I agree that this post regarding Upstart is perhaps overly optimistic and there assumptions that are not supported by data that is publicly accessible. Some of the logic is sound and I enjoyed reading it.
My take
We have no way of knowing if they are sandbagging and by how much. I don’t think they know as well. If you read up what other third-party analysts say about Upstart it is that they have trouble valuing the company because they are so different. They can’t effectively model it. This is why there is such a huge gap between what the public markets think the company is worth and the actual value. This is a very interesting and unique situation and I would recommend people be humble in their approach, especially after such a huge quarter.
What we Know and Don’t Know
Given what we heard on the last earnings call, direct mail is now a primary channel for Upstart. This is a channel that we will not be able to monitor through a third party, it’s not digital. Keep in mind that while they claim it got more effective, the optimization of direct mail can’t grow exponentially. It has a limit. Yes, it may get a bit better next quarter, but the safe assumption is they have figured out how to be effective in that channel, they have mastered it now. This means direct mail will only scale by adding more dollars. It’s important to understand that direct mail does not grow organically like web traffic. This means marketing spend will be a key metric to monitor. At some point with direct mail, they will reach saturation and the effectiveness will start to decline. I have no idea when that is. Given they are growing so fast it could be in the third or fourth quarter. No one knows.
I think all of this points out the important difference between a Sass subscriptions business and a fantastic but non-subscription business like Upstart and why it should be valued lower than a Crowdstrike or a Datadog. Upstart is now reaching a point where marketing spend will be the key driver of growth and if there is any interruption in it, the business will slow. The larger the business gets the more reliant they will be on marketing.