Boom and Bust, Market Brutality and Opportunity

Boom and Bust, Market Brutality and Opportunity in Q3

What a Q3 earnings season. Company after company reported and sell-off after sell-off ensued. On the very same day, Thursday November 4th, both a ‘reopening play’ (LSPD) and a ‘Covid play’ (Peloton) were down 30% after earnings. A week later and another board favourite, Upstart, was down similarly.

This was then compounded by a sector rotation with many high growth tech names selling off, and market brutality again ensued. But in brutality there is opportunity.

What has been going on? Well as per my name, I have some thoughts.

Investing Background

I haven’t posted on the board since last Q3 earnings a year ago. In truth I didn’t want my words to be construed as financial advice. When I started investing semi-passively a few years ago I thought first abstractly and long term about what industries were the future, and companies were secondary to that. With no investing education at all, and without even reading earnings reports at the time, I then bought what I thought and read might be potential disruptors in those industries. With that in mind, I fortuitously picked up shares of Etsy at $35, Enph at $11, Tesla at $45 (adjusted) & IIPR at $20 among others. Great huh? Well yes, if only I had held them all until now. In April 20 with the pandemic I suddenly had more time and cash and decided to begin investing actively. Unfortunately an outcome of this was being exposed to a lot more noise, re-strategising and selling out of said names at a fraction of the profit they would’ve been now. So what?

Well soon I realised that while I could accurately model a company’s growth rates even if contrary to analysts or company guidance itself (in part thanks to my financial analysis background), that didn’t mean the market would see things the same way as I did and there was often a disconnect between my and market expectations which I struggled to bridge. And so I chose to sit on the side-lines from this board for a while, while trying to understand better the confluence of growth rates and market expectations, and how to beat them.

I hear a lot that the market is forward looking. Perhaps. But it is not forward looking commensurately. More often than not it is forward looking one or two quarters at a time at best, and one reason for the sell-offs or sudden spikes is mixing up one-off and underlying growth rates to create heightened or tempered expectations. This has at times not been favourable to investing with a long term/buy & hold or abstract mindset in recent months and has required to be flexible with positioning.

And one thing the market definitely doesn’t like is uncertainty. It’s human psychology after all. But here it’s my belief that with either finding certainty in a long term mindset, or even better, with timing – there is opportunity.

Underlying growth

What is underlying growth? I feel it is a very important principle to understand in investing, but I see it being overlooked all the time. As simple as it sounds, it is important because underlying growth will best help you interpret what the forward growth rate is. At a basic level underlying growth means growth excluding one-off impacts. Now what is truly ‘one-off’ is a grey area and can be interpreted differently according to the company. Do we have a sense of the underlying growth rates for all of our companies? Some are easier to determine than others.

For companies with short term macro impacts, underlying growth can be extremely difficult to model. Can macro tailwinds count as underlying growth? I think that comes back to how sustainable they are.

Upstart

Let’s use Upstart as an example. I’ll start by saying I like Upstart a lot as an abstract and long-term investment, I first bought at $60 and have a cost basis of $110. But I’ve seen its growth misrepresented on various platforms time & again and believe market expectations were too high going into Q3 which led to the sell-off.

First, I’ve seen some investors using a YoY growth rate of 250% in FY21 to justify forward growth. In Q2 20 Upstart was severely impacted by Covid and lost virtually all its revenue. Normalising the comparatives Q2-Q3 20 would at least adjust your YoY growth to 160% as a starting point.

To help understand underlying growth rates, we first need to break out its growth/revenue drivers. For Upstart:

Loan size x loan originations x take rate = revenue

What are some of the assumptions/drivers are that go into each of those? For Upstart there is a lot to consider.

Loan sizes: there is a general macro trend of downsizing combined with Upstart loan values declining due to lowering of FICO requirements. But assuming macro downsizing moderates, will Upstart’s impact on loan sizes moderate too? Do we have the mix between the two drivers? This seems quite a crucial assumption modelling Q4. I’d suggest we don’t.

Loan originations : I won’t profess to be an industry expert, but at a high level can we understand how much the macro environment has driven loan originations in the last few quarters versus underlying performance? The only pertinent macro comparison I saw ahead of Q3 was deceleration of Lending Club originations from 63% to 14% QoQ and Customers Bank which was flat QoQ. This didn’t strike me as macro acceleration going into Q3. Management suggested their macro assumptions were static forward looking. Other than macro, there are origination drivers in model improvements/funnel efficiencies/conversion rate and new wins.

In predicting a huge Q3 beat, did we have a clear sense of whether model improvements that drove Q2 outperformance were repeatable (management had already said the impact of these would be lumpy). For modelling contribution of new wins for Q4, is it fair to use existing bank partners to predict contribution without considering relative members/AUM or to use historical macro driven origination data. How about the impact of marketing trends or simply if the loosening of FICO requirements is at least in part a one-off impact (ie how quickly until that sub-prime segment becomes saturated)? Would there also be any impact from dormant subprime lenders during Covid coming back as competition?

The point is, it is very difficult to get a sense of Upstart’s underlying growth when trying to predict it quarter from quarter, because it is impossibly hard to strip out all these elements accurately. We simply do not have enough information, and I’m not sure relying on Google Trends data is the most reliable indicator as we saw. Therefore, for a company like Upstart, you just have to trust their guidance is accurate because they do have the information.

This unpredictability causes uncertainty and volatility. We’ve seen this phenomenon numerously with Zoom, Fastly and others before, with macro growth becoming difficult to strip out from underlying growth, the market building up expectations where it assumes the growth is all underlying and selling off when the impact dissipates.
This is where heightened expectations create a ‘risk on’ environment heading into an earning season and if you’re invested, to have cognisance of this risk.

Heading into Q3 earnings I was becoming sceptical about the fervour surrounding Upstart, the anticipation of 30%+ QoQ growth and assumption that management was sandbagging to the degree of a 20-25% beat. I saw some investors predict $300m+ vs $228m actual. The high expectations made the sell-off feel inevitable when it came. For next year some are predicting FY22 revenue of $2bn. Possibly, but what is underpinning this? What mix of personal and auto loan and what are your assumptions of each?

For me it pays to step back and think long term. Upstart claim their Total Addressable Market (TAM) is $81bn personal loan originations (shrunk from $92bn estimate in Q4 20), so extrapolating their Q3 originations Upstart today is at 15% market share. What is a realistically attainable market share in the end game? TAM is often a ‘made up’ number or misquoted ambition.

How much of that TAM can Upstart actually reach – ie what is their Serviceable Addressable Market? For example, 50% of the TAM? Taking this example this would put Upstart at 30% penetrated. In this case there is a ceiling in the next 1-3 years of ‘hyper growth’ where its personal loans opportunity could become fully penetrated. In Q4 20 Upstart’s market share was just 5%. So Upstart has gained 10% share in just 3 quarters (using the two relative TAM’s quoted). Is it realistic to expect this torrid rate of growth over FY22, putting them at ~30-37% market share in a year’s time (or 70% penetrated for eg). Probably not. Is it early enough along its S-Curve? Enough.

And so the outlook turns to the much bigger markets of auto loans and Upstart’s other new loans offerings to sustain hyper growth beyond FY22. While we ought to trust management to make inroads in these new markets, we know mortgages, small personal loans and SMB loans won’t be incremental to FY22 revenue – leaving us with auto. While the indicators are very good that auto will be a ‘meaningful growth driver’ next year, we don’t have enough information yet to model accurately what ‘meaningful’ actually means. And so there is a leap of faith that management will execute in the same style as they did for personal loans.

Sanjay Datta, Upstart CFO, Q3 call:
“We plan to continue investing heavily in our technical workforce as we ramp investments in machine learning, auto retail, fraud and as we scramble new teams to begin tackling opportunities in segments, such as the small-dollar lending, small business lending and mortgage initiatives”

“Scramble”. There is something frantic and desperate about the word scramble. A response to an emergency, as you’d scramble fighter jets to a hijacking. It might seem facetious, but I think a lot can be learned from semantics and tone of management comments in earnings season. It is, at least, something done with urgency, at pace. Are they scrambling due to the ‘emergency’ of slowing personal loan growth? Or because the opportunity is here and now and they don’t want to miss it. Let’s hope the latter.

However, if you believe notionally that an AI powered cloud platform will reform lending and that you have faith in Upstart management to execute on its opportunity at a fast enough pace, then why would you not be invested – other than uncertainty. This is a fair enough reason. But often as the market is too quick to bid up expectations, it’s too quick to bring them down. ‘Good enough’ is understated for progress to a long-term goal, it might pay to focus on the long-term with Upstart; that it is directionally on path. Everything is a question of risk reward. Boom or bust or somewhere in between.

Q3 thoughts

Mostly everything has already been said for stocks covered on this board, so rather than regurgitate what’s been said before, I’ll offer a few thoughts linked to the above notions on underlying growth.

Datadog

For the value of understanding underlying growth rates versus market expectations of growth, Datadog has been a case study. A year ago after Q3 20 Datadog sold off as it notionally ‘decelerated’ even as its usage reaccelerated. And so, in the uncertainty came opportunity, with Q4 and Q1 presenting timing:
https://discussion.fool.com/datadog-redefining-expectations-3466…

Oliver Pomel (RBC TMT conference on Nov 16th 2021) here explains the main driver of their accelerating growth rate as simply: “What we hear and what we see in the market is that the rate at which enterprises are moving workloads into the cloud and growing those workloads in the cloud has resumed to pretty much what it was before the pandemic”.

Management had told us as early as Q2 20 earnings call that growth rates were returning to pre-pandemic levels, and the market ignored it. Datadog has macro tailwinds with the cloud transition but this is adjudged to be long-term and sustainable. And importantly, its growth is predictable.

Looking forwards:

“What do you think we’re going to be most surprised with a year from now versus kind of what we know today about Datadog?”

Olivier Pomel:

”I think the surprise might be that a lot of it will look the same, but the year is a little bit further along. The thing with the heavy land and expand motion we have and the expansion for the new products too is that it is very gradual. Like we don’t have something that all of a sudden jumps to the top. The new products come in. They’re small initially and grow very fast and they gain importance and gain scale, and we layer them on top of the other products. And that’s what’s been happening in the past, and I think that’s what we want to happen in the future.”

What we might infer from this simple statement, is that ”Datadog’s growth is not going to slow down any time soon. ” I recently saw some comments that growth would slow “due to the law of large numbers”. I don’t subscribe to this thinking; there is no ‘law of large numbers’. To me that’s a cop out. As an organisation scales it will face coordination headwinds and it may begin to saturate its market, but that’s not due to numbers. My post from a year ago is as apposite today as it was then as to why Datadog can maintain its high growth rate for a long period:
https://discussion.fool.com/i-think-that-the-low-set-is-unrealis…

Another interesting snippet I took out of the conference was:

"The long-term trend, I would say, is one of data explosion. And it sometimes can get completely out of hand. Any application can generate an arbitrary large amount of logs. I think how we can deal with that in a way that doesn’t scale costs for customers in an unreasonable fashion is to give them feedback loops so that they can understand what they consume and why and create a lot of value, and then give them levers so they can decide what to consume from us to deal with that data.
But whether they send that to us or not, it is generated, it is costing them money. So we need to help them optimize that. If there is no feedback loop, this is a runaway cost on them no matter what. We don’t do ELAs. And the reason for that is we’re SaaS. And we’re SaaS in a domain where data can explode in volume. And we feel good about that.

And we help them do that within Datadog for everything we sell at Datadog. We also started helping them doing that for the rest of their cloud consumption. We announced a new product at our conference, which is Cloud Cost Management. And the goal is just that. It’s help you close the loop on where the money goes, what’s consuming dollars, what aligns with your applications, your customers, your changes, your processes and how you can actually install the right feedback loops directly between the costs, like finance teams and the engineering teams that are generating those costs. So you can drive continuous optimization there."

An aside: we know that Datadog’s growth stalled in Q2 20 with the onset of the pandemic from concerted customer usage optimisation, whereas optimisation is a continuous process usually. But how will this feedback loop turn out with their new product ‘Cloud Cost Management’? For e.g. I manage a IoT connectivity usage based platform at work and we migrated platforms to allow for more effective customer optimisation, completely underestimating the level of optimisation that then entailed which ended up being detrimental to growth. Ours is a very different platform though; Datadog can provide enough ROI with its platform, this helps with any pricing pressure from customers’ ‘data explosion’ costs – and it is yet another product to sell. But from my perspective, the less ‘optimisation’ is mentioned on earnings calls the better.

LSPD

Another company featured a lot on this board in recent months, I’ve never really been convinced by how big LSPD’s TAM is or by its positioning. However, I think it’s an interesting example of underlying vs macro growth, and the unpredictability of trying to model underlying growth rates for these hyper-macro impacted companies.

In Q1 LSPD reported organic GTV growth of +91%, including hospitality +380% YoY and organic total revenue growth of +78%. This lapped Apr-Jun 20 – the height of lockdown. The stock appreciated significantly.
In Q2 lapping non-lockdown summer 20, GTV organic growth ‘slowed’ to +39% and total revenue growth to +58%, the stock sold off even more dramatically.

Perhaps on both the way up and the way down, organic growth equated to underlying growth in the market’s ‘mind’, particularly as acquisitions have confused the overall revenue picture. But how sustainable was GTV growth of 91% given the quarters they lapped really and how justified the sell-off despite ARPU +17% QoQ (albeit slowing customer locations).

The market seemed to think the GTV growth had been sustainable, and now it thinks the revenue deceleration is indicative of a more permanent slowdown; I’d challenge both conclusions, but that’s just my take. And so we saw the mania on the way up and the brutality on the way down. Boom and bust.

Opportunity

Other than the stocks heavily featured on this board, which I also own variously, I’ll try to offer something different.

I first stumbled on this board in about April 2020 when researching what information that I could find on a little known company called ‘Red Violet’. At the bottom of the post, I noticed the poster had a 28% position in ‘APPS’, which was about $4 at the time: https://discussion.fool.com/rdvt-red-violet-34417298.aspx

Curious, I found another thread about APPS (Digital Turbine) on the board, but it was quickly dismissed as ‘a turnaround’, ‘a history of fraud’, ‘only available on Android’, ‘bloatware’, etc etc. But I was still curious, so I researched some more and ended up buying a small position.

Fast forward 20 months later to today and I have recently doubled my allocation, with APPS now at ~$55. Up over 10x in 2020, I believe there is still upside ahead. I’d not argue this is a ‘great business’ or in the league of your Datadog’s or Crowdstrike’s etc, but I believe that a ‘great business’ and a ‘great investment’ is not necessarily one and the same thing. Not all investments need to meet the same criteria either, at least for me.

It is very high risk, arguably at terminal risk to unseen privacy or regulatory changes that could come along, and I am not an industry insider – so be cognisant of that. But there is varying risk with all our businesses as we have seen, it’s a question of risk reward; and timing.

This post is already too long to go into my thesis now and I know it’s a largely unpopular stock here, but I wrote a short thread on Digital Turbine here:
https://twitter.com/thinking_stocks/status/14643730309105745…

Dead and Buried

There is opportunity in market dislocation, a market that seems to be either slow or reactive or too ambitious in equal measure, flitting from mania to despair one week to the next – ‘schizophrenic’ if you like.

Nothing has been on the receiving end of more market brutality this year than ‘Covid plays’, with many of them reverting to pre-pandemic valuations. There is plenty enough risk or opportunity in other stocks featured here and elsewhere, and although I minimised my exposure to them late last year and early this year, I am keeping a close eye on one or two Covid names which I think one day in the not too distant will re-emerge from the ashes. But it’s not quite yet the opportune time to post on them. The time to invest will be when you can identify the crossover point where underlying growth is reflected in a reversion of YoY growth comps and before the market catches on to it. Probably this won’t be apparent until H2 22 if it executes. I believe that timing can be learned.

This won’t be a ‘turnaround’; it’s my assertion that the market is misinterpreting growth pull forward as underlying and the consequent deceleration as indicative of a terminal growth rate, which has created uncertainty – the thing it hates; lest we hope none of our stocks grow too quickly to be fatalistic when running up against its own comparatives. Dead and buried to the world.

Why bother with uncertainty at all, since the market doesn’t like it? Well, for me anyway, I want to be invested in the companies of the future. The future is uncertain, I’m prepared to hedge my bets and ride some uncertainty along the way. And sometimes what is perceived as ‘uncertainty’ is only exposed after the fact.

Crowdstrike is the last of my holdings to report, on Wednesday. I haven’t touched a share in over a year, my thesis has not yet changed, in spite of the multiple re-ratings down recently. Here’s hoping for a little less earnings season brutality: more boom, less bust.

Thanks for all the great content as I’ve lurked this year :slight_smile:

235 Likes

AThinkingFool,
Thanks for sharing. Can you show your math on how you arrive at Upstart with a 15% current market share in personal loans? I don’t follow that math. Bigger picture, Upstart only has a couple dozen bank partners, many of which are quite small, meanwhile there are over 4,000 banks in the US. 15% seems overstated

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RE: Opportunity

My experiences on stocks went sideways for long time and then suddenly increased 1000% in 1 year is that it won’t do as well in the future. Examples: Aterian, EXPI. The risk with turn-around stocks is that: the gain is easy come and easy go. The stock went nowhere for years for a reason.

For Digital Turbine, I can’t pin point why its revenue is accelerating and whether it’s sustainable. I know its revenue accelerated to hyper growth in recent quarters. I noted its decelerating from 123% to 46%. When the QoQ growth decelerating from a high point, the stock will be punished severely.

Red Violet revenue growth has decelerated dramatically over past few years. Not sure why the stock went up.

I think the agreed strategy on Saul’s board is we want the stock price increase supported by durable business performance. We are not trying to find the next Amazon, Apple or Tesla. We are trying buying companies with consistency in growth. We are not venture capitalist. Since we just own around 10 stocks. We don’t need to buy companies with questions.

32 Likes

Thanks for sharing. Can you show your math on how you arrive at Upstart with a 15% current market share in personal loans? I don’t follow that math.

Hi MoneyTree. I took their transaction volume in Q3 ($3.13bn)x4 to give you an annualised figure, and divided by their $81bn origination volume stated TAM = 15%. You’ll sometimes get varying methods for calculating market share with varying results, but that should be directionally accurate.

https://ir.upstart.com/static-files/c64de42c-972e-4b0e-b5dc-…

My experiences on stocks went sideways for long time and then suddenly increased 1000% in 1 year is that it won’t do as well in the future.

Hi Cloud L. That’s a fair experience, but due to acquisitions Digital Turbine is a very different business and investment to before its 10x return, and arguably cheaper.

For Digital Turbine, I can’t pin point why its revenue is accelerating and whether it’s sustainable. I know its revenue accelerated to hyper growth in recent quarters. I noted its decelerating from 123% to 46%. When the QoQ growth decelerating from a high point, the stock will be punished severely.

Last quarter was the first full quarter post acquisitions. You can see reacceleration in management’s guide for next quarter, and sustained high growth over the next 3-5 years given their guide in the analyst day this month. I don’t know many of our other company’s offering 3-5 year forecasts with visibility of high growth. Not to mention Digital Turbine has one of the strongest beat and raise (ie sandbagging) histories of any tech name.
I modelled out Digital Turbine’s implied guide with the new companies here:
https://pbs.twimg.com/media/FFJ8dM0XMAcNfef?format=png&n…

Red Violet revenue growth has decelerated dramatically over past few years. Not sure why the stock went up.

I get that my post was very long so don’t blame you for skimming it, but I feel that you missed the point I was trying to make :slight_smile:
I was not suggesting Red Violet is an opportunity. It was merely a reference to how I found this board, and how I found out about Digital Turbine at about $4 (when it was similarly dismissed).

I think the agreed strategy on Saul’s board is we want the stock price increase supported by durable business performance. We are not trying to find the next Amazon, Apple or Tesla. We are trying buying companies with consistency in growth. We are not venture capitalist. Since we just own around 10 stocks.

How do you define ‘durable business performance’ and ‘consistency in growth’ exactly? How many of your 10 stocks have anything like a 3 year forward revenue CAGR of 60% and EBTIDA CAGR of 120%. And trade at a modest valuation? At what point is perceived durability of business performance factored into risk reward.

I’m not sure where I inferred Digital Turbine would be the next ‘Amazon, Apple or Tesla’, and I’m certainly not investing in them in the remote belief they could be. However, while I do like companies to fit in with my long term view of the future, that’s not at the cost of business performance.

We don’t need to buy companies with questions

If you are buying companies without any questions, then I’d suggest that you might not be asking the right questions.

47 Likes

Let’s use Upstart as an example. I’ll start by saying I like Upstart a lot as an abstract and long-term investment, I first bought at $60 and have a cost basis of $110. But I’ve seen its growth misrepresented on various platforms time & again and believe market expectations were too high going into Q3 which led to the sell-off.

Heading into Q3 earnings I was becoming sceptical about the fervour surrounding Upstart, the anticipation of 30%+ QoQ growth and assumption that management was sandbagging to the degree of a 20-25% beat. I saw some investors predict $300m+ vs $228m actual. The high expectations made the sell-off feel inevitable when it came.

AThinkingFool,

Thanks for this post. So my understanding is since you believe UPST is progressing fine enough on its long term trajectory, UPST is still an investment for you, despite Q3 massively falling short of expectations.

But I have to ask - If you became skeptical of UPST before Q3 report, what’s the reason that you still expected UPST to blowout Q3 earnings, and that you remained overweight in UPST through the Q3 report??

Also why not trim your position to balance a risk/reward calculus that you believe shifted more towards risk, before Q3?
(That’s what I would have done if that was my belief. I would have sold heavily before Q3.)

(According to your tweets https://twitter.com/thinking_stocks/status/14571267788169011…

I expect $UPST to blowout Q3 but that’s the risk (if they don’t)

Upstart’s underlying growth is more unpredictable at this point than eg $Net or $Ddog but cognisant of this risk, I like it enough long term to go into earnings overweight.)

And did you sell any shares immediately upon Q3 results not matching the expectations?

Or is the lesson that volatility is to be expected and that you chose to hold your entire position…or even add more shares post Q3 because of your long term view?

(I would comment what my perspective was but I have little new to add my previous posts on UPST Q3)

28 Likes

For me it pays to step back and think long term. Upstart claim their Total Addressable Market (TAM) is $81bn personal loan originations (shrunk from $92bn estimate in Q4 20), so extrapolating their Q3 originations Upstart today is at 15% market share. What is a realistically attainable market share in the end game? TAM is often a ‘made up’ number or misquoted ambition.

How much of that TAM can Upstart actually reach – ie what is their Serviceable Addressable Market? For example, 50% of the TAM? Taking this example this would put Upstart at 30% penetrated. In this case there is a ceiling in the next 1-3 years of ‘hyper growth’ where its personal loans opportunity could become fully penetrated. In Q4 20 Upstart’s market share was just 5%. So Upstart has gained 10% share in just 3 quarters (using the two relative TAM’s quoted). Is it realistic to expect this torrid rate of growth over FY22, putting them at ~30-37% market share in a year’s time (or 70% penetrated for eg). Probably not. Is it early enough along its S-Curve? Enough.

This is what I have been scratching my head about for a while now. I’ve seen so many articles saying that Upstart has only penetrated a small percent of their TAM. But the way they state their TAM of “81 Billion in loan originations” is somewhat ambiguous. Is that $81b figure the dollar amount of loans being originated? Or is it the possible revenue UPST can generate through origination fees? When I look at the slides, what you are saying here seems like it lines up.

But everything I have seen in analyst commentary doesn’t indicate UPST has already reached 15% penetration. It also doesn’t match my own perception of how things are going to think that UPST is already originating 1.5 out of every 10 loans in the US.

Can there be any clarity here?

7 Likes

Thanks for this post. So my understanding is since you believe UPST is progressing fine enough on its long term trajectory, UPST is still an investment for you, despite Q3 massively falling short of expectations.
But I have to ask - If you became skeptical of UPST before Q3 report, what’s the reason that you still expected UPST to blowout Q3 earnings, and that you remained overweight in UPST through the Q3 report??
Also why not trim your position to balance a risk/reward calculus that you believe shifted more towards risk, before Q3?

Hi Jonwayne.

I don’t always think in straight lines and maybe it’s difficult to follow my thinking sometimes, and unfortunately Twitter lacks context so will try to elaborate :slight_smile: I wouldn’t say Upstart massively fell short of my expectations, it was on the lower side for Q3 sure, but perhaps the market’s more.

I wouldn’t say either that I was sceptical of Upstart ahead of Q3 but more what the market expectations might be.

The message I was trying to convey, is that I didn’t really know where Upstart was going to outturn in Q3. Could they have delivered $250m or 30% QoQ growth? Or even $275m? Absolutely. But I couldn’t predict that with much certainty and the possible outcomes seemed wildly divergent depending on a number of assumptions I didn’t have much visibility or knowledge of ($210-260m?). My scepticism was drawn to what seemed like a consensus that Upstart would post something like $250m+. So if I thought Upstart would deliver blow out, and it seemed that the market did too, then where was the upside? On a blow out beyond all expectations. But with lack of visibility, it felt like the risk reward was skewed at a stretched valuation, or ‘risk on’.

In making forward looking forecasts, it seems important to understand your starting point as completely as possible. With Upstart, the starting point was blurred, at least for me. But that’s not to say ‘it’s too difficult to predict accurately, don’t bother trying’. In fact, the opposite. By modelling it we can help to lay out all the assumptions and different drivers of the business and any gaps that we might have, which will only help us make more informed decisions. And I’m not saying it can’t be done, just that it’s more difficult. I’d love to see anyone’s view of FY22 and understand what the assumptions are behind it, although it seems we might be missing an important piece of info in auto loans right now. A risk in Q4, might be that their FY22 guidance underwhelms, given the uncertainty of the imminent contribution of auto.

Another possibility is that I am completely wrong with my own assumption about unpredictability, that it could have been modelled accurately and I just don’t know how. That’s entirely possible and open to learning. It’s just my opinion.

At risk of going into portfolio management, but yes I did trim an outsized position along the way up pre-earnings to something I was more comfortable with. And yes I still went into earnings overweight and as my biggest position.

(That’s what I would have done if that was my belief. I would have sold heavily before Q3.)

I guess ‘heavily’ is subjective, but yes I saw that’s something you did very effectively with Upstart (building it up opportunistically to a 90% position and then quickly recalibrating your risk reward and reducing your exposure afterwards). That is something I’m trying to improve - you’ll notice on my thread you quoted I ended with “a personal challenge is to bridge cognisance with action more effectively”. That was also an allusion to Upstart, because I was cognisant of the ‘risk on’ into earnings but still sat ‘overweight’. Why? I could probably write an essay on that point alone but I’m sure no one would be interested. But…

Trimming? While I like to have a feel of what my expectations are and what the market’s are, more often than not if I try to ‘play earnings’ I get it wrong. What if you sell and you’re wrong? So if I want to be invested in a company long term I might trim it if I feel its outsized or risk on, while holding the core. Sometimes trimming proves to be a mistake (ie such as with Net) and sometimes holding proves to be, but having a process helps with that.

Psychology. Inexperience and noise/hype definitely plays into that. Last year as an inexperienced investor I remember the first time I read a real time Fastly earnings report. I remember thinking as I read it, ‘what is all the fuss about’:

“I am more concerned about the continued growth of new Enterprise customers as a whole if we can assume the usage tailwinds are now running at run-rate. Appreciate any thoughts on what is going to continue to accelerate Fastly’s growth from here, perhaps before ‘Compute Edge’ becomes realisable.”
<https://discussion.fool.com/what-really-jumps-out-at-me-reading-…

But then as the share price goes up and seemingly the whole investing community thinks Fastly will take over the world, you think ‘What do I know! I must be missing something’, especially when more experienced investors tell you ‘that’s a huge mistake’ to think that, and you begin to make excuses to fit in with the company narrative. A year or so ago I could’ve given you half a dozen excuses about Fastly’s sales function. And then we all know what happened, a quarter or two later Fastly sells off, its usage tailwinds had ebbed, it lost a key customer and its sales function had continued to stall - and you think ‘I knew this already’ and you question yours and others’ theses. But it’s too late.

To me, that’s the danger hype can represent, and I’ve seen it time and again in a short space. It’s not directed at anyone, it’s simply psychology - a phenomenon. I began to notice the same thing with Upstart, a company I liked, where just about every post or comment was overwhelmingly positive. How much was ‘hype’ playing into the collective consciousness, my own included. Or was this my bias? And so in my mind it manifested itself with predictions of an enormous revenue beat in Q3, of which it was not the notion but the consensus that made me feel as if it was ‘risk on’. The unpredictability was being overlooked, in my opinion.

And so that’s something I was cognisant of going into earnings and with my pre-earnings thread. Since earnings, I’ve noticed others picking up on the same theme of macro-driver unpredictability. So perhaps that’s now more in the collective consciousness.

And did you sell any shares immediately upon Q3 results not matching the expectations?
Or is the lesson that volatility is to be expected and that you chose to hold your entire position…or even add more shares post Q3 because of your long term view?

Going into earnings I don’t necessarily have an arbitrary line where I would sell, for example ‘anything under $250m revenue and I’m out of here’, especially for a company like Upstart. Due to the unpredictability of the outcome, that would feel too much like gambling. Where are you placing your line and why? And yes I have a long term view, but that’s not at the cost of business performance. If the Q4 guide was light, I probably would have sold. For me, it needs to be directionally right and at a ‘good enough’ pace. What’s good enough - well that’d probably need another post.

I sold a small proportion of my shares right after the report to manage a little the risk to the downside. I had expected or hoped for more in Q3, but the Q4 guide seemed favourable. And, for me, the story hadn’t changed. And yes I have since rebought all the shares I trimmed pre and post earnings. The risk reward seems more favourable to me now, although the market sentiment/momentum is less favourable. Though that’s not a recommendation for anyone else to buy buy buy, I factor in future cash contributions quite heavily into my thinking on position sizing and ‘risk reward’ at any particular time. Generally I’m trying to maximise my exposure when the upside is clearer, and to reduce my exposure when I perceive it more ‘risk on’. ‘Timing’ and ‘positioning’ perhaps. But this is still a work in progress. Ultimately, I love games and I see investing as a game of sorts. I believe that games can be worked out and perfected, though I’m still figuring this one out.

Your posts on Upstart have been some of the best analysis and insights I’ve seen on any company here or on any forum, so please don’t think my post was aimed at denigrating any of that. I was just expressing my thoughts on Q3 earnings season, and offering an alternative perspective.

This is what I have been scratching my head about for a while now. I’ve seen so many articles saying that Upstart has only penetrated a small percent of their TAM. But the way they state their TAM of “81 Billion in loan originations” is somewhat ambiguous. Is that $81b figure the dollar amount of loans being originated? Or is it the possible revenue UPST can generate through origination fees? When I look at the slides, what you are saying here seems like it lines up.

Hi BobbyBe.

That’s a good question. Happy to stand corrected if anyone has other insights into market share.


Sorry for the long posts, I clearly have too many thoughts to air having not posted in so long. I definitely think we can overcomplicate investing, which my posts risk doing. But my focus has really been on opening up new angles and ways of thinking after an earnings season where the market reaction might not seem to make sense to many people. Whether or not that might help in the future, I don’t know :slight_smile:

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Is that $81b figure the dollar amount of loans being originated? Or is it the possible revenue UPST can generate through origination fees? When I look at the slides, what you are saying here seems like it lines up.<<<<

It is definitely NOT the possible revenue for UPST. It is the total unsecured personal loan amounts originated from start of Q2 2020 to Q1 2021, per Upstart’s latest Q321 earnings presentation. Data comes from Transunion, and it is presented in slide 6.

I have done my own calculation before and it jives with the 15% penetration number for personal loans. That is why the auto loan industry opportunity seems so great to me, if Upstart can recreate what they did for personal Loans.

JDR

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This is what I had calculated before:

From the earnings presentation, personal loans are about a 81B TAM of GMV - this year UPST is on pace to do $10-12B volume, and the prior year they did about $4B( with COVID qtrs, would have been more like $5B)
That volume translated into a FY20 revenue of $233M (or about 6% of GMV),and looking like it will be about 800M for FY21 (or about 6.6% of GMV)…The FY21 penetration then looks to be 12-15% (10/81 or 12/81)

So I model about a 6% of GMV revenue opportunity, but I don’t know if that translates directly to auto loans.
Note that in FY20, they had about less than half the penetration, say about 4%. If they can do that in FY22 to the auto loan industry, it would mean $960m in revenue, which almost doubles their revenue from FY21.

JDR

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