Oh boy!! Even more UPST thoughts!

[stocknovice]

I’ve gotten quite a few messages asking my thoughts on UPST. Rather than respond individually, I thought I’d post my blink to the board:

I thought it was a great quarter. It certainly answered most of the questions raised after Q3. I was impressed by the loan total and the auto guide even though I’m not crazy about the continuing decline in average loan amount. Conversions, automated approvals, and contribution margin are all back on track. Those developments and the FY guide give me a lot of comfort this will be a winning company in the long run.

However, given its complexity I was determined to wait for the call rather than chase the afterhours jump. And I must admit that complexity gives me some pause. One of things I love here is the deeper we dig on most companies, the easier they become to understand. This could just be me, but I’ve felt the exact opposite recently with UPST. Each new thread only seems to make it more complicated rather than less. Fraud, delinquencies, interest rates, banking regulations, macro…it’s enough to make my head spin. Being 100% honest, I’d consider UPST the business I understand the least of those we discuss (especially in relation to the volume of posts about it). That doesn’t mean others don’t understand it, and more importantly doesn’t mean others should or shouldn’t own it. Frankly, that’s none of my business.

And that leads me to my second UPST observation. Over the years, I’ve found posts here generally fall into one of three categories:

1. Outlining company variables and performance (which is relevant to just about everyone).

2. The thought process for putting those pieces of information together (which is relevant only to those who find it useful).

3. The buy/sell/hold decision (which is ultimately only relevant to the person making it).

The board works best when focused on #1 and #2. Drifting too far toward encouraging, advocating, or defending a particular #3 is when we seem to go astray. It’s not only a very fine line, but one that’s super easy to cross even if unintentional. When that’s happened in the past, it’s created battleground stocks like <grimace> TSLA or <gulp> FSLY. I’d say I fear UPST is headed in that direction but there’s a good chance we’re already there. I honestly don’t care what anyone does with UPST, and no one should care what I do with it either. This is a place for sharing ideas, not telling people what to do. To each his/her own in that regard. We’re all adults, after all (except maybe Spencer Skates according to my Twitter feed ).

After digesting it all, I’ve moved UPST to the top of my watch list but ultimately don’t think UPST in this range is intriguing enough to bump CRWD from my portfolio with CRWD’s report just a couple weeks away. But ask me again in a couple weeks…

[ibuildthings]

The board works best when focused on #1 and #2. Drifting too far toward encouraging, advocating, or defending a particular #3 is when we seem to go astray. It’s not only a very fine line, but one that’s super easy to cross even if unintentional. When that’s happened in the past, it’s created battleground stocks like TSLA or FSLY. I’d say I fear UPST is headed in that direction but there’s a good chance we’re already there. I honestly don’t care what anyone does with UPST, and no one should care what I do with it either. This is a place for sharing ideas, not telling people what to do.

I respectfully disagree with the notion that we (I) would not want to know if others buy/own/sell a company. If we were to cease posts of final decisions, we would get the faculty lounge effect. Lots of intellectual discussion without conclusions.

I do agree that we should not just post “I bought it” and “I sold it”. But when I read a page of analysis, I like to know what the analyst decided to do about it, if they in fact did decide.

I am willing to take the risk that I would be convinced to buy/own/sell based on what our highly credible posters do than take the risk that this board becomes the faculty lounge.

One other thing: When someone tells me, “you can’t beat the market”, here are years of posts of monthly portfolios proving we do.

[FoolishJeff]

Nice Post.

-I sold out of Upstart completely this morning and it feels so good! I only had a 6% position but it feels great!

1. It’s too complex and risky for me to understand and frankly, it’s not that interesting for me to study so why own it? Loans have never really been that exciting to me. I tried reading the stockmarket nerd’s deep dive but it was such a snoozer. I am glad that I was honest with myself about that. Ultimately, I’ll sleep better at night not owning it (an important metric that Morgan Housel always points out).

2. Frankly, all the chatter and complexity was distracting me from the rest of my Portfolio. The crazy third party stats, the emotion, the attacks. I’m so glad I can skip all those Upstart posts now!

3. And Lastly, Upstart’s loans don’t seem to be moving the needle as much as I’d hope. If the company was expected to easily grow in the triple digits next year, then I might reconsider. However, it’s risk/reward profile is way too high and I already have amazing companies like Monday.com and Datadog growing at a pace that isn’t a whole lot slower but with much less lumpiness, complexity, and execution/macro risk.

[stocknovice]

Me: The board works best when focused on #1 and #2. Drifting too far toward encouraging, advocating, or defending a particular #3 is when we seem to go astray. It’s not only a very fine line, but one that’s super easy to cross even if unintentional. When that’s happened in the past, it’s created battleground stocks like TSLA or FSLY. I’d say I fear UPST is headed in that direction but there’s a good chance we’re already there. I honestly don’t care what anyone does with UPST, and no one should care what I do with it either. This is a place for sharing ideas, not telling people what to do.

ibuildthings: I respectfully disagree with the notion that we (I) would not want to know if others buy/own/sell a company. If we were to cease posts of final decisions, we would get the faculty lounge effect. Lots of intellectual discussion without conclusions.

Maybe I didn’t make my point clearly enough. I agree concluding one’s thoughts with the ultimate decision is worthwhile. For example, I freely posted my UPST decision since I was asked (top of watch list but not enough to bump CRWD). However, once that’s done there is no reason for anyone to spin off into dissecting the decision itself. I’m not responsible for anyone else investment decisions, and no one else is responsible for mine.

This is a forum for discussing individual companies and their potential as investments. It’s not for arguing or passing judgement on what anyone does with that information once it’s presented. Particularly with UPST, too many recent comments are focused less on the company and more on whether the poster falls into the buy/sell/hold camp. Not all, but definitely too many. When that happens, Saul’s Investment Discussions turns into Saul’s Battleground Stock Arguments. That decreases the quality-to-noise ratio, and as I observed here (https://discussion.fool.com/ot-why-saul39s-works-35029379.aspx) I believe this has caused some semi-regular but valuable contributors to stop posting in recent months.

The incredible crowdsourcing benefits of this board get lost in the shuffle when discussions become too many individuals taking potshots at each other. As someone who has been fortunate enough to read and learn here for a long time, I am of the strong opinion far too many recent posts are crossing that line. Remember, everyone, that’s what Twitter’s for and not the Motley Fool.

[RafesUserName]

I find myself thinking about the complexity question a lot here, but in the opposite direction. I think if anyone around here took a deep dive in to the tech in almost any company we follow and tried to pick apart the details they would look way way more complex. I mean, how many people here can tell me in detail how Crowdstrike’s tech works? By use-case? Or what would happen if they let a major attack happen?

I feel like we have gone to work to make Upstart complicated. Perhaps because it has a finance component and this board has a major stake in understanding company financials (at least a little). Is it because we feel like we should dive deeply in to finance but tech is ok to ¯_(?)_/¯ off as “I’m no techie”? Well I’m no banker. I don’t care how debt tranches are priced from tranche to tranche. I don’t care if loan size is going up or down (it is just a metric that means nothing in isolation). While I do like to read about the details, I don’t think it makes the business complicated just to hear about it…at least not any more than new modules, a new flavor of zero-trust or government certification.

Why aren’t the normal metrics enough to satisfy?

• Exceptional management, mission, impact
• Revenue growth
• Margins
• Expansion in to more and bigger verticals to fuel long-term growth
• Competitive advantage
• Healthy balance sheet
• diverse revenue sources

Sure the risks are important too. It is always worth checking in on risks. But…what are the REAL risks here right now? I can list a bunch, but are there any that are seriously a concern right NOW? The most common comment seems to be that it will be lumpy or unpredictable because it isn’t SAAS. Maybe that is worth a lesser conviction-level, but it isn’t like SaaS is perfect either (Amplitude isn’t real fun right now). The growth story is just so darn compelling at Upstart.

[solishu]

Maybe it’s just a byproduct of my analytic skills being way below par that I fall back on generalities to this about Upstart, but to me “understanding the business” is pretty simple.

Over the entire course of human history, it has been understood that loaning money and charging interest is a profitable business.

The biggest list in this endeavor is that you lose money if people don’t pay you back, so you only loan money to people you are sure will pay you back.

No one knows the future, so the lender needs to find the equilibrium between not getting paid back, and not having anyone to lend to.

Upstart claims that they have found (and are continuing the find) the most efficient equilibrium here.

If true, this is a very valuable service to lenders.

Upstart gets paid for finding people who will make lenders money.

[NvB]

RafesUserName,

I think you are spot on, we dont need to understand everything and most things are complicated. I do think that, with everyone here turning the stones, my understanding has increased significantly. Thank you all!

What they are:
They are a risk rating engine which applies ML to a range of data points that they collect, analyse, infer and learn from. Their pricing is usage based (one off or during consumption of a loan). They are now at a point where they can calibrate real risk to rates in a way that allows specific loan tranches overall to be profitable. Wow, that is execution and value creation.

The world around them:
Now to plug their tech in they need to have a thorough understanding of their ecosystem/s and they have shown that they do have that and can execute on that understanding. The fact that the eco system is complicated increases my faith and probably their moat. It also looks like they can adapt to new ecosystems such as car finanace but are humble enough to adjust to the environment if/when needed. TAM is increasing.

The metrics:
Their metrics as you note Rafael are better than most companies and that really is all we need to judge it on. Growth, profitability, TAM, quality of team…

I bought, held and bough and held Upstart over the last year over the last year. From 90 to 180 back to 90 up to 400 down to 75 and up to 140. It is painful but such is the life I chose. Without this board my ride would have felt a lot worse.
Thank you all,
Nik

[BroadwayDan]

Rafe,

This is a note one of our board members got from Upstart IR.

Thanks for your email and happy to clarify. Neither of you are precisely correct. We have 42 traditional bank partners that originate and hold loans, this makes up about 1/4 of our total volume. The other 3/4 of our volume is originated by one of two banks that act as conduits (including CRB). After origination, and seasoning for a few days, these loans are sold to a group of ~160 credit investors (hedge funds, mutual funds, etc). We also stand up a securitization, approximately every quarter, in order to provide liquidity to these credit investors. However only a minority of credit investor volume is ultimately securitized (largely opportunistically, such as over the last year when markets were particularly constructive) with most held for yield on their balance sheets. Hopefully that helps and please let me know if you have any other questions.

That is complex stuff. “Seasoning for a few days”? Does this involve Kung Pao sauce? Seriously what on Earth actually happens in the seasoning process of a loan?

With CRWD the company sells a product to companies. Our tech experts vouch for the tech therefore the process could not be simpler. Classic B2B w subscription component. No need to deep dive into the details of the tech. We all know enough.

With Upstart the company partners with lenders, who lend to consumers, has products in development (auto, mortgage) that are unproven, is sensitive to macro economic conditions and as you note is not SaaS.

We have not had a financial equivalent of Muji to help us all cleanly, clearly understand how this stuff works, though some have better industry knowledge, grasp than others.

What we have is a perfect storm of greed at the TAM, emotion of the benefits to humankind, heightened fear (recent sector rotation, wild AMPL drop, war in Ukraine, interest rates), an almost record-breaking amount of stock price volatility, and a CEO (like the car guy) who tosses out big lines, for example, comparing UPST to the early days of Google. And suggesting literally everyone in the world may one day use UPST.

Note that no one ever got this upset about Zoom Video. Or Shopify. Or back in the day, Skechers. Why? Cause everyone knew what we were dealing with. The heat alone here is proof of complexity.

Best,

BD

PS - On conflict in general. Anger and fighting are fueled by people failing to validate each other’s opinion. If you ever rage at your spouse or lover, watch what happens when you both clearly validate each other’s take. “Oh, dear, you’re mad because you felt insulted by what I said. I don’t think I said that but I see why you do, therefore I am sorry. Maybe I could have spoken more clearly.” Once you both agree on what even happened, the emotion dissipates. But when people have no clue what the heck the other person is even remotely talking about, anger floods in. This is a force at play here. We can’t find a clean clear shared grasp of factors to discuss, therefore emotion fills that void. Please do not respond to this! Just trying to help lower the temperature.

[mizzmonika]

Let’s look at the positive of this board: all of the opinions.

But ultimately, YOU have to do your own thinking.

IMHO, it’s perfectly ok for some people to think Upstart is too complicated. Hey, then don’t go in it. But recognize that this might just be YOU, and your inability or lack of desire to get your head around it. Not the actual product or space itself. And that is Ok.

And I have a real problem with this new board habit of picking apart words to validate a point.

That is complex stuff. “Seasoning for a few days”?. I agree, Broadway Dan, that this particular phrase out of context makes no sense. But overall what the CEO is saying makes sense. I would like to suggest we go with reading a whole paragraph from now on, and picking apart words only when there is a real hint at trouble.

I happen to agree with Rafes. I’ve never disclosed my background, but I am in fintech, with a degree in computer science. And I can tell you, even with that computer science background, some of these software stack companies are mind-blowingly complex to understand. So I trust Muji and Peter Offringa and I try to learn enough to make a decision. Upstart is easier for me to understand. Loan securitization is easy for me to understand because if you can understand bond funds, you can understand loan securitization. These Upstart loans are micro bonds.

But that’s just me. Just because Upstart is easy for me and Cloudfare is tougher, does not mean that Upstart is less or more complex than Cloudfare. Get it?

People, in the end, you have to go with your own thinking. And it’s ok to say it’s your gut, instead of blaming the complexity of the stock or the space or taking pot shots at the company or the management. I think that’s what creates the anger. I know that is what set me off and caused me to be a not-nice poster yesterday.

So, say “This is a space I can’t seem to figure out, or I don’t want to figure out” vs. “This company is just too complex.” They are almost all very complex. If they were easy, everybody would be in them and winning big together.

I didn’t go into AMPL. Just didn’t see the competitive angle vs. others. I’m out MNDY too. I am almost certain I will be wrong about that and I am ok with it! We all sleep better at night when we don’t own stocks our guts are telling us not to own. But I am not blaming the complexity of the company or deriding the management. I’m owning up that it’s me, my choice, my decision.

[Texmex]

I have been invested in UPST right through and added more after this EC. Like many, I saw the EC as very positive. Here are a few things:

1. Valuation. With typical beats, I calculate a P/S of 7.0 for UPST by the end of the year as compared to Datadog’s 29.1. UPST has better revenue growth rates and margins. Is a 76% valuation cut make UPST more attractive? I think so.

2. This company just increased the potential loan market by 60x over the last year - from 100B to 6T! Their take rate is 7% of the loan in personal lending. It was great news to know in this EC that auto loan take rate is likely to come in the same range. Mortgage should come in lower. Whatever your assumptions this company perhaps has got the highest TAM among what we follow. Perhaps even more than TTD I would say.

3. I agree with Rafe - we are trying to make this too complex. Do you believe a lending market will exist in future? Yes! Do you think UPST AI models are unlocking efficiencies and are better than the current approach? If the answer is yes, more banks will continue to partner with UPST. Institutional investors will continue to lend to UPST as they will make more money this way than by following the old approach. So, as long as their models have the edge I don’t see their money supply evaporating.

So, it really comes down to this. Are their models better than what we have now? I thought the team handled the rising delinquencies question very well on the EC. We should continue to watch this.
Another thing I like to track is the pace of hiring. Throughout 2020 as Covid was raging and despite the Q2 20 slump, Datadog kept telling us that they were raising their headcount by 60% annually. UPST raised their headcount by 100% in 2021 and want to raise it by 150% this year. I see these as very bullish trend.

[Chapter3]

That is complex stuff. “Seasoning for a few days”? Does this involve Kung Pao sauce? Seriously what on Earth actually happens in the seasoning process of a loan?

It’s not that complicated. It’s a standard industry term. Just google “loan seasoning,” and you will get over 6.5 million hits. The top hits relate to the mortgage approval process and what it means for the borrower, but there’s plenty of information online to explore the term in different contexts.

To me, focusing on something like this seems like being critical just for the sake of it. If one has an issue with the company or the stock, I would hope it would be for something far more significant than this.

[StocksandStouts]

That is complex stuff. “Seasoning for a few days”? Does this involve Kung Pao sauce? Seriously what on Earth actually happens in the seasoning process of a loan?

Seasoning a portfolio of loans is outside my wheelhouse, but I can tell you that at least in real estate investing, banks often put seasoning requirements on borrowers, meaning you have to show that you have had the funds you will be using for down payment for a certain amount of time. Funds take a few days to fully clear, and there are ways of manipulating an account balance in the short term.

It sounds like the IR rep is saying that they hold the loans long enough that the transactions are verifiably complete, and then they sell the loans.

[kwealth]

When I first read that comment about “seasoning” being complicated, I actually thought it was sarcasm. Not knowing the definition of a word or having a local expert on-hand to say “don’t worry about it, it’s all good” doesn’t make something complicated.

From Crowdstrike’s homepage: “The CrowdStrike Security Cloud correlates trillions of security events per day with indicators of attack, threat intelligence and enterprise telemetry from across customer endpoints, workloads, identities, DevOps, IT assets and configurations.”

At face value, does this not sound like the most complex process on earth? I do know generally what Crowdstrike is trying to accomplish, but there’s a ton of proprietary technical stuff involved that I will never understand. We have trusted tech experts that tell us “it works” and “it’s the best” and “it’s critical” and we read the quarterly reports and the numbers agree. So all good.

I also know what Upstart is trying to accomplish, and how their AI/ML works at its core is the technical stuff that I’ll probably never understand. But the loan securitization process is secondary to Upstart’s main contribution to the loaning process. Loan securitization is not the secret sauce nor proprietary. It’s been going on since Wall Street and banks have been a thing. We also don’t need experts to tell us it works and it’s needed, because that’s already been established by investor (not us, but hedge funds/investment banks) hunger for these types of high yield securities.