analyzing UPST sequential growth

Here’s what I have for UPST sequential growth. (Sorry that the formatting isn’t ideal and I haven’t included the raw data.)

2019
Q1 to Q2 28.4%
Q2 to Q3 67%
Q3 to Q4 27.6%

2020
Q4 to Q1 11.2%
Q1 to Q2 -81%
Q2 to Q3 372%
Q3 to Q4 34%

2021
Q4 to Q1 39%
Q1 to Q2 60%
Q2 to Q3 17.5%

So taking out the COVID quarter, this quarter was the “weakest” sequential growth we’ve seen since Q1 2020, which also may have had some COVID impact. Even though the growth still looks good, it isn’t nearly what it had been.

Why not?

From listening to the Q and A (but not, I confess, the opening remarks) the answers from both the CFO and CEO on the call make it clear that it was because they had to commit significant resources to combatting an organized effort to fraudulently obtain loans.

They make it sound as though they have this totally under control and it should not be a factor analysts need to put into their models. So, is this a legitimate excuse for the slower growth?

I simply don’t know the answer. It seems plausible, and there is so much I like about Upstart that I don’t want to sell now with the shares in the 250s. Also, their guidance for Q4 for 16% growth at the upper end versus the guidance they gave last quarter of 10% growth at the upper end suggests growth will pick up again.

But I don’t quite have the confidence in Upstart that I did before. I suppose I will just have to wait and see.

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Thanks for your analysis – I agree that fraud was a point of emphasis in the remarks. As a result, just like you, I now have more doubts about the business. Understandably, the specifics about the fraud were missing, making it impossible to evaluate.

Basically, the company is asking investors to take it on faith that the fraud attacks have been satisfactorily answered and that the proper steps have been taken to prevent recurrences. But this doesn’t explain why these steps weren’t taken previously.

It doesn’t inspire confidence.

Overall, perfection is not a realistic expectation though striving for perfection is.

Sounds very much like the Zoom concerns during Q2 2020.

Every cutting edge project of any kind will have to overcome hurdles.

I don’t know why their one-sentence response, which seems to hide an interesting story, should or should not inspire confidence. I surely would not expect the company to say anything more on its own. No analyst dug into it (or I totally missed it). Time will tell.

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I guess what the look back by more than 2 quarters shows, is how lumpy Upstart’s growth has always been. Maybe we just deluded ourselves into believing, from now on it would go up in a straight line. Our typical SaaS companies benefit from a soothing factor of continuing customers (it also helps overall growth as we well know), so we are spoiled by the predictability of these business models.

I can’t say I’m not disappointed, actually shocked by Q3 - not only did growth slow, but also just about all key KPIs like conversion rate, automation rate, contribution margin. And this when we expected the introduction of auto loans to provide an additional boost.

At the same time, I don’t see the narrative or business model as broken. By all accounts, they appear to do and roll out exactly what they said they were going to do, just a bit slower, at least temporarily, than WE expected (not than what THEY guided). but WE clearly being the entire market, not just his board.

My preliminary conclusion is that UPST still shows all the promise it did a week ago, but at current performance doesn’t deserve an outsized position. I will most likely hold, but reduce the size significantly.

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