I shouldn’t have said They trained us to expect huge raises and then they ran into a wall and couldn’t give one. A lot of people seem to think I meant they did this intentionally, and I’m not sure they did, and it doesn’t matter anyway, and that’s not even close to my point. My point is, in Q3, they did not grow explosively like they had been. I’m sorry I focused on the low guidance raise to make this point – IRDoc rightly said, A guidance raise of $100 million this quarter would have been great, but would only have made sense if they actually turned in $260 million this quarter. It makes sense to be disappointed by the actual report from Q3, but the “light” guidance raise already incorporates the disappointing quarter.
That’s right and that’s actually the point. The trajectory they were on is no longer as steep as it was. And that’s not a prediction or a guide…it’s what we saw happen in Q3. Look at their sequential growth each quarter going back a long way:
Q1 2019: -18%
Q2 2019: +66%
Q3 2019: +52%
Q4 2019: +27%
Q1 2020: -3%
Q2 2020: -73%
Q3 2020: +276%
Q4 2020: +33%
Q1 2021: +40%
Q2 2021: +60%
Q3 2021: +18%
Q4 2021 guide: +16% (will be beat, of course)
Q1 2022 guide: ???
Notice that before last Tuesday’s report, the lowest sequential increase (other than in a Q1) was 27% back in Q4 2019. Even if you smooth out the quarters from Q1 2020 to Q2 2021, it’s a 25% CAGR. That’s not happening now, and Q3 was a rude awakening to that fact. Upstart’s steep up and to the right trajectory has flattened quite a bit. We might get a quarter or two of 25% or even 30% sequential growth (though also perhaps negative sequential Q1’s again), but long term I think the trajectory is unlikely to re-accelerate, because the raw revenue/origination numbers have become pretty large. If I’m belaboring this point, it’s because some people sound like they’re trying to ignore this slow down, saying that, “oh, it’s just lumpy because it’s non-Saas.” No, it has slowed down considerably.
Also from the numbers above, we see Q1 seasonally is not their friend (except 2021 since they were still bouncing back from covid). Something else to watch out for in the upcoming quarter – the market might not like the guide.
I greatly respect GauchoRico, and his thoughts should always be seriously considered, but this strikes me as a very uncertain proposition: If we focus on the business and project that UPST will do for other lending market segments what it’s already doing for unsecured personal loans, we can see that UPST’s powerful disruption will be applied to inefficient parts of the multi trillion dollar lending market. That’s a lot of hoping…will mortgage (for example) be as profitable for Upstart? Perhaps Upstart’s business model only works on high-interest / sub-prime personal (and maybe auto). Or maybe GauchoRico, and UPST’s CEO, are right and they will dominate the lending world. I already said this was a possibility. But the problem with the long term is, it takes a long time. And it’s usually not a straight line. Here’s a quote from this board (from a very respected poster) on Peloton from February: Peloton has a chance to not only dominate fitness but possibly turn itself into a lifestyle ecosystem. I don’t think he was wrong, and I honestly don’t think that’s changed. What has changed is Peloton’s trajectory. Growth exploded for a while, and now it’s not exploding. The reasons don’t matter, because whether supply issues or demand issues, external issues or market issues, etc…this is just how it goes for non-SaaS companies!
Upstart’s trajectory has changed, too. Even if long term it’s still quite up and to the right, it’s not as steep as we were hoping. Frankly, it’s not as steep as I need to invest in non-SaaS. So maybe GauchoRico is right on this point: Bear stated that UPST is not SaaS and therefore its business model is inferior. Correct that UPST is not SaaS, and perhaps Bear will only invest in companies with a SaaS for all eternity.
I can try.
Bear
PS I got an extremely thoughtful email, the main point of which was that while Upstart doesn’t have recurring revenue, perhaps it has recurring business when it signs up more and more banks. I don’t disagree with this, but the relationship between bank partners and originations is non-linear, to say the least. This is because 2 banks (Cross River and Finwise) made up 84% of Upstart’s revenue this quarter. I think each bank they add is at best an incremental “kicker” rather than a sturdy ballast to the level of revenue/originations Upstart enjoys. I believe other factors (such as macro loan demand) will have a much stronger effect on Upstart than their number of bank partners.