Crammarc March 2022 Portfolio Update

YTD Portfolio Return at end of:
Jan -24.2%
Feb -12.8%
Mar -21.1%

Portfolio Weights (as of 3/31)
UPST 28.9%
MNDY 21.7%
DDOG 18.1%
CRWD 9.5%
SNOW 9.0%
NET 7.2%
ZS 5.5%

Not many changes from last month except that I sold some UPST to purchase SNOW. I did this prior to SNOW earnings and then added more about a week after. When I wish to buy any company that I am confident in I do not like to wait until after earnings. For me, confidence means I expect good to great earnings (although not necessarily great price reaction). Therefore, waiting until after earnings to buy is just opening myself up to missing out. Waiting until after earnings would also be an indication that my confidence not actually that high. This perspective also helps me narrow down the number of moves to consider making.

Upstart (UPST)
This continues to be my favorite high growth company. Their guidance has been very conservative since I have been tracking them. They can’t predict leaps in their AI’s effectiveness so I think there is always potential for an occasional surprise to the upside if that quarter contains the result of a jump in their AI performance. I do struggle to understand the complexity of the lending environment. However, I can’t look past the numbers. Upstart guided to $1.4 billion in revenue this year, after $849 million last year. That is 65% full year guide which is about as high as any of our companies guided to. At the end of the year they easily could deliver $1.5-1.6 billion in revenue and maybe more. Their growth rate over the next few years is likely to be good but hard to project (40-80% who knows). This company is already profitable and doesn’t have far to go to generate multiple billions of revenues annually.

Upstart and KBRA
I have read through a bunch of these reports and I am still unsure how much the performance of the securities directly impact Upstart as a business. I have not made decisions to buy or sell based on the information that I have found in these reports. I do feel that it has helped me wrap my head around UPST’s place in the lending industry. I hope to eventually make a full post walking through what I think I have learned from these reports.

A recent example:…

I recommend reading through the “Key Credit Considerations” section Pg. 4. This is a series of relevant summaries from KBRA scored as +, -, +/-, -/+. For a novice like me it gave me some starting points to explore and look up definitions. KBRA as a company appears focused on transparency and states that they don’t want to be beholden to the companies they are reviewing. There are useful notes that confirm the importance and impact of information about UPST. One of my favorite reasons for investing in UPST originally was the alignment of interest between UPST, banks/credit unions, and borrowers. KBRA (who knows waaay more than me) states that alignment of interest is a strong “+” for UPST. Good to get some confirmation from an expert.

A few other examples of useful notes from KBRA in the above link:
“several rounds of government stimulus meaningfully contributed to positive credit performance”. This reaffirms that stimulus checks really did artificially/temporarily change default rates in 2020-2021 for unsecured loans. It also bolsters the reality of “tax refund season” that UPST management has mentioned as an impact and helps me take their comments as more than just excuse making.

”In the third quarter of 2021, Upstart experienced a large and coordinated fraud attack. The attack did not affect any outstanding securitizations. Additionally, as discussed in Upstart’s third quarter 10- Q for 2021, the attack did not have a significant impact on the Company’s financial results.” I didn’t recall UPST going into much detail about this attack. It is nice to confirm that it does not appear to be an ongoing concern and that it did not impact the securities or the financials.

Pg 10. “Removal of Customers Bank. In UPST 2021-5 there was 12.4% of the aggregate principal balance originated by Customers Bank, a Pennsylvania chartered commercial bank which utilizes the Upstart Platform to originate loans under their own underwriting criteria. UPST 2022-1 will not contain any loans originated by Customers Bank.” Very interesting to see this, not sure what it means though. I guess something went wrong? Here is something new to keep an eye on.

There is a ton of information and interesting detail in the KBRA reports. However, for me it is very difficult to appreciate what all the numbers mean. On top of that it remains unclear to me how much good or bad results in the performance of UPST’s collateralized loans actually impact the company. For example, packages of loans that deliver reduced cumulative net loss (CNL) relative to KBRA’s predicted CNL amounts are presumably a good thing. See page 13 in the above linked report for a summary of UPST transactions. This was dramatically the case for the many of UPST tranches from 2020 and older. Much of this could be due to the unique event of stimulus money steadying otherwise precarious loans. However, looking at the 2021 vintages there is a curious split some tranches are below the CNL and some are above. That sounds not as good and maybe bad. A confounding factor is how KBRA is adjusting their expected CNL for new tranches. I think it is somewhat based on the results that they are seeing for other UPST collateralizations. Potentially, this could mean that if USPT does score risk better that KBRA will move the goal posts and lower expected CNL for new tranches, making it hard to continue exceeding expectations. But I don’t understand this stuff well enough to understand if/how that plays out.
I could ramble on for pages but I don’t how accurate those musings would be. This loan and finance stuff is complex. For now the growth rate, profitability, and story are enough for me to look past this complexity, your mileage may vary. (MNDY)
I liked this company back when it was $350 a share and I don’t think the story has changed much. Revenue growth has slowed from 95% but I didn’t expect it would continue for very long at that rate. Last year Monday had 308mil in revenue and they guided to $474 mil or 54%. Assuming they continue their conservative quarterly guidance if they beat by 7-8% each quarter I expect the actual yearly growth to be over 80%. For now this stock feels undervalued. It feels like it’s priced as if its growth has already slowed to 40-50%. But it hasn’t yet and if it doesn’t I could see this stock appreciating faster than just about any others.

Snowflake (SNOW)
SNOW reported quarterly results of $359.6 mil product revenue. This was low as they guided to $350 mil last quarter. As I mentioned above I bought a 4-5% position pre earnings. It dropped a bunch after earnings which I could understand with the lower than expected revenue. Not concerning enough to sell but it wasn’t like Zscaler where the report was great and the stock still dropped. The explanation was that the lower revenue was due to an increase in efficiency/savings that they passed on to their customers. After reading more and mulling over the discussions on this board I decided that ultimately, I think this is actually a net positive. It reminds me of Amazon 10+ years ago. The business was not about the bottom line but about providing more and more valuable services to your customers. Do that and the growth will keep coming. After about a week I added more to make it a 9% position and I feel great about it.

Crowdstrike (CRWD)
I am content with this company. Maintaining 60%+ growth at this scale is impressive to me. I haven’t had the time to really get into SentinelOne but I was initially hesitant at the deeply negative operating margin. Now that it has improved it looks like the financials for S are similar to CRWD back in 2018. I still need to think through which I would prefer or if I would like a mix of the two companies. For now until I can think through it I am sticking with CRWD because I have known it longer.

Zscaler (ZS)
Growing well in an expanding and critical field.

Cloudfare (NET)
Growing well in an expanding and critical field. Long term vision that I am eager to see unfold.


P.s. I think that we could see some very nice reactions to the next round of quarterly reports. I am just speculating but it feels like during this past year many investors became aware of the tremendous price potential of share price growth in hypergrowth companies (hard to not be intrigued by 200%+ annual gains in some portfolios!). To me, it became apparent that not all investors were familiar with how to interpret quarterly results and the usual guidance games. There were many reactions to quarterly results that didn’t appear to reflect how the company actually did. Maybe, at the end of 2021 more investors were aware that these companies guide to a handful of percent lower than what they actually expect to deliver. Now, after this past round of Q4 results we received the new 2022 full year guides and many companies dropped dramatically. I can imagine that investors got used to seeing a 55% quarterly guide really meaning that 60% is closer to what management is telegraphing. The miss that I suspect may be happening now is that if a company guides for 55% growth for the full year that doesn’t mean they are expecting ~60% for the year. They may easily be baking in 4 quarters of sandbagging at 4-7% which would mean they could be signaling >70% growth. Just a hunch and it doesn’t change any of my own investing behavior, which is to be 100% invested in the companies I think are the best and will do the best.


“Pg 10. “Removal of Customers Bank. In UPST 2021-5 there was 12.4% of the aggregate principal balance originated by Customers Bank, a Pennsylvania chartered commercial bank which utilizes the Upstart Platform to originate loans under their own underwriting criteria. UPST 2022-1 will not contain any loans originated by Customers Bank.” Very interesting to see this, not sure what it means though. I guess something went wrong? Here is something new to keep an eye on.”

I’m a shareholder in UPST and Customers Bank (CUBI). Just now completed a discussion with CUBI’s IR Director David Patti regarding my inquiry about the KRBA note you referenced above. Mr Patti said the UPST/Customer Bank relationship continues uninterrupted, and that there might have been some KBRA confusion in connection with CUBI’s spinoff of BankMobile last year.

So, seems like that point in the KBRA note is not correct. Heaven knows misinformation like this can mislead analysts like Wedbush.

Thanks for your excellent summary and thanks for bringing this point up so i could clear it up to my own satisfaction. CUBI is a good bank with brilliant management.

I have not checked this matter out with anyone at UPST.