core business economics. I think we discussed this at length already, so I’ll keep this brief.

Lansing primarily initiated a pricing shift and a strategic shift toward cloud-based services, focusing on transforming FICO’s Software segment. At least on a backward-looking basis, only judging by the numbers, both of these decisions have been a success.

Additionally, Lansing has kept FICO’s operations lean, ensuring that the company can generate high returns without a heavy reliance on physical assets. As mentioned, despite having a workforce of around 3,300–3,600 employees, FICO achieves around $500,000 in revenue per employee, showing how efficiently the company operates.

Returns on Invested Capital (ROIC)

FICO’s ability to generate high returns on invested capital (ROIC) has been a key factor in its success. Over the past few years, the company has averaged posted a continuous uptrend and more recently posted a 59%+ ROIC, a figure that is outright impressive and significantly above the 15% threshold typically considered necessary for a business to generate solid excess returns. This high ROIC is the result of FICO’s capital-light business model – with minimal capital expenditures needed to generate additional revenue – and its elite margin profile.

FICO’s operating margins have steadily improved, driven by strategic pricing changes and an increasing shift toward higher-margin Software revenues.

Return on Incremental Invested Capital (ROIIC) & Growth Investments

Looking forward, FICO’s leadership has shown a strong focus on two key growth areas: Software platformization and channel modernization.

The company’s largest growth investment is in the FICO Platform, which is now the cornerstone of FICO’s transition to a cloud-native business model. The platform has seen impressive growth, with a >120% Platform Dollar-Based Net Retention Rate (DBNRR), indicating that once customers are acquired, they expand their use of FICO’s products over time. Additionally, the Annual Recurring Revenue (ARR) for the platform has been growing consistently at 30%–33%, signaling a strong and sustainable revenue stream.

Another significant commitment (and pivot) is FICO’s Mortgage Direct License Program, which is designed to bypass traditional credit bureaus and capture more value in the massive $12 trillion U.S. mortgage market. This initiative is a strategic shift that could allow FICO to capture a larger share of the market and reduce its reliance on third-party credit bureaus.

FICO continues to invest heavily in predictive R&D, dedicating 8%–11% of revenue (approximately $193 million in FY25; see chart above) to maintain the predictive edge of its algorithms. The transition to FICO Score 10T, which according to management is five times more predictive than VantageScore 4.0, demonstrates the company’s commitment to staying ahead of the curve in the increasingly competitive credit risk space.

These investments are expected to generate high returns over time, contributing to robust future growth prospects. Given the company’s ability to reinvest profits at high rates of return, FICO is well-positioned to continue compounding value for shareholders.

Share Buybacks and Acquisition Strategy

When it comes to capital allocation, Lansing has been a disciplined and smart allocator, focusing on share buybacks and organic growth rather than making large, risky acquisitions. FICO has used its steady free cash flow and access to debt markets to fund share repurchases. Over the last decade, the company has reduced its share count rather aggressively (-30%), contributing to the exceptional per share CAGRs.

In fiscal 2025, FICO repurchased $1.4 billion worth of stock, reflecting its commitment to returning value to shareholders. While the company has stated that it is not a market timer, FICO has historically leaned in during stock price corrections, which demonstrates a strong sense of opportunistic capital allocation.

Longer term, the share count reduction has been even more impressive.

As for acquisitions, FICO takes a conservative approach. The company prefers to focus on organic growth, investing in R&D and small, tuck-in acquisitions rather than large, costly mergers. This strategy minimizes integration risks and avoids the costs associated with acquiring businesses with disparate code bases.

FICO also discontinued its dividend in 2017, viewing share repurchases as a more flexible and tax-efficient way to return capital to shareholders.

3.4. Management Roasting

Warren Buffett once said,

“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.”

In theory, having pricing power is an excellent position to be in, especially for a business as embedded in the financial system as FICO. For years, the company has enjoyed elite pricing power, with its dominant role in the U.S. credit system allowing it to raise fees for mortgage and credit scores without much resistance.

But there’s a dark side to this power: overuse.

FICO’s pricing hikes – specifically the 800% increase in mortgage score prices between 2022 and 2025 – illustrate the dangers of pushing pricing power too far. FICO’s strategy shift from a “low-price” model to aggressively monetizing its position began in 2018 with a series of “special price increases.” While these increases have certainly boosted FICO’s profitability, the company has pushed its pricing power to its limits, attracting regulatory attention in the process.

As someone on X put it,

“The 16x increase in five years for FICO was pure greed, and I’m glad someone is pushing back on it.”

The price of a tri-merge report for lenders, which cost about $50 in 2022, could rise to $150–$250 by 2026 due to these hikes. The cumulative effect of these price increases, while small per transaction, is significant on a larger scale. Had FICO exercised more restraint, much like Netflix, which raised prices over a 15-year period by 150%, the company may have avoided regulatory pushback and continued to generate consistent revenue growth without triggering the kind of scrutiny that can derail long-term success.

The company’s behavior highlights an important point about pricing power: there’s a level where it stops being a strength and becomes a liability. In the case of FICO, management has exercised its pricing power too aggressively, attracting unwanted attention from regulators and competitors.

FICO’s management may have been short-sighted, overly focused on revenue maximization rather than keeping an eye on emerging trends. As one former executive pointed out, FICO’s leadership failed to push for new scoring models, like FICO 10, until VantageScore had already gained a foothold with the FHFA. Similarly, FICO’s early exit from promising technologies like Context Vector, a predecessor to large language models, and the CyberScore product that could have helped companies assess cybersecurity risks, showcases a lack of long-term vision.

Management’s inability to adapt to emerging trends – particularly in AI and cybersecurity – resulted in missed opportunities, which further underscores the company’s failure to anticipate the competitive landscape and future industry shifts.

In summary, while FICO’s pricing power and market dominance have made it a lucrative stock to own in recent years, its greed-driven pricing hikes have attracted regulatory scrutiny, and its failure to innovate has exposed the company to long-term risks. FICO’s strategy shift, while understandable in the short term, has left it vulnerable to competitive and regulatory pressures.

The lesson here: when you have pricing power, use it wisely – because borrowing from the future can come with consequences that are hard to undo.

Part 4 – Balance Sheet

4.1. Balance Sheet Health

As of December 31, 2025, FICO’s total gross debt stood at $3.197 billion, which includes $399.7 million in short-term debt (current maturities) and $2.797 billion in long-term debt.

Subtracting $162 million in cash and $55.9 million in marketable securities, the net debt comes to $3.035 billion, or $2.979 billion when factoring in the marketable securities.

While this level of debt may seem substantial, it’s important to recognize that FICO’s Scores business – with its predictability and high margins – justifies a higher debt load than most other firms can support. In fact, the company’s ability to generate cash flow is so robust that it can maintain this level of debt while still executing its capital return strategy without significant risk of financial distress.

FICO’s Net Debt to Free Cash Flow (FCF) ratio is approximately 4x, meaning it would take around four years of FICO’s entire free cash flow to pay off its net debt if the company were to allocate all of it toward debt repayment (without any growth investments or share buybacks).

Over the last five years, FICO’s debt has steadily laddered up, with debt rising from $1.1 billion in 2021 to $3.7 billion according to Koyfin figures. This increase in debt has been matched by a similar rise in earnings and free cash flow, as illustrated by the upward trajectory of EBIT (purple bars) and FCF (blue bars).

The data suggests that FICO is not simply borrowing to survive but instead using leverage to support its growth trajectory, particularly in its stock buybacks. This growing debt has allowed FICO to continue reducing its share count rather aggressively, which has directly contributed to a boost in earnings per share (EPS).

FICO’s interest expense in FY 2025 totaled $133.6 million, which is equivalent to 18.1% of its free cash flow. This interest-to-FCF ratio is quite healthy, meaning that for every $1.00 of free cash generated, approximately 18 cents are used to service its debt. This ratio is an important indicator of how comfortably FICO can handle its debt obligations. If we look at the actual cash paid for interest, which amounted to $103.6 million, the cash interest-to-FCF ratio drops to 14.0%, which further underscores the company’s ability to handle its debt burden without jeopardizing operational stability.

In addition, FICO has strategically locked in much of its debt at fixed rates, including through its recent $1 billion bond offering in March 2026. The proceeds from this offering were used to retire $400 million in 5.25% notes due in 2026 and pay down revolving credit, effectively pushing repayment deadlines out to 2034.

This move reduces short-term refinancing risk, providing FICO with more flexibility in managing its debt load and ensuring stability, even if interest rates rise further in the market.

4.2. Operating Perspective

FICO’s balance sheet also offers some more key insights into its highly efficient capital-light nature, which drives the company’s profitability and high-margin operations. A close examination reveals a few dominant operating items that shed light on the company’s cash conversion cycle, its bargaining power with both customers and suppliers, and the mechanics behind its capital stack.

The most significant operating items on FICO’s balance sheet are Accounts Receivable ($495.1 million) and Deferred Revenue ($173.4 million). Notably, inventory is zero, which is typical for a company that deals primarily in software and data services rather than physical goods. The large balance in Accounts Receivable indicates that FICO’s Scores business (its main revenue driver) operates on a usage-based billing model. This means that banks and credit bureaus use FICO’s scores and pay FICO later, often with a delay of 30-60 days.

“Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days.“

This structure reflects the “toll-bridge” model FICO has in place, where it collects a fee every time a credit decision is made, yet it doesn’t need to immediately collect cash to continue operating.

Deferred Revenue is another important “liability,” representing cash already collected from customers for software subscriptions that has not yet been recognized as revenue. This reflects the classic SaaS (Software as a Service) model, where customers pay up-front for access to FICO’s platform, but revenue is only recognized as the service is rendered over time. This prepaid income helps fund the business’s operations and reflects the recurring revenue model that is a hallmark of FICO’s software segment.

Additionally, Goodwill – which totals $783.5 million – is the largest asset on the balance sheet. The total goodwill is split between FICO’s two operating segments, with the vast majority sitting within the Software business:

• Software Segment: $636.9 million (approx. 81% of total).

• Scores Segment: $146.6 million (approx. 19% of total)

The company has opportunistically grown through acquisitions in the past, even though acquisitions haven’t played a major role in its more recent growth history.

Capital-Light vs. Asset-Heavy Business Model

FICO is a textbook example of a capital-light business, requiring minimal physical assets to generate significant revenue. To generate nearly $2 billion in annual revenue, FICO only needs $73.7 million in physical Property and Equipment (PP&E). The company’s physical asset base is almost negligible compared to its $20 billion+ market valuation, reflecting the high-margin, software-based nature of its business model.

This asset-light model allows FICO to remain highly capital-efficient, with its human capital (e.g., data scientists, engineers) representing the most significant “input cost.” With $76.8 million in Accrued Compensation, FICO’s largest expenditures are directed towards its workforce, further reinforcing the company’s reliance on intellectual property and talent to power its business. Stock-based compensation is used strategically, allowing FICO to preserve cash while attracting top talent in data science and technology.

Net Working Capital (NWC) and Bargaining Power

FICO’s Net Working Capital (NWC) analysis reveals the following: The company’s operating current assets (primarily receivables) outweigh its current liabilities (accounts payable, accrued expenses, deferred revenue). While most companies strive for a negative working capital – which means that customers are effectively financing their growth – FICO doesn’t quite achieve that. This is primarily due to the company’s large accounts receivable, a result of its massive exposure to the world’s largest banks. FICO allows banks to operate with somewhat “slow” payment cycles because the revenue it generates is guaranteed, and its high margins make it manageable to wait for the cash.

Despite this, FICO’s ability to generate massive free cash flow (FCF) means that its working capital requirements are manageable, even if it means waiting for some payments to come through. And generally, FICO’s bargaining power with customers is enormous. The company has near-monopoly status in credit scoring, which gives it tremendous pricing power.

4.3. Off-Balance Sheet Items & Hidden Risks

Fair Isaac Corporation does not engage in complex off-balance sheet arrangements such as structured finance or special purpose entities. However, there are some standard off-balance sheet commitments, guarantees, and contingencies that investors should be aware of.

For instance, as of the annual report, FICO has significant non-cancellable contractual purchase obligations, primarily related to third-party data center hosting agreements, software subscriptions, and service agreements.

• As of September 30, 2025, these total $99.2 million.

• A large portion of this is due in the near term, with $72.1 million payable in fiscal 2026.

As discussed in part 1, FICO is also involved in ongoing legal proceedings that represent potential future liabilities not fully reflected on the balance sheet.

Part 5 – Risks

5.1. Inversion

Before committing to an investment, it’s important to invert the thought process – actively considering where the mistakes might lie and testing whether the investment thesis holds up under scrutiny.

FICO, with its long-standing dominance in credit risk assessment, certainly seems like an attractive opportunity in light of the recent selloff. But to truly understand the risks, we need to consider why others might be selling their shares, and which factors could undermine FICO’s growth over the next 5 to 10 years. This devil’s advocate approach will ensure a more comprehensive understanding of potential downsides.

The Sellers’ Perspective

The current sellers of FICO shares likely believe that the company has reached its “monetization ceiling” and that the aggressive pricing strategies (especially in the mortgage sector) has attracted (and will continue to attract) too much regulatory backlash for continued success. Since FICO’s “special pricing” strategy between 2018 and 2025 raised royalties by an 800% – without significant volume loss – it could be argued that the company is pushing its pricing power too far; we discussed this risk at length in the management segment (hence, I’ll keep this short here). As a result, regulatory scrutiny, especially in light of antitrust lawsuits and the FHFA’s “Lender Choice” initiative, could reduce the effectiveness of this pricing model in the future.

Furthermore, the lack of insider buying and the millions worth of stock sold by CEO William Lansing in the last two years suggest that even FICO’s leadership may see tempered growth expectations in the near term. The lack of material insider purchases at least raises concerns about the company’s future trajectory, especially during a period of valuation compression.

Some Strongest Counterarguments to the Thesis

• Regulatory Disintermediation (to be discussed again further below): The FHFA’s move to a “Lender Choice” model could significantly reduce FICO’s exclusivity in the mortgage market. Historically, FICO was the only game in town for credit scoring, but things may have changed.

• The “Standardization Paradox”: The “Standardization Paradox” suggests that when a standard (like FICO’s credit score) becomes so pervasive and expensive, it essentially acts as a “tax” on the economy. This, in turn, often leads to government intervention or the facilitation of alternative scoring models. VantageScore has been gaining traction, and the FHFA’s formal validation of VantageScore 4.0 has given it the “permission to compete” with FICO.

• AI: The rise of Artificial Intelligence poses a multifaceted disruptive risk for FICO, spanning competitive threats, product obsolescence, regulatory challenges, and heightened operational risks.

  • On the competitive front, FICO faces increasing pressure from alternative AI-driven credit scoring models that leverage neural networks and machine learning. Low-cost or free consumer credit scoring solutions, powered by AI, threaten to bypass traditional models like FICO’s, and if FICO fails to innovate and adapt to these emerging technologies, its products could become obsolete.

  • Additionally, the regulatory landscape is evolving, with global regulators scrutinizing the fairness and transparency of AI algorithms, particularly in credit scoring. The EU AI Act and potential algorithmic accountability laws could limit FICO’s ability to operate or render certain products obsolete if they fail to comply with new standards.

  • Furthermore, consumer resistance to sharing data for AI-driven solutions due to privacy concerns could impede FICO’s ability to deliver its services effectively.

  • On the operational side, the integration of AI into FICO’s internal processes and external offerings introduces technical vulnerabilities and new security risks. The use of AI to develop products or add features could lead to errors, defects, or delays, damaging FICO’s reputation and potentially resulting in product liability claims.

  • Moreover, intellectual property leakage becomes a risk as AI technology increases the chances of unauthorized use or disclosure of proprietary information. FICO also faces enhanced cybersecurity threats, as AI-driven attacks evolve more rapidly, enabling malicious actors to exploit vulnerabilities in FICO’s systems and target sensitive consumer data. Despite these challenges, FICO is actively embracing AI, integrating it into its FICO Platform for smarter decision-making and leveraging its FICO Focused Foundation Models, designed to be more accurate and cost-efficient than traditional AI approaches in financial services.

  • However, balancing the benefits of AI with these emerging risks will be critical for FICO’s future success. Below is CEO Lansing’s view on AI (be aware the clip is two years old), highlighting that in fraud detection, it’s already deeply integrated, but that on the credit underwriting side, it will take time to overcome regulatory challenges:

• Here’s a more recent clip with FICO’s Chief Analytics Officer:

The Short Thesis: Does It Have Merit?

A potential short thesis on FICO could be built around the regulatory risks and the company’s pricing model. If the FHFA’s Lender Choice initiative leads to greater competition and adoption of VantageScore, or if antitrust litigation successfully dismantles FICO’s exclusive distribution model, the company could face serious revenue declines and margin compression. Furthermore, if FICO’s cloud transition struggles to take off (which seems very unlikely at this point, I must say), leaving the company dependent on its increasingly contested Scores business, the stock could see a prolonged period of underperformance.

While the short thesis has merit, it’s important to consider that FICO still retains substantial pricing power and a dominant market share in its core business, and that the industry structure tends to be a winner-takes-most one (we discussed this in the second part). The company also has a significant moat built around its institutional embeddedness and its regulatory approval in the mortgage market. That said, if competition intensifies and regulatory pressures mount, this could stifle FICO’s future growth.

5.2. VantageScore vs. FICO: Is the Credit Scoring Giant Losing Its Grip?

For decades, FICO scores have been the gold standard in determining creditworthiness, with lenders and investors alike relying on them to assess risk in everything from mortgage lending to credit card approvals. FICO has long held a market share of over 90%, creating a near-monopoly in the consumer credit industry. But in 2006, the landscape began to shift when VantageScore was introduced as a new competitor to challenge FICO’s dominance.

VantageScore wasn’t born out of a desire to compete solely on the accuracy of predictive models. Instead, it was designed to disrupt the entrenched credit scoring system by leveraging the deep data access of the three major credit bureaus, Equifax, Experian, and TransUnion. The collaboration of these bureaus was initially framed as a “Coalition of Rivals,” meant to break FICO’s stronghold on the market by creating a more inclusive and accessible alternative for both consumers and lenders.

However, VantageScore’s journey to challenge FICO has been anything but smooth. Over the years, it has primarily carved out a niche in non-critical areas such as marketing, lead generation, and free credit monitoring services like Credit Karma. These areas are important but far from the core, high-stakes arena where FICO has maintained its grip – namely, the mortgage and lending markets. Despite some initial interest and adoption, VantageScore has for a long time largely been relegated to the periphery of the industry, never quite gaining the widespread traction that would allow it to pose a serious threat to FICO’s market share.

Still, the credit bureaus behind VantageScore haven’t been sitting idle. They’ve been biding their time, slowly chipping away at FICO’s dominance, and positioning VantageScore as a worthy competitor. But breaking FICO’s monopoly isn’t just about having a better model – it’s about overcoming the massive structural and institutional inertia that has entrenched FICO as the industry standard. For lenders, switching to a new scoring model means more than just recalculating credit scores; it involves overhauling internal systems, recalibrating risk models, and retraining staff. And these are just the financial costs. The reputational risk of adopting a new system, particularly one that hasn’t been tested through the full spectrum of economic cycles, can be a huge deterrent. And decision-makers are reluctant to take on the career risk that would come with switching.

Yet, further below, I’ll explore how VantageScore has been quietly chipping away at FICO’s stronghold and has somewhat quietly gained more momentum recently, using regulatory shifts, alternative data sources, and evolving business dynamics to force the industry to rethink its long-standing reliance on FICO. While VantageScore’s market share remains small, recent developments suggest that its role in the credit scoring ecosystem could soon become much more significant.

The real battle for dominance may just be beginning.

The Turning Point – Regulatory Shifts, FHFA’s Approval, and the Latest Developments

The competitive balance in the credit scoring market began to change in late 2022 when the Federal Housing Finance Agency (FHFA) made a historic decision that shifted the landscape for both VantageScore and FICO. For the first time, VantageScore 4.0 was officially approved for use by Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that serve as the backbone of the U.S. mortgage market. This decision represented a major turning point, as it signaled a shift away from FICO’s exclusive control over credit scoring for conforming mortgages. The move was not just symbolic; no, it had real, far-reaching consequences for the credit scoring industry.

The End of FICO’s Exclusivity

For decades, FICO had been the only mandated score for loans backed by Fannie Mae and Freddie Mac. This exclusive relationship had cemented FICO’s position as the de facto standard for mortgage lending. However, the FHFA’s approval of VantageScore 4.0 created a new reality where lenders now have a choice. Under the new “Lender Choice” model, mortgage originators can choose to use either Classic FICO or VantageScore 4.0 when submitting loans to the GSEs.

This shift represented a massive disruption to FICO’s long-held dominance. While FICO still maintains a significant market share (so far), this development marked the beginning of a new era where competition, particularly from VantageScore, could begin to erode its stronghold. For lenders, the new flexibility allowed them to explore alternatives that might …

• reduce costs,

• improve inclusivity, or

• provide a different risk profile

… – each factor potentially pushing them away from FICO.

Bi-Merge vs. Tri-Merge – The “Pulte Pivot”

The most disruptive force in this transition was not just the technology, but the leadership of FHFA Director Bill Pulte. Sworn in in March 2025, Pulte brought a “tech-disruptor” mentality to the agency, frequently bypassing traditional bureaucratic channels to announce policy shifts directly on social media.

One of the most significant potential changes related to the shift to “Lender Choice” was the planned move from the traditional “tri-merge” system to a “bi-merge” system. The tri-merge model requires lenders to pull scores from all three major credit bureaus (Equifax, Experian, and TransUnion) to assess a consumer’s creditworthiness. However, the FHFA’s discussions about the possibility of a bi-merge system – where only two scores are pulled – introduced the potential for significant disruption in FICO’s market. I recommend reading part 1 again to better understand the significance of this for FICO’s economics.

In the bi-merge scenario, if lenders were to choose to include VantageScore as one of the two scores pulled, FICO could face a direct 33% reduction in its volume per application. This represented a major threat to FICO’s revenue, as much of its business was tied to the three-score system, which had been the industry norm for decades. To offset this massive loss in volume, FICO effectively doubled the price per score (from $4.95 to $10.00) to ensure its revenue remains stable (or grows) even as fewer scores are pulled.

This price increase, combined with the need for lenders to pull three scores for each application (now a $30 line item per application), sent shockwaves through the industry. Many lenders began to question whether FICO’s pricing had become untenable, especially when considering the availability of free alternatives like VantageScore. To counter this pressure, the credit bureaus (Equifax, Experian, and TransUnion) began offering VantageScore 4.0 for around $4.50, or even entirely free for a limited time (as seen with Experian’s recent initiatives for mortgage clients) to incentivize them to switch their underwriting systems away from FICO.

This pricing strategy was aggressive but strategic; by offering VantageScore for free, the bureaus could quickly accelerate its adoption, positioning it as a cost-saving alternative to the increasingly expensive FICO model.

However, in a surprising twist, the FHFA maintained the tri-merge requirement in July 2025, much to the relief of FICO.

On July 8, 2025, Pulte stunned both FICO and the credit bureaus with a post on X that preserved the tri-merge volume while simultaneously breaking FICO’s exclusivity: