UPST delinquency rates?

[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

[Citibeach44]

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

[sidsar]

I’m sorry for the extra message. I forgot to include earlier - for what it’s worth - this from the executive summary of the last KBRA report:

“Static pool gross loss levels for 36 month, 60 month and 84 month loans have been improving and demonstrating greater consistency over time”

[tamhas]

Is it possible that the period of higher delinquency corresponds to the period when they were experiencing a burst of fraud? Presumably, fraud undetected at initiation would lead to delinquency … and would be an indicator of a fraud problem, not a problem of rating applicants.

[chang88]

CloudL, to say Upstart is no better than payday loan is a claim that is not supported by evidence.

When I was doing my “Main Street” research, I came across posts on internet where people defaulted on their Upstart loans. Some of the people do have 30%+ interest rates - they took their money and proceed to put it in stock market or cryptocurrency, then lost it all. Then they defaulted on their loans. Yes, this is the type of person a loan originator should avoid no matter the interest rate. So there are borrowers that are 100% bad business.

For machine learning, however, you first need to collect data in real world before you can determine the quality of model. If they have never stepped into certain categories of subprime borrowers, they will have to “lose” some money before they can determine which parts of it are good businesses and which parts are bad. Machine learning models have to touch risk in order to manage risk. I’m fine with that.

On the other hand, I also saw people say “wow Upstart made a deposit in a day.” Or “Upstart’s interest rates are a lot better than I can get elsewhere.” Payday loans? Really?

One post that got my attention was lhdill’s
https://discussion.fool.com/hi-jonwayne-i39ve-been-a-lurker-on-t…

He says “maybe we should view it as a new product versus credit cards” and this seems to fit into the general theme of discussions about Upstart loans on the internet. I think capping the TAM for Upstart using Transunion figures, like wsm007’s post, makes no sense. My definition of a great company is one that knows how to expand beyond the clearly visible TAM.

Review my own investment thesis on Upstart

Owning it makes sense for me because

1 the most important: Rapid revenue growth. It is still a lot higher than everything I own besides Monday. I don’t own Snowflake even though I use they daily because I think it is still a nosebleed valuation and Google BigQuery has been catching up as competitor. I rank my portfolio percentage on revenue growth numbers.

2 Excellent management team. Paul Gu is the first exec in fintech that I saw that “gets” machine learning for business. I posted this on 11/18 and nothing has indicated change for me: https://discussion.fool.com/as-an-active-ml-practitioner-it-is-a…

3 Large TAM, though the auto may be smaller than I originally thought. I don’t think using the total loan size to judge the TAM for loan and housing is a good idea because they tend to have much lower interest rates, hence much lower take rates for the middleman. I would say they can be both a $1-10B revenue business for Upstart in North America at best. But still, they are clear targets for expansion, unlike some SaaS companies that have no other clear business line in sight (DDOG, AMPL. AMPL is early I’ll give you that. DDOG will not be a 200B company in its current form. Hardly 100B in my opinion.) and we have seen past failures (ZM)

4 Personally I have a much longer investment horizon for companies than many experienced member on the board. I am simply a lot younger and will be the market longer if you count from today. So I have more weight in “speculative bets” than pure high growth SaaS discussed here (like SQ, which also got pummeled for market emotion.)

To me, nothing has changed since the last earnings report.

I believe their business model is closer to payment processors than SaaS subscription. Once they partner with a company that provides inbound loan request, they take a percentage of the loan value, similar to GMV for payment businesses. I disagree that “they have to start from zero” for revenue. More lumpy, sure, but growth is growth.

On the other hand, based on the board’s teaching to sell out Upstart and only invest in SaaS is a reasonable way to restructure one’s portfolio. Especially if the logic is “I want a less complex portfolio.” I completely understand. But I am comfortable with my own decisions too. So I am happy to see the discussion here.

Why not research more?

JonWayne raised an interesting question: why did we hold large positions but did not look into delinquency rate? Truth is that I mostly look at revenue numbers and use that as the primary indicator for company performance, so I only restructure my portfolio percentages after ERs. I found other indicators to be too much of a noise for my daily life, where I would rather spend my day on increasing the earning power over my career. But I agree that one should always keep pulse on KPIs if possible. I actually didn’t know how to use KBRA before. Likewise, there are KPIs about SaaS companies that I likely have no idea how to discover either.

I am also disappointed to see the posts that are doing character assassination on valuable board members like JonWayne. It took some dozen posts before a few of us step in and posted the actual numbers. This board will only get better if we stop shooting the messengers and use objective facts to discuss high growth companies. There’s bystander effect showing here.

Final take

SaaS is generally viewed today on the board as “less complex” because it seems that you can mostly look at revenue growth and decide which ones are good and which ones are terrible. I tend to agree. Investing in Upstart may need more than that. I may be wrong in my evaluation with Upstart’s business but I am fine with letting the revenue number speak for themselves. If they are excellent, great. If they are terrible, then I will cut accordingly. But what I will not do is to get scared by the price action or analyst opinions and get out.

[TheMightyKhan]

I’m holding through at least one more quarter as well. I don’t strictly invest in the hyperbolic growth companies being about 60% following Saul’s methods and 40% conventional. At the time I got into Upstart it was clearly because it was a Saul stock. Looking at it now, the valuations are such that I’d look at it conventionally and it may still have a very high growth rate. I bought into the hype and expected a blow out quarter and went into earnings way overweight at about 30%. Twice as big as I’d ever allowed anything else to get. The largest before that was Crowdstrike that I had already started trimming before the Upstart earnings date. Had I stuck with my rules the sell off would have been much less painful. As it stands now I’m at 20% but have twice the shares in Upstart I had at the peak.

I sold lightspeed on the earnings without hesitation but I never trusted that company as a long term investment either.

The only thing that gives me pause with Upstart is that the heavyweights are reducing or exiting. The thing about that though is that Saul might sell today and buy back in a few days. He’s amazingly unemotional and quick about his decisions so I don’t take it as final. Besides as he’s apt to point out, he could be wrong.

The last of the Crowd I couldn’t bring myself to sell so far off of the high so I donated the appreciated shares (in a taxable account) to India Partners. When the portfolio hit the all time high in early November I had planned to make some large charitable donations and then took a beating since. This will pass and I wasn’t going to let the market sell off and my own irrational exuberance being so highly allocated to UPST stop me from doing some good in the world.

The biggest mistake any of us make is getting outside of our comfort zone. Have a plan on what to do under what circumstances and you won’t have to make the choice while you are fighting greed and fear. As Dirty Harry said, “A man has to know his limitations.”

UPST 20.6%, DDOG 14.29, ZI 6.75, Net 4.5, MNDY 4.3, ZS 2.7, SNOW 1.7, S 1.3, AMPL 1.1 plus a whole host of stocks this board wouldn’t be interested in.

[perspectives99]

https://youtu.be/C2cKcXOwibA

I had some free time so I’m listening to Paul Gu. This guy is really smart. He addresses fraud and describes a lot of platform’s detail and complexity. I feel much better about my investment and might buy even more!

[SaulR80683]

IT’S ALL BEEN SAID A HALF DOZEN TIMES, and is even having irrational attacks against JonWayne, which is totally ridiculous as well as personal attacks being inappropriate and forbidden on our board.

NO MORE POSTS ON THIS THREAD.

Thanks

Saul