Goldman Sachs issues UPST Buy

Investment Analysis Clubs Saul’s Investing Discussions
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This is a snippet from Seeking Alpha publicly available news on UPST.

… Goldman Sachs analyst Michael Ng initiates coverage with a Buy rating on the premise that the fintech lender’s artificial intelligence enables better borrowing selection, price efficiency, and ability to offer lower APRs for better risk-adjusted returns over the long-term

…

Sets $147/share price target, implying 18.8% upside from where it’s currently trading; target is based on 16X next twelve months + 1 year enterprise value/sales and it’s trading at 13/5X 2022 estimate EV/sales.

https://seekingalpha.com/news/3714299-upstart-holdings-surge…

If you have a GS account, the details of why Mr. Ng upgraded will be available from them. SA’s article only has a few snippets.

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Maybe, but this coverage is not surprising. I believe that GS was part of the group that underwrote the initial IPO. So I would expect a positive rating from them.

Not that I disagree. In fact, I think the target it low. But I do think that GS may be a bit biased here.

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Maybe, but this coverage is not surprising. I believe that GS was part of the group that underwrote the initial IPO. So I would expect a positive rating from them. Not that I disagree. In fact, I think the target it low. But I do think that GS may be a bit biased here.

I googled it and Goldman Sacks was a lead underwriter, so I agree, I’m not sure either how much this means. But I think that they are probably being quite conservative.

Saul

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I would just note that there are rules in place that put firewalls and large restrictions between the groups in banks that do underwriting vs analysis. The two should largely be independent.

https://www.investopedia.com/terms/b/broughtoverthewall.asp

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I googled it and Goldman Sacks was a lead underwriter, so I agree, I’m not sure either how much this means.

We got our answer today. Nothing (or worse than that). In my experience upgrades by Goldman more often than not end up being rug pulls in the short term for stocks (not that it matters).

Bnh

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One day later, they announced to partner with Apple to launch Apple Pay later service. Then UPST dropped 8%. What does it mean? UPST isn’t unique and probably easy to copy for FAMAG.

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UPST is a credit quality evaluation service, i.e. FICO by other means.
Apple Pay Later is represented as a lending service for on-the-spot purchases, kind of like Afterpay. I don’t think they are competition for each other.

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One day later, they announced to partner with Apple to launch Apple Pay later service. Then UPST dropped 8%. What does it mean? UPST isn’t unique and probably easy to copy for FAMAG

I imagine it means that Upstart’s 8% gain the day before was market short term noise due to a analyst target raise rather than any material business related news. So it is back to where the stock price was two days ago, and nothing has changed with the company itself. Seems to check out to me.

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For this case, you may be right.

But if you think a little bit further, Amazon or Google or Apple have their own unique data from their App Store customers, developers and suppliers.They can leverage the data to create their own “FICO” service easily. The FICO services can be sold to banks or credit unions as well.

This news are really bad for Affirm, then potentially UPST.

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Bad for Affirm? Apple is using Apple Pay to allow customers to fund purchases of Apple products. You want to buy a Peloton or finance something from a Shopify merchant you go with Affirm.

People over read everything. Yes, competition. Not like Affirm has a network effect or proprietary advantage and their branding may not be much of an advantage at this time so others could always enter the market if they desired. Apple did, but to find financing of its own products. This should therefore have negligible impact on Affirm.

At present (according to the Goldman report) 98% of the loans (as of 2020 - and Im sure this has gone down somewhat) are begun on UPST’s own website and not its bank customer websites. White labeling is a small business opportunity at present. Hopefully it will rapidly grow.

But UPST (1) has branding as its own marketing efforts have been very successful, (2) switching costs with its own bank customers as it takes time to integrate w their API’s and (3) appears to be writing the book on how to comply with fair lending laws (ie, they are like a safe harbor in security law terms).

FICO scores cannot just suddenly jump in and do what has taken years for UPST to do. In contrast, not so difficult to do what Affirm does. They provide money based on a fee schedule. Anyone with money can replicate that. They don’t, however, because Affirm is losing money hands over fist. Apple can enhance its own profits self financing its own products. I’m sure Peloton would do the same if they had the capability.

This said, yes, all fear of competition scares the market. Generally this passes as well as reality kicks in (eg Amazon competing with Netflix; Amazon competing with Elastic).

But UPST is a different egg than Affirm. Still, the market likes to run in herds and a finance company is a finance company to many. Numbers will tell the tale in the end.

Tinker

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UPST isn’t unique and probably easy to copy for FAMAG.
But if you think a little bit further, Amazon or Google or Apple have their own unique data from their App Store customers, developers and suppliers.They can leverage the data to create their own “FICO” service easily.

These are a bit cavalier statements to say that building a useful AI model with 1600 variables (https://discussion.fool.com/i-listened-to-all-available-podcasts…) is “easy.” While there is no doubt that many big tech firms can do this for lending (and maybe they are doing this), saying that it is easy, which implies it could be done quickly, is another matter.

It is substantially a non-trivial effort at that scale to (a) gather the meaningful, clean data and (b) identify the meaningful and useful model for those data. Even after the data are gathered and the first generation model is created, this all needs to be maintained and updated as the data changes over time, which means the model will change over time. One day machines will just do it all for us, but we haven’t built those machines yet.

BlueGrits also made a similar statement on technical moat (https://discussion.fool.com/upst-general-thoughts-34867522.aspx?..).

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Hi covediver

One day later, they announced to partner with Apple to launch Apple Pay later service. Then UPST dropped 8%. What does it mean? UPST isn’t unique and probably easy to copy for FAMAG.

you are confounding random correlation with causation, and then looking for a meaning. There are thousands of news in the financial/technology world everyday, yet this one should be significant? Please elaborate then, otherwise it is just noise.

Also, affirming that UPST isn’t unique without providing evidence cannot bring the conversation further. Which other company does the same? Please provide one, with supporting evidence.

Same goes for “probably easy to copy”. I would contend that just gathering a unique and powerful team of mathematicians/statisticians/ML specialists with the purpose of improving personal loans coverage across the spectrum is “not easy”, and takes time. And I didn’t even mention data collection or starting to formulate the problem to solve. Whether it is successful is another thing, and that remains to be seen, but so far as per the numbers it seems like it.

They can leverage the data to create their own “FICO” service easily.

Again an evidence-lacking affirmation. Buying an app at $2.99 is a different thing than securing a $25.000 personal loan. Sure Apple can derive data from paying customers, but this data pertains to buying apps and perhaps a Coke at Walmart. Not really earth shattering, don’t you think?

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Then UPST dropped 8%. What does it mean? UPST isn’t unique and probably easy to copy for FAMAG.

This is bordering on conjecture, but I imagine the drop in Upstart’s stock price on Tue (and today) has to do with the major banks reporting Q2 earnings this week, and while they are showing increased profitability, are also showing “disappointing” loan growth.

This is in a way bullish long-term for Upstart, since they are in the business of improving the loan process.

Chase and Goldman Sachs
https://www.barrons.com/articles/big-banks-stocks-earnings-l…

“Loan Activity Was Weak. With pandemic-era trends in the rearview mirror, investors are looking for the next driver of growth. So far, it doesn’t appear that it will come from loans.”

Bank of America
https://www.cnbc.com/2021/07/14/bac-earnings-2q-2021.html

“given the industry’s sluggish loan growth this year”

Wells Fargo
https://www.cnbc.com/2021/07/14/wells-fargo-earnings-q2-2021…

“CEO Charlie Scharf said in a press release that demand for the bank’s loans remains somewhat muted despite the economic recovery”

When the company reports earnings in a few weeks, they seem likely to show an explosion of revenue along with strong guidance for the remainder of the year, as has been pointed out numerous times on this board in the past couple of months, and this week will seem like a blip.

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One of many possible “reasons” for the UPST dip yesterday could also have been that an investor with over 200k followers on Twitter (Puru Saxena) announced that he was exiting his position. I was watching yesterday and the price began to flounder close to the time yesterday morning that he posted, “my gut says there is something not quite right with one of my companies” and he might have to get out. That set off a craze of speculation on his timeline (he makes his holdings public), with most deciding it must be UPST, and the price started to really go south. He then confirmed it almost 12 hours later.

In the end, he couldn’t really identify a problem, he just never understood the advantage they had, thought their growth estimates (from the GS report) were too weak from 2022 onwards, and therefore sold.

I don’t think that accounts for the whole swing, by any means; UPST is like a bucking bronco with its share price. But I also don’t think that announcing to over 200k followers that you’re selling a position–an announcement that was teased and hyped unnecessarily for almost 12 hours first–would have no impact at all.

UPST is my largest position.

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After studying Saul’s KB, I trained myself to look at week over week movements only.

The fact is that UPST has declined week over week for five straight weeks and is well on its way to a sixth week.

Is this a ZI case where the fundamentals are there but the market doesn’t like it or understand it? I don’t know yet.

I do think it pops after results and declines slowly thereafter though. It seems to be the pattern.

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I found a lot of grounds for skepticism after poking around Puru Saxena’s Twitter feed for several minutes. For example, when a Twitter follower pointed out Upstart was originally supposed to do $350M in 2021 (now estimated at $600M)- and therefore we shouldn’t rely on growth estimates - that person was immediately blocked. Mr. Saxena has also retroactively deleted all his previously positive posts on Upstart. I think it is reasonable to be curious of his motivations.

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This is bordering on conjecture, but I imagine the drop in Upstart’s stock price on Tue (and today) has to do with the major banks reporting Q2 earnings this week, and while they are showing increased profitability, are also showing “disappointing” loan growth.

I read the earnings reports of Bank of America and Wells Fargo today. Loans are slightly down from a year ago, but keep in mind that we’re lapping the PPP loans, which are all rolling off. In addition, both BAC and WFC mentioned that loan growth has hit an inflection point in the conference calls, and has started trending up:

Here’s Bank of America CEO Brian Moynihan:

What all these figures point to is accelerating growth during the quarter as we’ve spoken about on occasion. This quarter, we saw loan levels across most every business move past stabilization begin to make progress. Companies need to build inventory, hire workers to meet the growing customer demand. This virtuous circle of hiring workers and meeting customer spending will help drive the economy, and hopefully, will resolve more line usage on ones.

I think if you look across all the businesses on an end-of-period basis had loan growth, which bodes well. The usage on lines is still low. And so that is still running in the low 30s, which is about 1,000 basis points on average lower in the banking segment. But what you see underneath that is that even Business Banking, which is the segment from $5 million to $50 million, is net growing finally and it was the most affected by the PPP runoff. And the runoff of PPP in the quarter was $6 billion, $7 billion or something like that. So we – in Paul’s – basically flat average balances that included the overcame that. So we feel good as we look across the things. So what you really see is the net card production back to pre-pandemic. You see gross card production basically about 90% of pre-pandemic. You see autos which will pick back up as inventories become available.

and here’s Wells Fargo CFO Michael Santomassimo:

Although average loans declined in the quarter, the rate of decline slowed with balances down 18.7 or 2% from the first quarter. The decline from the first quarter was almost entirely driven by lower residential real estate loans primarily due to continued high prepayments and the resecuritization of loans we purchased out of mortgage-backed securities last year. The total period-end loans were down 1% from the first quarter. And while it’s hard to predict exactly what will happen during the second half of the year and while line utilization rates remain low, we are seeing signs of green shoots with modest growth in period-end balances compared to the first quarter in auto, other consumer credit card and commercial real estate.

BAC conference call:
https://app.tikr.com/stock/transcript?cid=19049&tid=2592…

WFC conference call:
https://app.tikr.com/stock/transcript?cid=292891&tid=266…

Mike

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One of many possible “reasons” for the UPST dip yesterday could also have been that an investor with over 200k followers on Twitter (Puru Saxena) announced that he was exiting his position. I was watching yesterday and the price began to flounder close to the time yesterday morning that he posted, “my gut says there is something not quite right with one of my companies” and he might have to get out. That set off a craze of speculation on his timeline (he makes his holdings public), with most deciding it must be UPST, and the price started to really go south. He then confirmed it almost 12 hours later.

In the end, he couldn’t really identify a problem, he just never understood the advantage they had, thought their growth estimates (from the GS report) were too weak from 2022 onwards, and therefore sold.

I don’t think that accounts for the whole swing, by any means; UPST is like a bucking bronco with its share price. But I also don’t think that announcing to over 200k followers that you’re selling a position–an announcement that was teased and hyped unnecessarily for almost 12 hours first–would have no impact at all.

UPST is my largest position.

JabbokRiver42,

Regarding your mention that some random retail investor with lots of twitter followers sold UPST:

I’m sure you agree that it is meaningless noise.
We should not care why retail investors sell stocks we hold.
They do not carry intimate knowledge of the business.
If business fundamentals have changed, that’s another matter. Earnings reports and guidance matter the most. The only time I would consider exiting a position because someone else sold, is if heavy insider selling occurs. As insiders may know something we may not.

However, we know at this point that this is not the case for UPST so far.

We’ll have to define ‘insider’ as any director, senior officer, entity, or individual that owns more than 10% of a publicly traded company’s voting shares. Because if they make any transactions, they must file a Form 4.

We know for UPST, there have been exactly ZERO SEC Form 4 filed since IPO lockup expiry last month indicating any insider selling.

I actually see this as a very good sign, as Third Point’s billionaire Dan Loeb holds about 14% of UPST shares. As they own >10%, they must file SEC form 4 for any transaction.
Third Point holds 12.2 million shares at a cost basis of $2/share, and they actually averaged up by purchasing an additional 1.2 million shares at IPO last year for $20/share.
https://thirdpointlimited.com/wp-content/uploads/2021/05/Thi…

When IPO lock up expired, Third Point could have sold some shares to lock in a tremendous seventy-bagger gain. I would not blame if they did, but they really have not sold a single share!(at time of this writing, at least).

I think this speaks volumes about Third Point’s confidence in UPST’s long term execution and growth. I currently share their same sentiment, unless business fundamentals negatively change in the future.

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