It's been difficult to find strong-performing stocks this year because the broader market has been hit hard and the S&P 500 is down roughly 17.5%. It's been even more difficult to find strong-performing fintech and tech growth stocks, many of which plummeted this year in the face of high inflation and rapidly rising interest rates. The Nasdaq Composite is down close to 31% in 2022.

But one fintech stock that seems to be flying under the radar, at least when it comes to some of the more frequently discussed names, is Fair Isaac (FICO 2.60%). This is the company responsible for developing the FICO scoring system that assesses the borrowing risk of consumers.

Fair Isaac's stock is up close to 34% this year and is beating the broader market by more than 50 percentage points. Here's why.

There's more than meets the eye with Fair Isaac

You might know FICO as the three-digit score you frequently see on your credit report. But the company runs a comprehensive software business that leverages predictive modeling, transaction profiling, and data to help businesses make better decisions. 

To generate FICO scores, Fair Isaac uses publicly available information from property data and other records such as phone and cable payments to rank the consumer on a scoring range of between 300 and 850. Lenders usually want to see a FICO score above 660, which is considered a prime borrower.

People in conference room clapping.

Image source: Getty Images.

Fair Isaac's business has two major segments: Scores and software. The scores business is really the consumer FICO scoring business. Fair Isaac sells scores to most banks, credit unions, and mortgage and auto lenders, which can integrate the scoring into their business in order to make credit decisions. Fair Isaac also sells FICO scores directly to individuals through myFICO.com and other consumer channels.

The software segment leverages Fair Isaac's technology to help businesses automate and improve decision-making for activities such as customer engagement, acquisition, and pricing, as well as the servicing and management of those customers and fraud protection.

Fair Isaac also assists companies with non-customer functions such as supply chain optimization, scheduling, and policy adherence. This software can be deployed in the cloud or within a customer's IT and is sold as multi-year subscriptions. Fair Isaac's software business is currently being used by clients in more than 120 countries.

A strong business model with a good moat

FICO scores are maintained by national credit reporting agencies such as TransUnion, Experian, and Equifax, and then users pay a fee for each individual FICO score. The reporting agencies then pay a fee to Fair Isaac.

This allows the company to generate solid results in a variety of climates. For instance, this year mortgage originations have been down due to higher interest rates, but this has been offset by a surge in credit card and personal loans due to consumers' dwindling personal savings and a higher cost of debt. As a result, Scores revenue managed to grow 3% year over year in Fair Isaac's fourth fiscal quarter of 2022.

The company also continues to grow its software business, which had an annualized revenue run-rate (ARR) in its most recent quarter of more than $569 million, up nearly 9% year over year.

Notably, there was a real ramp-up of the FICO platform solution, which allows companies to gain customer insights in real-time that can enhance the way they interact with their customers. The solution also utilizes a land-and-expand model, where customers can increase their usage, also increasing Fair Isaac's billings. The FICO platform went from just 11% of software ARR at the end of 2020 to 20% in its most recent quarter.

Management is also guiding for double-digit percentage earnings growth for its fiscal year 2023.  Jefferies analyst Surinder Thind thinks Fair Isaac can continue to grow earnings at or above the mid-teens percentage range for "the foreseeable future."

A well-earned rise 

Fair Isaac is undoubtedly a fintech business, but it's unique in that it can perform well in a variety of different economic climates, giving its business resilience that most fintech and tech stocks don't have. Although the company was founded decades ago, management continues to innovate and push for solutions that are invaluable to its customers and that create recurring revenue and a strong moat. The significant outperformance is well-earned.