First-time poster and long-time lurker. Like many, I have benefitted greatly from Saul and others and am extremely grateful. To quote from user longmalibu in a recent post, “I have read Sauls’s Knowledgebase end-to-end 3 times. It was literally like plugging myself into the matrix… all of a sudden: ‘I know Kung Fu!’…” Great line that sums up my experience as well.
Prior to this week’s increase, UPST was my largest holding at 23% and now is at un-Saul like 35% but I don’t feel like selling. Therefore, I’m also searching for bear cases and I have the following concern:
What seems to separate UPST from it’s “competitors” is it’s ML/AI. How concerned should we be that UPST will maintain the right personnel (principally Paul Gu and possibly others) to maintain their edge in AI moving forward? In other words, is their ML/AI product mature enough that a loss of personnel, for any reason, would be a bump in the road rather than a deal-killer for future growth?
1 Like
Let’s try this again…
My bear case takes into account what the market value of UPST has become. It IPO’ed at $20, now is trading at a little over $200. It’s chief comparison seems to be FICO, which has been the de facto credit scoring system for decades and the one that other credit bureaus have compared themselves to.
Market Value:
UPST - $15.6B
FICO - $12.8B
I’m not a value investor, but sooner or later the actual worth of the company is achieved. It’s tempered my expectations, and given me reason to research more what the organization could realistically achieve based on competition in the marketplace.
Full disclosure - the recent run up in UPST has created a virtual three way tie in my portfolio for the number one position, matching my holdings in CRWD and NET. Not bad company. I am not looking to change any of my allocations.
1 Like
Nice thread.
I’ve also been looking around for compelling bear arguments and haven’t found much.
In addition to concentration and regulatory risks (mentioned above),
the top concerns seem to be competition (a large competitor coming in and taking over) and an economic downturn where lending dries up.
Compared to most of the other companies I own, most of the risks to UPST seem to be relatively minor.
Oli
2 Likes
You should not be concerned at all about this.
I come from that world, of engineers and tech, and quite the opposite of what you fear is true.
Companies with great businesses and great personnel attract MORE great personnel. Why would anybody leave and I imagine that they may be pulling away the top talent from other companies as we speak.
I can’t imagine Paul Gu going anywhere - he founded this baby and can take it to the sky.
5 Likes
Jclayppol, you expressed a worry over market cap of upstart vs. fico.
When i first began exploring upstart i worried about that too.
But in digging into the businesses, I emerged with the realization there is nothing to worry about.
Upstart is clearly generating so much more revenue per loan than FICO. FICO currently has only 1.5 x revenues as Upstart, plus or minus, per quarter, even though it’s used for virtually all types of loans and it’s been around for 30 years. Clearly their revenue model generates so much less, I didn’t dig into it to understand why, perhaps their pricing structure is not per use but by license or whatever, doesn’t really matter when you realize Upstart is likely going to take over their revenues within a year with just a handful of bank partners.
The worry I have is that a serious competitor comes in and pushes down their pricing. But I imagine by the time that happens, they are going to be at a much higher volume and hopefully, the recognized leader and “safe play.”
5 Likes
Regarding your concern about concentration risk. Below is a snippet from the Q2 2021 ER where the CFO says in the last sentence:
“So concentrations in marketing channel distribution are definitely declining across the board.”
This tells me the concentration risk is declining going forward.
"Ron Josey – JMP Securities – Analyst
Got it. That’s super helpful. And just a quick follow-up, Sanjay, to your last answer. I think you talked about marketing and gains in the funnel this quarter.
So can you just talk a little more – or please talk a little bit more just the the expansion of the marketing channels. We’ve relied quite a bit on Credit Karma in the past. And so would love to hear how that’s evolving. Thank you.
Sanjay Datta – Chief Financial Officer
Sure. I mean, I guess I’ll say that we did a significant expansion once again of our marketing programs. We grew our marketing spend for about – from about, I think, $45 million, $46 million last quarter to $71 -million plus. So we grew our programs by more than 50%, and yet they got more efficient, right? So our contribution margins actually went up, which is rare.
It’s just kind of underlying that is just the continued strength of the funnel. And then in terms of channels, we are definitely seeing a lot of our strongest growth in channels that are more sort of direct to the consumer and to the borrower. So concentrations in marketing channel distribution are definitely declining across the board."
Long UPST 18% (#1 in my portfolio)
6 Likes
I can’t see why we would worry about Fico and market cap comparisons. We invest in growth companies, right? Upstart just grew revenues 1000% YoY. Fico grew…7.9%. The market predicts Upstart will keep on growing in the future and prices accordingly.
4 Likes