Bad theses

Investing theses should not be based on the following:

  1. Attractive PS ratio (LSPD, GLBE, DOCU, TDOC)
  2. Huge TAM / long term opportunity (PTON, UPST, AFRM, ROKU, TDOC)
  3. Small Mkt Cap (BAND, MGNI, LSPD)
  4. High-profile partnerships (AFRM, GLBE, MGNI)
  5. Supposedly game-changing disruptive product (AFRM, NTNX, TDOC)

These can be distractions. None of these characteristics are bad – some (if not all) are good! The problem is when they are held up as the key to the investing thesis for a company. Even if a company has all 5, that’s not enough.

I also need them to have other, more important characteristics like hyper-revenue-growth, recurring revenue, solid gross margin, and a growing roster of impressive customers who are spending more and more. Or as Saul puts it, https://discussion.fool.com/how-i-pick-a-company-to-invest-in-33…

Multiple people have asked what Upstart would have to do for me to consider getting back in. You might as well ask me what Affirm would have to do to get me interested! I have to admit, Upstart was likely never a long term position for me, because they don’t have significant recurring revenue. When I bought Upstart originally, the market hadn’t figured it out yet. You can say I made a trade – I won’t be offended. I saw a $5 billion dollar company that I thought was going to do close to a billion in revenue this year. I saw opportunity. This is very similar to Peloton last year. They were being undervalued, in my opinion. But with both, the plan was never to stick around through the ups and downs, for years to come.

You may disagree with this approach. You are free to call this wrong or dirty or whatever you like. I’m just trying contribute what I think is going to a) help us make money and b) keep us from losing money.

I’m sorry if with my list above, I gored your favorite ox. Maybe I am wrong. But if so, I suggest you make your case based on characteristics like hyper-revenue-growth, recurring revenue, solid gross margin, and a growing roster of impressive customers who are spending more and more.

Bear

PS Since people have asked what magical companies I’ve found to invest in rather than Upstart, here are all my positions (other than those with allocations below 2%) as of today:

DDOG 21.9%
MNDY 19.0%
AMPL 9.6%
ZS 7.3%

191 Likes

“I suggest you make your case based on characteristics like hyper-revenue-growth, recurring revenue, solid gross margin, and a growing roster of impressive customers who are spending more and more.”

I’ll take a stab at this.

Hyper revenue growth: Bear’s estimate for 2022 is 78% (Post # 81398). With auto lending coming on and still early days with personal loans I think UPST could continue growing revenue for quite some time. For me, UPST checks the revenue growth box.

Recurring revenue: It’s not recurring in the same way as subscription to an SAAS package. Some SAAS solutions can be quite sticky but better solutions can come to market and subscriptions can be cancelled. For me, the question is really, “What is the likelihood that there be a large market for the products/services the company provides?” I don’t think personal loans, car loans and other types of loans are going away. Economic conditions may hurt business at times but I like UPST’s chances of success with the services they provide to banks, CU’s and other lenders.

Solid Gross Margin: Apologies for being lazy here but in the interest of time I’m going to use numbers provided by Yahoo to make my point. Profit Margin for UPST is 12.22% for DDOG it’s -5.01%. Currently UPST is doing considerably better on this criterion than DDOG – a board favorite.

Growing roster of impressive customers: UPST is adding banks, CU’s, car dealerships, etc.

Some very successful companies have experienced share price hits as significant as UPST. I don’t think the long-term story has changed substantially. But I can understand that others may not share that opinion or may believe there are better opportunities in the near or medium term.

80 Likes