I agree that the call was stellar and everyone should check it out. I laughed aloud when there was mention of talk of delinquencies on “public forums” and then going on to point out that one part of that was actually a feature by which they measure their success.
In the Q&A the delinquency issue was raised again, and I found the response fully satisfying. So I’m posting it here in full:
Andrew Boone – JMP Securities – Analyst
Hi, guys. Thanks for taking my questions. I wanted to go first to default rates. So Sanjay, I think, you talked about it being a feature, not a bug.
But can you just give us a little bit more detail? Can you provide any incremental just pieces of data to give us more confidence there, talk about cohorts or anything else to just give us a little bit more confidence.
Sanjay Datta – Chief Financial Officer
Yeah, Andrew, thanks. So I guess, I was just trying to maybe draw a distinction between two different things that often get conflated. One of them, which is talked about a lot is – it is the fact with each successive vintage that’s originated on our platforms, the absolute level of delinquency default goes up, and that’s reflected in our securitizations. And so, the first point I was making was that’s, in our view, not a bad thing.
It’s happening because we are expanding our universe of approval of borrowers over time. And any time you go from a situation where you have a small amount of data and you’re acting conservatively, over time, having a lot more data and then relaxing your constraints around risk, then your average delinquencies will rise just mathematically. And as long as you’re predicting that correctly and pricing the loans accordingly, our view is that this is a good thing. So in fact, I would say it’s maybe the best single distillation of our entire history of success in corporate value creation as a platform, right? Like that’s what we’re doing.
We are expanding the frontiers of approvability and making the universe bigger, whereas we started from a position that was more conservative. So I would say like put that aside. So that’s one thing that’s happening, but that’s just sort of a reflection of our business journey. But the second point, which is different, but equally about the delinquencies is that if you imagine that sort of delinquencies by vintage, which – where each vintage has a higher delinquency than the last, it is a true statement that every single one of those individual data points is lower than where we had expected it to be.
Now that’s a statement that’s equally true about all vintages and equal in magnitude about all vintages. And we have been of the belief that that’s because of the stimulus and the economy. And we’ve been consistently messaging that we have been predicting that that would revert at some point and those little dots would return to the sort of position where we originally expected them to be. And lo and behold, since October or November, each of those vintage curves is now reverting back to where we expected.
So this is something that’s more of a local phenomenon. It’s not just about the secular vintage-over-vintage profile of our business, but it’s more about each individual vintage returning to a higher level of default. But the fact that we had been sort of predicting it for more than a year, and seeing it finally materialize separately is not a huge impact to our business. If you are in some temporary suspended state of abnormality, as long as you don’t delude yourself into thinking that that’s the new normal, the eventual resumption of normalization shouldn’t be a big surprise.
And so, we’re going through that shift, but that’s something that is new as of October or November. It’s not sort of a longer-term sort of increase in default profile, which I was just reacting, too, because we see it discussed a lot in the public forum. So we thought it was worth clarifying.
His response here is encouraging to me on multiple fronts. First, it is clear, even for someone like me who doesn’t have even a single toe in the lending industry. This is not double-speak or in-the-weeds industry jargon. It is clear for investors across the board, which I think is a critically-important skill in management.
Second, it’s also clear that they took the concerns that have been expressed on this board and elsewhere seriously, even while believing that one aspect of rising delinquencies was actually a measure of the success of their business model and the other was something they have been predicting and modeling for. Both in the initial presentation and in that follow up, they took time to make sure the intricacies were understood and that the two types of delinquency occurrences were differentiated, explained and confirmed to be planned for in their models.
Third, one of the reasons I have stuck with Upstart through thick and very, very thin is that I take seriously David Gardner’s advice to invest in companies that represent the world I want to live in. Upstart’s mission of expanding credit to those who have been unfairly cut out of the system is absolutely the world I want to live in. That the CFO, of all people, would be not only explaining the delinquencies but cheering them on as a sign that their mission is being fulfilled is evidence of the strong culture and sense of mission that makes me love them for what they do beyond how they perform.
Read this again: I would say it’s [that first kind of delinquency] maybe the best single distillation of our entire history of success in corporate value creation as a platform, right? Like that’s what we’re doing.
We are expanding the frontiers of approvability and making the universe bigger…
I’m here for that.
I also found what I was looking for in addressing the auto supply chain problems. It came in the Q&A:
Simon Clinch – Atlantic Equities – Analyst
OK. Great. Just to follow up on that as well. In terms of your rooftop expansion, could you talk about the pace at which you can expand and sort of what, I guess, where you think you might end up to in this year? Or what kind of bottlenecks you might be experiencing, what the challenges are in actually ramping that up rapidly?
Dave Girouard – Chief Executive Officer
Hey, Simon, this is Dave. Yeah, I mean, it’s not a specific number we’re giving guidance on. I would say, generally, if you looked at the numbers, and you can see them in the investment deck, we did see acceleration in the fourth quarter, which is nice. We actually rebranded from Prodigy to Upstart Auto Retail in the third quarter.
So it was nice to see that that didn’t cause any disruption. In fact, it was an acceleration in Q4. I think, generally, the biggest challenge for auto retail at the moment is the supply chain that car manufacturers and the auto industry overall is seeing, meaning it can be challenging to sell software to a dealership that helps them sell more cars when they don’t have enough cars to sell in the first place. But despite that and despite that headwind that we’re selling into, as you can see, we are expanding pretty rapidly.
So our expectation is we’ll see rapid acceleration of that over the year. Certainly, as supply chains sort of repair themselves and inventory levels on car dealerships, etc., begin to sort of return to normal, we think that will be a tailwind that will just further accelerate. So we’re really pleased with the progress and we think we would expect to continue to accelerate adoption across rooftops through this year.
So they recognize the issue, aren’t afraid to talk about it, and are using the time to get into dealerships to be ready to catch the wave of pent-up demand at whatever point the supply chain issues are resolved.
I’ll end with Dave Girouard’s summation:
We believe we can help forward-thinking banks succeed in their mission with better technology. We think of ourselves as a consumer Internet brand focused on personal finance. Unlike a bank, an Internet brand can seek to serve all Americans and eventually everyone in the world, this time, with an incredible diversity of offerings from hundreds, if not thousands of partners, each of whom will benefit from leveraging Upstart AI. So in short, our goal is to become a technology partner to all the world’s great financial institutions.
While noting that “forward-thinking banks” is somewhat of an oxymoron, I’m in for this ride, however bumpy it may be.
Yesterday: 19% Upstart
At today’s value: 25%