Thinking About Upstart

Although I don’t post too often, I’ve always enjoyed reading the thoughts and opinions of others that do. Saul exemplified this recently with his crowdsourcing and summarizing possible reasons for Cloudflare’s soaring stock price. If you haven’t, please make sure to read that thread. It’s a masterclass in how this board should operate at all times.

There have been hundreds of thoughts and opinions on Upstart in the recent days, and although some are throwaways, some have been helpful in establishing what happened, what have we learned and how we proceed. I thought it best to re-read most of them in attempts to find the signal within the noise.

What Happened?
Upstart reported earnings on Tuesday that showed continual growth, but not enough to either meet expectations or keep the stock price on its rapid ascend.

Revenue was $228m, up 250% yoy and up 18% sequentially. Big numbers, and by any other measure a great quarter. EXCEPT, of course, when the previous sequential growth numbers had been 39% in Q1 and 60% in Q2. Let’s call a spade what it is and admit that’s a big slowdown.

Total loans clocked in at 362,000, up 26% sequentially. Again, monster numbers on the whole, but not compared to what had been 69% in the previous quarter. Another slowdown.

The stock got hammered and we all lost lots of money.

What did we learn?
Naturally, when dealing with the most divisive emotional trigger, a mass influx of board posts ensued. Here were some that resonated with me the most.

This was actually in response to Lightspeed’s earnings, but back on November 5th Saul stated, “it just reminded me how much more reliable our SaaS companies are.”…

jonwayne235, who if I understand his post correctly allocated over 90% of his portfolio to UPST, commented “this was NOT a good quarter based on my lofty expectations…loan sizes are down considerably.” He, along with many others, went on to say “Long term thesis for this company is intact…BUT the question for me is: does UPST continue to qualify as a hypergrowth company that deserves an overweight spot in my portfolio?”

Currently, personal loans are what Upstart is known for, but jonwayne also looked ahead at auto loans, commenting “lets suppose they grow 100% QoQ throughout the next 5 quarters…can they keep triple digit growth up….it will probably be necessary since average personal loan sequential growth may slow down further in 2022.”

A private investor on the earnings call also wanted to know about auto loans. He asked, “I’m not looking for guidance in ’22 and ’23, but as we start to think of those years, how should we think of revenue contribution from auto? Is it too early to ask that question?” To which the CFO, Sanjay Datta, responded, “Yeah, probably a bit early to ask with any specificity…we believe auto will be a meaningful contributor to our financials next year, but we don’t have any specifics on what exactly that means.”

The story of auto loan acceleration, before eventually expanding into mortgages, is clearly the thesis of Upstart today. Ironically however, due to supply chain issues and global shortages, actually buying a vehicle in the US nowadays is no easy task. rdgyy states, “In the USA-there are NO cars to be sold by dealerships! I’ve tried to buy a car in June/July, no chance. I’ve tried earlier in October – no chance. Every dealer has limited number of cars and they are marking them up like crazy. So whoever can afford to buy a car now is either super loaded and does not care about loans or rates, or desperate because their car broke down.”…

So if personal loans are diminishing, it is difficult to purchase a vehicle currently, and auto loan revenue is uncertain in the years ahead…what does that mean for Upstart today? stocknovice had a great statement, “this was a play on riding that business wave as long as you could. That’s the danger of no recurring revenues. And I see it as a HUGE gamble that the auto, mortgage or whatever S-curve can kick in before the person loan curve sees either a slowdown or macro pressure.”…

This was also echoed by Gaucho Rico on Twitter. “$UPST needs to prove that it can repeat for other lending products what its done for personal loans. Other loan products are further out and less certain…it’s a multi-year endeavor for those…will revenue from personal loans decelerate before revenue from auto lending can contribute meaningfully? Maybe this could be an issue for growth in 2022.”

Gaucho Rico also posted “was way over allocated in $UPST.” He wasn’t alone, and that was probably the most recurring comment I saw. So much in fact that I won’t even bother sharing everyone who seems to comment about their allocation errors. Many of us had UPST as our number 1 conviction and allocation. I sure did, and the market certainly told us to “hold my beer” on those thoughts.

Now what?
Prior to the earnings announcement, UPST represented 25% of my portfolio, which is clearly too much given everything we know now. I would expect the stock price to be flat, and most likely, down for awhile until they can address some of the concerns mentioned above. However, there are several bright spots.

  1. crammarc noted Q4 guidance carries a better outlook. “They just exceeded their Q3 top estimate by 6%. Applying that beat to $265m would get you $281m for Q4 (20% QoQ growth). If that is the case, revenue will be re-accelerating (maybe revenue will just be lumpy.” These numbers and comments were shared by many others too.…

  2. CMFMonkey highlights “Upstart has assembled a brilliant leadership and tech team, who have created an incredible product with obvious success in a financial market that is ripe for disruption…if they could figure out the complexities of personal loans, it appears they can figure out other ones.” Additionally, he states, “the realm Upstart deals with is AI. They know and understand AI better than most companies, and are already doing real-world things with it. Isn’t it extremely likely they will leverage that into all kinds of nearby opportunities?”…

Case in point, they started the company with the thesis of income sharing I believe, and they have clearly pivoted away from that to a more lucrative and sustainable business model.

  1. This is a bit of theorizing on my part here, but Upstart began with small, personal loans on very short payback timeframes, say 6 months or so. They are making inroads into auto lending, with traditional payback periods ranging from 3 to 5 years. Home mortgages are next, with traditional repayment periods ranging from 15 to 30 years. Each of these new ventures is for greater sums of money, with much more predictable, and longer, repayment cycles. If Upstart can get over this hump (humps are not uncommon at all for young businesses of course) then just perhaps some of their revenue and loan volumes will begin to normalize with quarterly numbers smoothing out in the years ahead? Its not Saas, sure, but there is additional stability there.

I believe in Upstart long term. The question now becomes how much am I willing to allot short term while some bumps are weathered? Only each individual investor can answer that for themselves.