A few thoughts on UPST, and NET as well

Hi Pavlos, Thanks for that excellent write-up of Upstart. I especially agree with this thought,

As we all know speed is as important as anything else. You come up with an idea and if you don’t execute it fast enough it will be more detrimental to the health of your business than if you executed the plan perfectly but at a later stage. At that stage you might not be relevant anymore, the competition might have caught up, or someone else might have come up with a better solution altogether.

Do it fast instead of perfect, and then fix anything that needs fixing. Cloudflare specializes in that also.

Just for disclosure, I bought UPST at $80, $120, $140, $160, $180, $200, $280, $300 and $330. Some might call this chasing the stock and find it risky as a strong pullback will have you in the red. [on the most recent purchases only]

Just in the past two weeks or so I also added at $290, $295, $315, $323 and $335, now it’s about $380. I know otherwise very excellent investors who sell because the stock has gone up. (“Valuation is too high now!”) I just can’t understand it.

I had trimmed my position in Cloudflare down to a regular position from one of my largest because I couldn’t understand why growth wasn’t accelerating but the stock price kept going up. I know people who completely exited it, (Again, “Valuation!”]… But then when they announced their most recent suite of products I built it back up to my third largest. In the last two weeks exactly it’s gone from $112 to $165. That’s up 47% in two weeks. Wouldn’t you feel silly if you had gotten out to try to time it and buy back $10 cheaper???

Best,

Saul

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Hey guys, Pavlos’ excellent post on Upstart deserved a lot more recs than my little thoughts. Make sure you read it.

Saul

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Totally agree with Saul - Excellent write up Pavlos! UPST is a great example of how we shouldn’t price anchor. I get it, it’s tough to consider buying a stock that’s run up so significantly, but when the company’s story is strong, and is getting stronger, we are rewarded when/if we can overcome our “price anchoring” tendencies.

For me, UPST’s continued rev growth, gross margins (87%?!? they are printing money!), moat/competitive advantage (with their proprietary AI and machine learning technologies), and their TAM are so compelling, it suggests UPST has a ways to run, even at current valuations. To illustrate this, consider their TAM potential. In their latest quarter, they announced ~$194M basically on about $2.8B of transaction volume, so let’s say their quarterly revenue is about 7% of transaction volume.

USPT’s TAM is as follows
$4.2T/yr: US consumer credit (credit cards and mortgages)
$635B/yr: Auto loans
$84B/yr: Personal loans
Total: $4.9T/yr or $1.2T per quarter

This suggests UPST current TAM penetration is a (measly) 0.2% ($2.8B/$1.2T). This is like a rounding error!

If we focus on just auto loans, and assume UPST captures even a modicum of the Auto loan market (say 5%), their quarterly loan transaction volume goes to ~>$8B (635B/4 x 0.05). Just using back of the envelope estimating, that would be a ~3x increase to their quarterly revenue, to about $550M. At current multiples, this implies a stock price of >$1k! Of course there are a lot of assumptions in this, not the least of which UPST’s share count stays constant, but you can see why folks love UPST.

Why I focus on Auto loans is when UPST acquired Prodigy, Prodigy gave them a nice entry into the auto loan market. Auto financing is a huge market and is relatively easier to penetrate than the mortgage lending business.

In summary, Pavlos did a nice job on assessing UPST, and Saul has taught us to look at the business, and to not necessarily sell when the valuation gets “high”, especially if the story remains and gets better. Strong companies tend to grow into their valuations, and their stock price often looks cheap when considering future revenue and cash flows. I think that is where we are with UPST, now.

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USPT’s TAM is as follows
$4.2T/yr: US consumer credit (credit cards and mortgages)
$635B/yr: Auto loans
$84B/yr: Personal loans
Total: $4.9T/yr or $1.2T per quarter

This suggests UPST current TAM penetration is a (measly) 0.2% ($2.8B/$1.2T). This is like a rounding error!

Surely this isn’t the correct way of thinking about Upstart’s revenues and penetration of the market TAM.

Upstart’s revenues aren’t commensurate with the total loan amount, they do lending origination for these loan markets which means their serviceable market from a revenue count is the origination fees associated with the loan values. (Unless you think they are going to charge 100% of the loan value as their origination fee). Just as Shopify is going to count GMV as their total addresable market but instead the 5% potential take rate of that market.

Ant

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Thanks Ant. I took UPST’s TAM data straight from their latest Investor Presentation:
https://ir.upstart.com/static-files/0281f9ee-44c6-47e3-8136-… slide 6. I do notice they don’t call it “TAM”.

I think what you are saying is a more accurate representation of UPST’s TAM is the total of all the origination fees associated with the loans in these three markets
credit cards + mortgages,
auto loans,
and personal loans.

Still, I’ll bet UPST penetration into these TAMs is very small.

Thanks for the feedback!
Gary

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Ok - so good to verify the TAM source. I guess to appropriately factor the penetration of the TAM provided then you need to do one of either 2 things…

  1. Compare the Gross Lending Value (GLV) if such a thing exists and is published by Upstart (i.e. the total value of the loans they originate) and compare that against the TAMs provided
    or
  2. Factor down the TAM by an estimate of Upstart’s origination take rate - whatever that is, and compare revenue against that.

But definitely not Revenue vs TAM as is stands.

Ant

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https://twitter.com/jaminball/status/1449107420668514304?s=2…

According to the info from the above tweet, NET now trades at the highest P/R multiple for SAAS / Cloud companies.

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