UPST delinquency rates?

[GauchoRico]

Upstart’s delinquencies spike, assuming that there isn’t a good explanation for it, is very disturbing. The competitive advantage of better risk assessment and therefore better underwriting and therefore lower rates for borrowers AND lower delinquencies for lenders is Upstart’s reason for being. These are the incredibly strong value propositions that will lead to the disruption of lending markets and financial riches for Upstart and its investors. This is true because borrowers and lenders will do what’s in their best financial interest.

Three months ago and after their Q3 earnings results, I wrote a post about why I was sticking with my UPST shares:

https://discussion.fool.com/ok-bear-i39ll-take-the-bait-now-firs…

If the delinquencies continue to spike relative to other risk models and if Upstart’s AI risk model is worse or no better (it needs to be not just as good but better) than other risk models then we have lost the value proposition for the lenders and we have a broken investing thesis. Obviously, offering lower rates to borrowers without lowering delinquencies will lead to a destruction of Upstart’s business because lenders will do what’s in their best financial interest and not do what’s not in their best financial interest.

I can accept that UPST earnings will be lumpy, and I can accept that the stock will be volatile. As long as the value propositions for borrowers and lenders remain intact, I can be patient. Upstart has been able to claim that its AI model performs better than traditional underwriting methods. This has been the case for several years including during the stress of the pandemic. Now that claim is being called into question which may foretell problems in Upstart’s ability to get new banks. Even the perception by the lenders that the AI is no better will hurt adoption. I’ve decided to sell most of my shares with uncertainty about Upstart’s AI model effectiveness now in question.

GauchoRico

[FoolishJE]

This is a fascinating report and I appreciate you sharing it.

Delinquency rates are definitely on the rise and it is of concern. After reviewing the information here’s what I pulled out as a counter argument and would love to hear your thoughts.

On page 20, it shows that the have been underwriting increasingly “risky” loans, defined as C, D, E, and F loans with an inflection point starting in Q2 2020 and steadily rising. In fact, from 70% Q2 ‘20 to 86% Q3 ‘21 of 36 mo loans and from approx 55% to 76% of 60 mo. loans.

Increasing your risk factor, you would assume a higher delinquency follows. The other reading that I find interesting is comparing the KRBA base case projection vs current (pg 12). All 2020 loans appear to be performing 4-8% better than the projected base case as of August ‘21). None of the 2021 loans have been reviewed.

Also, if you compare projected net loss (pg. 31) vs. current net loss for each, they expect 5% around month 13, although trending higher (pg. 13), it would appear they are still on track to meet or exceed that threshold.

Final observation, on pg. 11 it shows 2022 ST1 vs 2021 ST10. Of note, it shows less D and E grade loans, in turn showing a lower interest rate and a lower expected loss. This may be nothing, but part of my thesis is that they are able to reach more prime credit borrowers at a good rate, expanding their target market. Alternatively, it could be the opposite and the AI tightening up on loans to the D and E borrowers due to the higher delinquency rate. Hopefully, we’ll get more color from the company.

Side note: Man has this been a difficult two months.

[chang88]

I decided to dig into the numbers

The good 2020-ST1

From page 7 of 2020 ST-1 report

https://documents.kbra.com/report/28335/abs-upstart-pass-thr…

Three largest categories out of a total of $64.0M

29% Grade B
25% Grade E
18% Grade C
18% Grade D
8% Grade A, AA
0.21% Grade F

The W.A. Interest rate for 30 months is 15.70%, and for 60 months, 16.28%

It looks like KBRA call Grade A and B prime and C, D, E subprime.

the bad 2021-ST6?

For 2021-ST6, where the spike in delinquency rate (4.2%) concern came from

https://documents.kbra.com/report/51088/upstart-pass-through…

Three largest category

42% Grade E
20% Grade B
15% Grade D
14% Grade C
7% Grade A, AA
3% Grade F (vs 0.21% Grade F in 2020-ST1)

Collateral interest rate 19.63%. About 3% higher than 2020-ST1

It also says in the report

“UPSPT 2021-ST6 has a greater percentage of E Grade loans than UPSPT 2021-ST5, which results in a higher weighted average APR for this transaction.”

What I saw

It seems that Upstart packaged this pass through security differently. There is a larger composition towards the E and F category. As an investor I certainly would hope that the delinquency rate stay stable, but this may be just how they put this package together.

As an investor in the market

Having to dig through numbers like this make Upstart a definitely more complex story than SaaS companies. I don’t know how one should handle this but I am ok with holding my (still) 20% position in UPST despite the 75% drop from it’s high. I think the thesis for me hasn’t changed like GauchoRico said as I was digging through the numbers.

But I understand everyone’s decision and conviction is different. I am very glad that jonwayne brought this to the board. It tests the thesis which as an investor one shouldn’t shy away from despite all the emotions involved in the market.

[MFChips]

Does Wedbush read this board? Or is Jonwayne in fact Wedbush?

“Wedbush Lowers Price Target for Upstart Holdings to $110 From $160 on Elevated Delinquency Rates, Maintains Neutral Rating”

[John21]

I am a newbie, and still learning the ropes of stock investing. I dont think I should even post here, given my lack of investing credentials. So I am afraid I really can not add any substantive information to the discussion in question. However, Just wanted to add one piece of information. Apologies if this is not of much help and please delete if this is deemed OT.

I checked the analyst ratings on Upstart and this is what I see. Please note each of these ratings are AFTER the earnings report ( Upstart reported on Nov 8th…and these ratings are all within the last 2 months, with 4 rating in the last month)

These were in the last 1 month

1. Piper Sandler: Arvind Ramnani - BUY - $ 223
2. Wedbush: David Chiaverini - Hold - $ 165
3. Jeffries: John Hecht - Hold - $ 175
4. Morgan Stanley James Faucette: - Hold - $ 200

These were in the 2 months ago

5. Citigroup Peter Christiansen buy $350
6. JMP Securities Andrew Boone Buy $315
7. Barclays Ramsey el assal buy $285
8. Goldman Sachs Mike Ng buy $290
9. And then of course, Nat schindler from Bank of America who I believe was one of the first to double downgrade upst when it went to moon, and first gave it target price of $300…and then revised his sell rating again, but even his revised target price was…$250

At this point, being a novice, I am not really sure how useful this information is, or even whether such analyst ratings play a role in stock price movement. However, I am sure the downtrend started the moment the analyst downgraded it. I may be way wrong here…but if the macro environment was lets say bullish (which it clearly isnt), I can not but help think that UPST price would be much higher if even the “sell” side analyst rating has a price target of $255.

I just wanted to share this and seek the input of the thought leaders in our board, as I am still very much in the learning phase. If this is off-topic, I can certainly understand if this gets deleted.

Thanks a lot Saul and everyone,
John

[TeslaCanoe]

Analysts ratings and price targets are completely and totally meaningless. They upgrade after big advances and downgrade after big declines. The best thing you can do is ignore them entirely and learn to read a price chart.

[GauchoRico]

Having to dig through numbers like this make Upstart a definitely more complex story than SaaS companies. I don’t know how one should handle this but I am ok with holding my (still) 20% position in UPST despite the 75% drop from it’s high. I think the thesis for me hasn’t changed like GauchoRico said as I was digging through the numbers.

Thanks chang88 for looking into the composition of the latest securitization. From my perspective as an investor, the thesis may have changed. I just don’t know if it has and can’t be sure. I decided that I didn’t want to wait for things to become more clear and decided to take my ~15% position down to 3.4% with 3/4 of my remaining position subject to getting called away at $100 next week.

Yes, as Saul wrote, there are other high quality, hyper growth companies with better visibility into the future. These other companies are down as well and I have a lot more confidence that they will continue to grow revenue for a long time (and future stock prices should eventually reflect that growth). Yes, UPST is down a lot more but I think it’s fair to say that UPST never should have reached $400/share. So investors might want to be careful not to anchor on that all-time high for UPST. If I miss on future UPST possibilities then so be it.

GauchoRico

[tier88]

Can’t help but feel like this skepticism is heavily biased by the horrendous price action. The company put up strong enough numbers in Q3 for many people to hold their position all the way down from $300+ to now 95 bucks. I think a lot of people, myself included to a degree, have been looking for any possible reason to bail b/c it’s been such a miserable experience these last few weeks. I could easily be wrong, but this thread feels like an easy excuse to sell and I think there’s more psychological / emotional aspects at play here than necessarily investment logic. But, then again, that can just as easily apply to someone like myself whose stubbornly holding on to his shares…

[philiproth]

Wow, what a thread this has become! Like some others here, I saw jonwayne’s post, freaked out, and sold a good chunk of my Upstart, bringing my position down to about 2%. Painful as it was, I asked myself why I wasn’t selling all of it. This is a complicated story and lots of unanswered questions does not a Saul-worthy stock make.

On the other hand, digging into the report a bit, I noticed the following words on p.5

“While the Company’s model has not been tested through a full economic cycle, default and delinquency rates have not shown meaningful and sustained degradation since the onset of the COVID-19 pandemic.”

Got that? The authors of the report that is freaking so many of us out are not seeing a disturbing pattern.

This could mean many things. In no particular order, here are some ways to interpret the information we have.

1. ar3ar3 and missmonika are correct, and it is just attributable to UPST originating riskier loans, (something clearly shown, as ar3ar3 points out, on Pp. 20 and 21)

2. the authors of the report have an incentive to downplay rising delinquency rates at Upstart, because if they are perceived as being too harsh, Upstart will choose a different ratings agency (big caveat: I don’t know if Upstart is Kroll’s client, or how Kroll makes money, but bond ratings agencies notoriously worked this way leading up to the credit crisis)

3. the Wedbush analyst honestly misread the report.

4. the Wedbush analyst has a big client who is short Upstart and pressuring the Wedbush analyst to take a bearish view of Upstart. Hypothetical big client calls Wedbush analyst every day with negative info on Upstart, shows the Wedbush analyst the rising delinquencies and says “See? Rising delinquencies!” and the Wedbush analyst, maybe in part because wanting to keep a client happy and in part because busy with a million other things, does not dig too deeply into the report.

I think I will hold onto my two percent stake. While it’s true this story is too complicated for a Saul stock, this is by many measures a lot cheaper than the SaaS stocks, and I still think there is a very real chance that UPST can replace FICO, which, if it happens, means the sky is the limit for the stock.

[dividends20]

Sometimes it is important to simply read the press release by the company.

I lived this with Amazon and Tesla. The opposing ideas were always very compelling and coherent and jarring. Mr. Market frequently agreed with volatile swings.
My own conviction helped me.
Upstart 4th quarter earnings date is February 15th 2022

This is a company that is just born, is growing rapidly and extraordinarily profitable with high margins. There will be many many large bumps in next 10 years. Fasten your seat belts.

https://ir.upstart.com/news-releases/news-release-details/up…

“Since Upstart’s IPO a year ago, we’ve more than tripled our revenue, tripled our profits , tripled the number of banks and credit unions on our platform, and tripled the number of auto dealerships we serve,” said Dave Girouard co-founder and CEO of Upstart. “With that many 3s, Upstart is becoming the Steph Curry of the FinTech industry.”

Third Quarter 2021 Financial Highlights

Revenue. Total revenue was $228 million, an increase of 250% from the third quarter of 2020. Total fee revenue was $210 million, an increase of 235% year-over-year.
Transaction Volume and Conversion Rate. Bank Partners originated 362,780 loans, totaling $3.13 billion, across our platform in the third quarter, up 244% from the same quarter of the prior year. Conversion on rate requests was 23% in the third quarter of 2021, up from 15% in the same quarter of the prior year. Beginning in the third quarter of 2021, in order to better reflect actual conversions, we removed rate inquiries identified by our platform as likely fraudulent from our Conversion Rate calculation. Please see the section titled “Key Operating Metrics” below for further detail on the calculation and related information about prior periods.
Income from Operations. Income from operations was $28.6 million, up from $12.2 million the prior year.
Net Income and EPS. GAAP net income was $29.1 million, up from $9.7 million in the third quarter of 2020. Adjusted net income was $57.4 million, up from $12.3 million in the same quarter of the prior year. Accordingly, GAAP diluted earnings per share was $0.30, and diluted adjusted earnings per share was $0.60 based on the weighted-average common shares outstanding during the period.
Contribution Profit. Contribution profit was $95.9 million, up 184% from in the third quarter of 2020, with a contribution margin of 46% compared to a 54% contribution margin in the same quarter of the prior year.
Adjusted EBITDA. Adjusted EBITDA was $59.1 million, up from $15.5 million in the same quarter of the prior year. The third quarter 2021 adjusted EBITDA margin was 26% of total revenue, up from 24% in the third quarter of 2020.
Financial Outlook

For the fourth quarter of 2021, Upstart expects:

Revenue of $255 to $265 million
Contribution Margin of approximately 47%
Net Income of $16 to $20 million
Adjusted Net Income of $48 to $50 million
Adjusted EBITDA of $51 to $53 million
Basic Weighted-Average Share Count of approximately 81.9 million shares
Diluted Weighted-Average Share Count of approximately 96.7 million shares

[foolprash]

@philiproth - If I read the UPST information, it says that FICO score is used as one of the inputs, to determine lending eligibility. It is complementary to it, and doesn’t replace it

[Tryingmybest]

So has no one considered a slowing economy, rising interest rates, a sky high overextended housing and auto market that both need to reset as consumers seem tapped out?

How confident are you that going forward, that the auto and housing sectors are going to continue to roll on without a correction? Ford Broncos selling for 30k over sticker, that’s not a bubble? Home prices at all time highs, in many desirable areas doubling in price in the last two years, not a bubble?

Rising interest rates while prices are at all time highs is a recipe for a significant slow down.

This is why I cut my UPST in half recently and cut it in half again today. I don’t see the same economic environment slowing IT spending. That’s why I continue to add to the DDOGs.

Maybe I’m completely wrong, maybe banks will look to UPST especially now as lending slows. It seems though that with UPST counting so much on the auto loan business to take off, I’m not so sure that’s going to be quite as fast as needed to show continued hyper growth. Thats where I’m much more concerned.

Not exactly a great environment for lending, for the consumer, and for companies tied to the consumer. Another reason why I never touched AFRM. Wrong sector for 2022/23 IMO.

I’ll continue to hold my 2% position in UPST, which at one time grown to 12% on that crazy moonshot. I’ll wait for next earnings to see how it plays out.

TMB

[mostlylong]

Apologies for adding another post, but I’m concerned about the conclusions drawn from the data presented and would like to raise the importance of benchmarking. Most of what I see presented, especially in the initial post, are some delinquency rates for a few batches of loans with no market context or benchmarking. mizzmonika noted the apples-to-oranges comparison and this merits further comment.

For a fixed income product, like an Upstart loan which is packaged into a securitized product, the key credit risk attributes for each batch of loans are the yield (determined by the price paid for the loans by the investor) and the expected default rate (estimated by proxy via the credit rating) over the lifetime (term) of the instrument. If the expected default rate is higher, then the yield should be higher (lower price) to compensate (as noted by many: mizzmonika, Saul, ar3ar3, FoolishJE, chang88).

Most importantly, the performance of these loans, and their associated securitizations, should be measured relative to a representative benchmark.

If anyone is going to make performance statements (like delinquency rate) about a batch of loans issued at time S with X credit rating yielding Y% over term T, then this performance needs to be referenced against a comparable set of loans, like the market averages, or competitor averages, for loans with similar issue date, rating, yield, and term (as well as other attributes specific to the securitization structure).

For example, why do I care if Upstart’s delinquency rate is 6% if the competitor’s rate is 10% for the same types of loans/securitization? This gets to the core value proposition of Upstart: potentially better loan performance than the existing market. But no one has presented data to address this core value proposition one way or the other. In fact, on page 5, KBRA states “While the Company’s model has not been tested through a full economic cycle, default and delinquency rates have not shown meaningful and sustained degradation since the onset of the COVID-19 pandemic.” (also noted by philiproth with caveats)

Can anyone show data that supports the idea that Upstart’s loans (and hence AI model), in an apples-to-apples comparison, are performing better/worse/differently in terms of delinquency (or better yet, realized yield after term) than some other group of comparable loans, ideally a market benchmark for this class of asset-backed securities?

I have not seen a benchmarked comparison presented, and hence the delinquency rates presented so far are almost meaningless. If I have missed something, please let me know, I am not claiming perfect or expert knowledge, just challenging what has been presented so far.

Additional Comments on Use of Data
It is unfortunate that delinquency rates are a lagging indicator - only time can tell how their loans are actually performing.
This is incorrect, delinquency rate is a leading indicator of loan performance. Loans will, by definition, go delinquent at a point in time before they are determined to be in default.
But I think you made a mistake in what I would call your “second derivative” research - ie digging through search numbers and all the other stuff. It was a fun “what if” thing to do, but a lot of people made serious decisions with their money based on it, including you, and it proved to be incorrect.
I agree here. We need to be very careful with statistics like online reviews, keyword search trends, and estimating total addressable market. Unless the underlying data can be shown to be somewhat representative, then these metrics are likely riddled with biases that we cannot estimate which leads to conclusions that are random guesses at best and completely misguided at worst.

[FoolishJE]

While we may never know, today certainly felt as if it was a day of capitulation for Upstart. It has been hammered for months, broke the $100 barrier, saw almost everyone on this board get out, had a price downgrade on an alert from Wedbush on rising delinquencies that sure feels like came from JonWayne’s research on this board.

This company is now trading almost at the low from last May. Since it has delivered 58% growth QoQ in Q2 ‘21, 17.5% QoQ in Q3 and projected 16.7% for Q4 which I believe they will beat. If they can maintain that growth through ‘22 it will be another year of almost 80% growth. This is with auto coming online.

Digging into the report, I personally believe the loan quality affects the default rate. Obviously, I’ll wait for the company to continue to prove my thesis.

It obviously overheated after the 58% Q, but I believe this is still a hypergrowth company on the S curve. It is not SaaS, which is why everyone else seems to be getting out, but seems to me that it is still one of the fastest growers out there led by a good management team.

[sonnyday1]

My Son, Dan, reached out to UPST VP of Investor Relations, Jason Schmidt, this afternoon to ask if he could address rising delinquencies. My son is also shareholder (my fault for getting him into it). Their response might be redundant information but I thought I might as well share it.

Hi Dan,
Thanks for reaching out. Unfortunately we are in the quiet period leading to our Q4 earnings announcement on 2/15 so I can not directly answer your question, however I would point you to our CFO’s comments during our last earnings conference call. We have been pretty open over the last two quarters regarding our anticipation of increasing risk and default rates.

“In terms of macro outlook, we are seeing the early signs of a return to the pre-covid consumer profile, with personal savings rates in the economy now having fallen back to pre-covid levels and credit card balances steadily edging upwards to within 90% of pre-covid levels. We expect the continuation of this trend to eventually lead to an increase in consumer defaults rates consistent with pre-covid levels, and we believe that any issuer who has not priced this in is likely to experience a deterioration in the performance of their returns. We also expect these macro dynamics to ultimately lead to an increase in borrower loan demand, although this has yet to manifest in our results and remains upside to our forecast, as the exact timing is unclear.” -Sanjay Datta

Regards,
Jason

Jason Schmidt
VP, Investor Relations
Upstart

I’m again long UPST as of yesterday. Ugh!

[jonwayne235]

Hi Mizzmonika,

everybody makes their own decisions and needs to be responsible for them so you owe nobody anything.
Yes, I agree, 10000%.

you need to acknowledge the role you took on as an “expert on Upstart” on this board and what it means to others.
No.
I didn’t take on any role or responsibility. Clearly, I can’t stop anyone from thinking that way. Did we forget that this is a free public internet forum that anybody can read or sign up to post within the confines of the rules? If a bad outcome happens to you, you are freely welcome to blame others in order to feel better about whatever choice you made, but that doesn’t change the fact that your decisions were always yours alone and the only person you can ever hold accountable is yourself.

I am not anybody special. I am as regular a person you could ever meet. I have said several times before, I have zero tech or finance background. I’m also pretty much a newbie here, having discovered this place back in May or June of last year. And no, I am not a wedbush analyst.

I don’t come to Saul’s board looking for an echo chamber. I know I am wrong often and that’s exactly why I post, even if I spent lots of time doing the research behind what I write. When I submit my analysis and opinions, I am looking for others to scrutinize the same batch of publicly available information and hope they will craft a well-thought out response (that is similar to the same effort I put into my posts) to convince me that I am right or wrong about something. For example, recently this board helped persuade me that my thoughts about ZoomInfo were incorrect.

Saul’s board is the best open place for anyone to come and discuss the business fundamentals of any public company deemed to have hypergrowth potential. However, the ridiculous reactions I see in some of the posts of late do nothing but diminish the value of posts that are of substance. I wish more posts would follow the rules. I wish more posts have actual analysis of the information in question, not these crazy off-topic or off-the-cuff responses. I don’t want the board to turn into a Yahoo-finance message board (you can see plainly how useless it is for investors over there: https://finance.yahoo.com/quote/UPST/community/)
I much prefer to see chang88 and some others’ analysis/opinions in response to my initial post in this thread.

you do need to hold yourself to higher standards if you post something about Upstart - be thoughtful and understand what you are doing and its impact.
This is irrational thinking. No one should be following anybody blindly. Like you said, “everybody makes their own decisions and needs to be responsible for them so you owe nobody anything.”

I feel a lot of people are getting affected by this, they bought at the top and now they sell near the bottom.
Let me say this again. No one should be following anybody blindly or making investing decisions without doing their own personal due diligence.
Otherwise, this type of investing may not be suited for them. Again, just as you said, “everybody makes their own decisions and needs to be responsible for them so you owe nobody anything.”

For those who retained UPST as a large 20+% weight of their portfolio in December - I’m actually very surprised those folks did not post at all about UPST’s delinquencies last month. If you hold a heavy allocation into any company, shouldn’t you be hypervigilant into tracking everything about their business?

And no one has a crystal ball. Like Saul said, UPST could still go on and do amazing. My opinion about the rise in delinquencies for UPST’s 2021 loans could be totally wrong. But all I see is mounting red flags that the company is less certain than other businesses in my portfolio. Maybe you don’t see it that way and that’s totally fine! It’s your call to make. It’s just not anybody else’s responsibility to take on for you. Best of luck to all of us.

Jon

[perspectives99]

Thanks for posting this email exchange with investor relations! The timing of the Wedbush price target downgrade stinks of market manipulation. I just saw it happen with Appian by Barclays. I’m going to hold my shares (and also hold Appian). I have a pretty hefty chunk, but I’m well diversified. At some point you just have to have faith in the management team of a company to see through hard times. They seem like a sharp bunch and got the company to where it is. It’s not healthy to over analyze and obsess. I’m long long anyway, like 10+ years. And, in the end, it’s just money and you can’t buy happiness or take it with you after after. It’s only a tool to increase the experience of freedom while we’re here. I hope everyone has a good weekend. I’m off to the ski slopes…

[MovedOn]

This is deja vu of LSPD when I wrote why I sold out LSPD on Sep 30, 2020. I wasn’t 100% correct on my reasons but it did save me and some others from huge loss. It’s now downed 70% from when I sold it! My portfolio did a lot better during the same period.

I think it’s being responsible to inform people the change of thesis after originally being super bulish on a stock. Because if we don’t, we indrectly cause further loss because some people bought into our original bullish writeup.

The whole point of UPST AI is to find hidden prime borrowers who don’t have good credit score. If UPST ventures into more risky loans and charge insane interest because they have to charge higher interest rate to compensate for higher risk instead of charging fair interest for hidden prime borrowers, it’s no much different than payday loans.

Lastly, I did the Jon Wayne original DD of checking review website to form conclusion was questionable.

[ExponentialDave]

There’s a reason you got ratio’d in your own thread Jon Wayne. Hope you take some time to reflect on it. It’s a combination of arrogance, standoffishness, and sloppy work.

Hi Tier88, this is an absolutely unacceptable way to talk to anyone on this board. We don’t do personal attacks on Saul’s board. JonWayne is a great guy, not arrogant at all, and definitely not sloppy or standoffish. For you to insult him after all the amazing posts he has gone to great length to create and share for our collective benefit, what does that say about you?

To everyone reading, please consider carefully before adding to this thread.

[sidsar]

I think there are two contradictory explanations here:
jonwayne and others have implied a potentially fundamental AI-related flaw, while mostlylong and others, as well as the Investor Relations VP, have suggested that transitory factors such as the personal saving rate or the specific loan type provide a better explanation.

Lacking a benchmark comparison, that mostlylong first mentioned, I find the latter explanation more convincing, and I’m holding on to my 20++ position