UPST-why I won't get back in for now

Investment Analysis Clubs Saul’s Investing Discussions
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I have been thinking hard on whether to add back UPST to my portfolio. I sold everything after hours on Q3 report in Nov, bought back a 15% sized position the next day, but then sold it all again in the first week of Dec to reallocate to stronger SaaS companies that fell (DDOG primarily).
Now in January, its price has fallen another 40% from when I last sold.

However, I finalized my decision to not get back into UPST for now.
If my portfolio is to comprise only the truly best of breed hypergrowth stocks by “following the numbers”, UPST just can’t fit back in today.

In other words, I must not conflate reward/risk ratio with the probability of the desired outcome panning out.
Risk reward ratio: UPST share price drop, all else being equal, means greater potential returns if I buy it today.
Desired business outcome probability: the chance of auto succeeding in 2022, however, has NOT changed, just because the stock price has changed!

My rationale:

1.) Auto
Why does auto matter so much? Because personal loan growth may not sustain in 2022.

UPST already commands at least 20-30% of the below-prime personal loan market.
Those are the core borrowers and its truly near term obtainable market share. While UPST is trying to expand to the super prime/above prime category, I don’t think that’s going to be anywhere near as fast growing as its current hold on the below prime market in the near future.

Recall from the October 2021 publication: https://www.hbs.edu/ris/Publication%20Files/22-024_80dc9115-…
“Our dataset begins in 2014 and ends in the first quarter of 2021… On average, Upstart’s loans are about $11,700. The standard deviation of $10,000 indicates significant heterogeneity among borrowers, some individuals borrowing significantly larger amounts. The average contract is characterized by an APR of 22% with a four-year maturity. Borrowers tend to have an average credit score of 653 at origination. That even the top quartile exhibits a score barely above 680 shows Upstart’s focus to be on other than the individuals traditionally regarded as most creditworthy.”

UPST has already originated $7.654 billion from Q1-Q3 2021. In Q4, I expect them to originate at least $4B. So in total, $11.654 billion in 2021.
The 2021 personal loan originations market size might be $100B. But the below prime segment is about 40% of the total market.
At 11.654B / 40B, then UPST holds 29% of the 2021 below prime market. But, let’s suppose UPST keeps a 4B origination volume each quarter this year. Let’s assume the total market expands to 110B in 2022, and the below prime market to 44B. Then, that’s 16B / 44B = 36% market share in 2022 at the expected Q4 run rate.
That just does NOT leave a lot of room for sustained hypergrowth in 2022 by personal loans alone!
For example, if we estimate they grow personal loans at, say, 15% QoQ throughout 2022, starting from 4.0B in Q4 2021, that yields 4.6B + 5.29B + 6.08B + 7B = about 23B in personal loan originations in 2022. That would be a 98% YoY increase in origination volume from 2021. Is that possible? yes, but unlikely - this is hope! The law of large numbers will probably play a role in significantly decelerating personal loan growth.

And that’s why auto absolutely has to take off in 2022. But we know this is a wildcard. And that the preliminary numbers are not currently supporting the case that it will grow fast enough to replace a slowing personal loan volume growth. As I’ve said before, autorefi numbers have been very disappointing so far. Again, they expanded autorefi availability to 47 states in Q2. But in Q3 they could only complete 2000 autorefi loans…that’s pocket change numbers and in my opinion, very very slow growth from a nearly nonexistent base of 2000 autorefi loans completed in the first 6 months of 2021!
Maybe in Q4 2021, we’ll see numbers that show the contrary but - this is hope.

Similarly, success of auto retail/Prodigy platform is hope right now. We have no numbers to go on, other than the first loan was made on the platform in October 2021.

2.) Macro - covid/inflation
Other than auto, we also have two other major factors at play.
Omicron/COVID might have outsized impact on the personal loan market, or at least, cause management to use it as an excuse to not provide strong 2022 guidance when they report Q4 numbers. We can hope that doesn’t happen, but as we have seen with LIGHTSPEED last year, these macro events can have disturbingly outsized surprise impacts on consumer facing businesses.

And let’s not forget, inflation can have surprise impacts on spending (and thus, negative impact on personal loan demand). We saw yesterday that “U.S. retail sales slide the most in 10 months. December drop of 1.9% well worse than projected 0.1% decline. Decrease was broad with 10 of 13 major categories weakening.”
https://www.bloomberg.com/news/articles/2022-01-14/u-s-retai…
(As an aside, I suspect news like this will also create as much uncertainty for other stocks like AFRM).

3.) Macro - loan sizes
Loan sizes might not rebound or stabilize in 2022. If we follow the numbers, this is a disturbing trend with no evidence of recovery so far.

           Q4-20    Q1-21   Q2-21   Q3-21
Loan size  $10122  $10186   $9743   **$8628**

So if we believe loan sizes will bounce back in 2022 - this is also entirely based upon hope.

Summary
Now, I want to emphasize that feeling uncertain about the outcome does not guarantee UPST will fail. I’m rooting for the company. In fact, I’m currently estimating they will do 491K loans in Q4. And it’s still very early, but at the current run rate of Trustpilot reviews, they might do 554K loans in Q1 2022. But what we actually know from the Q3 report projects a murky future for 2022.

UPST might be a good ‘trade’ at current prices (I have played with small amounts of call options as a ‘bounce from oversold’ play last month), but holding shares with the same long term intent as DDOG or ZS seems not to be the best fit for my portfolio with all the information we have at hand today. Remember, DDOG or ZS or SNOW are not really going to be impacted by Omicron, inflation - and crucially - have reliably certain and expanding recurring revenue (DBNRR).
As I said at the top of this post, I don’t want to confuse a share price’s “risk vs reward” (it’s improved for UPST) with the fundamental “business outcome probability” (it hasn’t improved for UPST since Q3 report, and that probability of 2022 success decreased from Q2 to Q3).

Put another way. While we are always, in a sense, picking a story for our portfolio stocks…we have to decide, are we choosing the story of ‘fighting the market’, or ‘fighting the numbers at hand’?
In UPST’s case, if we buy shares today, are we disagreeing with the market dropping the share price of our company for ‘no reason’…or are we disagreeing with the hints provided by the latest earnings report and conference call numbers (that is, investing based upon hope).

A comment on MNDY
It’s like with MNDY - its stock price has been relatively hit much harder compared to DDOG, ZS, SNOW versus its remarkable hypergrowth rates. Why? I believe the market thinks growth durability for MNDY is far lower than DDOG, ZS, SNOW due to intense competition in the space.
However, in this case, I’m ‘fighting the market’ - not ‘fighting the numbers.’
MNDY earnings have been flawless thus far and I won’t sell unless that changes in future earnings reports.
In this case, MNDY’s last earnings numbers actually increased the chance of a positive ‘business outcome’ AND the risk reward ratio has increased as well due to the share price falling. So it makes sense to keep my existing (tax deferred account) MNDY shares, and I plan to add back to my taxable account (when my tax loss wash sales go away in a few days).

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Sorry, I left out a sentence in my post (sentence bolded below).

UPST has already originated $7.654 billion from Q1-Q3 2021. In Q4, I expect them to originate at least $4B. So in total, $11.654 billion in 2021.
The 2021 personal loan originations market size might be $100B. But the below prime segment is about 40% of the total market.
At 11.654B / 40B, then UPST holds 29% of the 2021 below prime market. But, let’s suppose UPST keeps a 4B origination volume each quarter this year. Let’s assume the total market expands to 110B in 2022, and the below prime market to 44B. Then, that’s 16B / 44B = 36% market share in 2022 at the expected Q4 run rate.
That just does NOT leave a lot of room for sustained hypergrowth in 2022 by personal loans alone!
For example, if we estimate they grow personal loans at, say, 15% QoQ throughout 2022, starting from 4.0B in Q4 2021, that yields 4.6B + 5.29B + 6.08B + 7B = about 23B in personal loan originations in 2022. That would be a 98% YoY increase in origination volume from 2021. And 58% market share of below prime segment in 2022. Is that possible? yes, but unlikely - this is hope! The law of large numbers will probably play a role in significantly decelerating personal loan growth.

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Hi Jonwayne,

I’ve been a lurker on this board for several months, and recently decided to start converting my portfolio to the stocks here. I have great respect for you, Saul, and others on this board who contribute so much to the education of the rest of us.

However, with respect to the TAM of Upstart’s personal loan business, I have to disagree with you. The idea that $100 billion represents a limit of any sort seems rather ludicrous to me. Most people are unaware that a bank will give them a personal loan. If they knew that, there would be far more personal loans. Upstart has just gotten started and has only a few bank partners. How can they possibly have a significant fraction of the real TAM?

As an example, why would people carry large credit balances on their credit cards if they knew they could get a personal loan through Upstart and save thousands of dollars per year? I don’t personally carry credit balances on my cards, but a friend of mine a few years back decided to pay his off. The big question was which card to pay off first: the one with the smallest balance or the one with the highest interest rate but that also had the highest balance. Logic says to pay off the one with the highest interest rate first, but my friend decided to pay off the ones with lower balances for the psychological sense of progress. According to Lending Tree (https://www.lendingtree.com/credit-cards/credit-card-debt-st…), the credit card balance of Americans is $804 Billion.

I think of Upstart’s situation as more akin to inventing an entirely new product category, such as the iPhone, rather than simply offering an existing product at a better price.

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So, I just had my wife check her rates with Upstart and Sofi (since I have checked my rates with both before, but she never has).

She has a high income, credit score above 800, never took out a personal loan before.
She applied for $50000 loan, reason for loan was selected as “major purchase” for both sites.
She also went through Upstart.com, not through any white label bank partner website.

I have to say, I am impressed with Upstart’s extremely competitive offer. In contrast to other above-prime posters in the past here, who applied at upstart.com and got crazy high rates, my wife got 5.61% APR (no origination fee) for 3 year loan term at $50000. And 5.55% APR (no orig fee) for 5 year loan term at $50000.

SoFi offered up to $75000 (above what she requested) at 4.74% with no orig fee on 2 yr loan term, and 7.66% for 3 yr loan term.

upstart beats on 3 yr and 5 yr loan APR.

Sofi beats on 2 yr loan APR and much larger loan size, but does not have 5 yr loan option.

Meanwhile, her Amex and our personal bank offered loan rates at much smaller (25k) size and higher rates (8%)!

This little test increases the hope that Upstart can rebound its loan sizes, and at the same time increase the hope that they can sustain personal loan growth rates in 2022, by capturing more of the above-prime market.

Still, I prefer to wait for Q4 results and guidance than buy back in for my portfolio at this time - I think my concerns about auto, covid, inflation are valid. (And upstart has tail risks like regulatory risk or fraud risk, which are not a real concern for my other holdings.)

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I know it’s anecdotal but buddy of mine wanted to add pool to house and has been buying “Saul stocks”. So he tried it out. And he was blown away by the rate, how easy and fast and immediately added the stock after that experience. very successful, tech savvy guy. I admit I’m playing the risk/reward on this one which is different than I usually do. But if it all goes well I feel this can be a serious home run, and has a certain x-factor where it caught fire before. 8% position. But Strong leader, clearly excellent product, relatively young. I’ll roll the dice here.

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JonWayne,

Interesting experience. I can’t remember whether it was in the Q3 conference call or in an interview, but I remember Upstart saying that one of their intended expansions was to extend competitive rates to all borrowers instead of just targeting those who had difficulty getting loans through the FICO system.

As you mentioned, there have been several previous posts of people with excellent credit being quoted a very high interest rate. Then others have chimed in to say they weren’t Upstart’s intended customer. Your experience could be evidence that they have already rolled out the “all borrowers” strategy, at least in the personal loan category.

I also remember Dave Girouard saying that we should not expect their pipeline to be linear–that they were working on implementing products and improvements in parallel. Expanding the personal lending pool while they work on auto is an example of that.

JR

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UPST vs MNDY

........	MNDY	UPST
----------------------------------------------
Market Cap	$9.5B	$9.1B
Revenue (Q)	$83M	$227M
RevGrowth-TTM	40%	87%
FCF (QO	        $0 	$38m
Net Income (Q)	($28m)	$29m
GrossMargin(Q)   87%    86%

Upstart is a better business by every metric. 

For Upstart, what is not known yet is the "stickiness" or return business.
People have a choice to use any search engine but they use Google every time because it is a superior product.
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And upstart has tail risks like regulatory risk or fraud risk, which are not a real concern for my other holdings.

Hi JonWayne, are you taking into account that Upstart is currently probably about 7x or 8x forward revenue while your “other holdings” may be 30x or 40x or more? Doesn’t that help balance some of the uncertainty?

Also you are worried about organized fraud risk, but every one of your “other holdings” is at risk of breaches and cyber attacks as well. Doesn’t that kind of balance out.

And your cyber security firms are at a much bigger risk. Consider that a well-publicized breach at ANY ONE of their thousands of customer companies could be rather bad for the cyber security firm.

Now Upstart is only a 5.6% position for me at present, my smallest, so I’m certainly not suggesting any kind of large position. However to say you can’t risk even a small position in a very innovative, very successful company, whose price has been irrationally beaten down (IMHO), is perhaps a sort of an understandable over-reaction to your upset at having gone into the last earnings with an insanely large (again, IMHO), 85% of your entire portfolio in the company, and perhaps having gotten justifiably terrified by the sell-off.

Best,

Saul

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Dividends, where did you get that nonsense figure, saying Monday’s revenue was up 40%. Monday’s revenue of the TTM is up 129.9%, up 130% to round it out, more than doubling, from the TTM before that. If you had made the slightest effort, even looked at the last quarter results, you would have seen that was totally incorrect. Please don’t post such silly misinformation on our board.

And by the way, your Upstart TTM revenue was way off too, and was up an astounding 201% (tripling), not 87%.

And that doesn’t make Upstart a better investment, as Monday is a SaaS company growing revenue at 95% last quarter, with a NRR (for customers with more than ten users) of 130%. Upstart, not being SaaS, has to start from zero each year, not from 130% of last years revenue.

And Monday was growing its enterprise customers over $50k by 231% last quarter, more than tripling (from 185 customers the year before to 613 this year), which is extraordinarily extraordinary, to coin a phrase.

Saul

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Saul,

Upstart is currently probably about 7x or 8x forward revenue while your “other holdings” may be 30x or 40x or more? Doesn’t that help balance some of the uncertainty?

As I said, upstart has much bigger reward to risk ratio than the day after Q3 report. In fact, as a trade, leading up to Q4 report date, it might even be better than holding, say, SNOW. There could be a nice oversold bounce back in price. As I mentioned I traded a bit of options (<1% portfolio size) on UPST last month, and certainly may do so again next week.
But with the intention of holding shares long term, as a business (with the flaws exposed in Q3), it is not as strong as SNOW with the information we have today (UPST has falling loan sizes, autorefi numbers, fraud impact, heightened inflation/covid risks. While SNOW we might only nitpick over customer count growth), so I can’t justify holding UPST in that manner.

Also you are worried about organized fraud risk, but every one of your “other holdings” is at risk of breaches and cyber attacks as well. Doesn’t that kind of balance out.

I don’t view it as the same. For cybersecurity firms, the cyber attacks are constant and happening all the time, and they deflect them, but they aren’t impeding their revenue generation when they devote resources towards defense (it’s what their R/D teams are already doing- their company mission!).

Meanwhile, for UPST, organized fraud attack derailed their AI/ML teams from automation/conversion rates/updating their models in Q3 so intensely that they could only grow loan dollar volume 12% QoQ (slower than LendingClub did in Q3!!!). Even though UPST deflected the attack successfully, it tied up their resources so badly it impacted their revenue generation.

understandable over-reaction to your upset at having gone into the last earnings with an insanely large (again, IMHO), 85% of your entire portfolio in the company

This is true to the extent that I don’t trust my use of alternative data to estimate quarter performance at all after Q3. In Q2, I had over 90% weight as I saw the data looked great and it coincidentally worked out very very well. Today, I’m estimating 491k loans for Q4, but I am not letting that influence my decision to buy UPST given what I learned from Q3.

Jon

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”… But in Q3 they could only complete 2000 autorefi loans…that’s pocket change numbers and in my opinion, very very slow growth from a nearly nonexistent base of 2000 autorefi loans completed in the first 6 months of 2021!”

This doesn’t sound quite right to me. The last time we heard from them was around December 6 when they reported 4000 refinanced loans. I believe they announced they were getting into refinancing auto loans in very late July. That is roughly 5 months in a brand new segment. In the end none of this may matter at all. It is just so new and small that a projection off of this data may not be relevant.

They only launched the main auto loan platform in October.

Also remember that this isn’t a decision to simply start selling something that is manufactured. These are technology roll-outs built on top of machine learning R&D and UX platform development AND expanding into a new segment where they have to build trust and the new track record. These things should ramp up VERY slowly at first (probably 4-6 months) and then begin compounding very quickly; somewhat exponentially as both the models and platform are proven to both customers and partner institutions, and the technology goes through some rapid early iterations once live.

One thing I’ve been thinking about as I read through the many posts about Upstart this month: I think there are nuances to market share thinking h that we may be missing. Upstart deals in customer rating and referral, and origination workflow technology. They only carry a tiny amount of loans directly to prove out their tech. I guess you could say they own some % market share because an end-user clicked on them to start a loan process instead of somewhere else, but Upstart aren’t the ones that own the loan. They effectively took 0% of loan market share by being a part of the transaction. I suppose this line of thinking could be corrected by simply saying that Upstart “handled transactions for” some percent of the market, rather than discussing it as “owning a share” of the market. And, of course, they have other entry points for revenue, right? They can be more B2B? Anyway, I can’t help thinking that a percentage of market share added to Upstart doesn’t necessarily mean a percentage of pure loan market share was taken from some where else. I guess what I am probably doing a bad job of articulating here, is that Upstart’s market share estimates should have additional components or markets mixed in. Revenues are not directly tied to loans.

Also, the technology components are going to add efficiencies, reducing the cost of customer and partner acquisition and sales as a ratio or transactions (or whatever unit of sales you want to use), over time and verticals, which should make the effects of market saturation a little less linear. The TAM also increases. I have no idea if this will have an impact large enough to matter though.

The only thing I’m genuinely worried about is actually a macareconomic concern about the interest rate rises that are coming this year. i’m just not sure how this will factor in. For now I’m just putting it into the “uncertainties” column.

I don’t believe we’ve had any new information since early December (except a new partner add?). We finally get an updated peek into all of this in a couple of weeks! I, for one, am very excited still. Leadership is fantastic. The mission is fantastic. The value proposition they bring to customers and partners is still one of the most clear win-wins I’ve ever seen. The numbers are fantastic. The price seems fantastic. Of course some of this is backward looking. I’m keeping my eyes wide open.

I’m not adding any more shares today as 14%, as a proportion to my other holdings, feels high. Still, it is very hard not to ignore that and buy the company in isolation. I’m just going to sit tight and dig into the next report.

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Monday’s revenue was up 40%. Monday’s revenue of the TTM is up 129.9%

Revenue growth for MNDY and UPST (revised from earlier post) -

From Monday’s IR: https://ir.monday.com/news-releases/news-release-details/mon…

Third Quarter Fiscal 2021 Financial Highlights:
Revenue was $83.0 million, an increase of 95% year-over-year.

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

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.

Monday is a SaaS company

I find this overused a lot, like it is a magic word. I work in this field. Almost all software companies, especially the new ones are SaaS now.
SaaS does not mean automatically that margins are guaranteed to be higher. The product and service does require significant capital investment that is continuous and never ending. Barrier to entry is lower and competition is higher pushing margins. Competition for talent is high with high-tech salaries rising fast and stock based compensation is a big expense often not understood or considered.

So yes, SaaS has good business economics but it is over used like a new found secret.

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This is true to the extent that I don’t trust my use of alternative data to estimate quarter performance ….

As much as I enjoy reading “alternative data” posts, and am impressed by the amount of research done by some people on this board, I often find myself thinking about what conclusions I can actually draw from the data.

In the past day, there has been great discussion about how people can look at the same SNOW financials and reach opposing conclusions. Taking indirect data that requires multiple levels of inferences and assumptions makes it tremendously difficult to reach good conclusions. I think going down the alternative data rabbit hole can set you up for confirmation bias problems. Are you drawing conclusions about the future performance and growth of the company from the alternative data, or are you finding data that allows you to fill in an analysis that supports your current feelings towards the company?

And let’s not forget, inflation can have surprise impacts on spending (and thus, negative impact on personal loan demand). We saw yesterday that “U.S. retail sales slide the most in 10 months. December drop of 1.9% well worse than projected 0.1% decline. Decrease was broad with 10 of 13 major categories weakening.”

I’m struggling to understand what impact this would have on Upstart’s long-term prospects.

3.) Macro - loan sizes
Loan sizes might not rebound or stabilize in 2022. If we follow the numbers, this is a disturbing trend with no evidence of recovery so far.

What is the takeaway here? Does it matter if average loan size decreases (temporarily or permanently, I don’t know) if volume increases? That to me is the beauty of a high margin business. Upstart’s originations increased 244% last quarter.

If I go on a diet where I only pour myself 2/3 a glass of beer instead of a full glass, but then refill three times, I don’t think I’m going to lose any weight. That’s the problem I see in focusing on a few metrics to the exclusion of others.

Again, I appreciate all the work people put into researching and making posts like this, but I would say to be careful about making inferences.

-StocksandStouts

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Hi Rafe,

This doesn’t sound quite right to me. The last time we heard from them was around December 6 when they reported 4000 refinanced loans. I believe they announced they were getting into refinancing auto loans in very late July. That is roughly 5 months in a brand new segment.

Autorefi began in summer of 2020. But wasn’t available in most states until Q2.

Q2 report call:
“We started in January, offering our auto refinance product in a single state, then expanded to 14 states by the end of Q1 and have now expanded to 47 states, covering more than 95% of the U.S. population.
Upstart powered banks have now originated more than 2,000 auto refinance loans in 40 different states.”

Q3 report call:
“A year ago, a handful of auto loans had been refinanced in a single state.
Today, more than 4,000 Upstart powered auto loans, have been originated in 47 different states.”

In my opinion, completing only 2000 loans in Q3 is too slow (so far). Suppose each autorefi loan delivers $600 in revenue for UPST (3% take rate on avg $20000 car loan). If we want auto refi to contribute meaningfully in 2022, let’s say we want to see about $90M in autorefi rev. That means 150,000 autorefi loans must transact in 2022. An average of 37500 autorefi per quarter.
Can we expect them to reach that if they only did 2000 in Q3? So perhaps they do 5000 in Q4 2021 then in 2022 they do 10000 Q1, 20000 Q2, 40000 Q3, 80000 Q4? Is this realistic to grow 100% QoQ at an increasingly large base?

Auto retail loans hopefully can contribute the other chunk of $90M in 2022 (so that auto total rev is $180M in 2022) but we have no clue the numbers for Prodigy today.

The only thing I’m genuinely worried about is actually a macareconomic concern about the interest rate rises that are coming this year.

What about loan sizes? They first blame a slight downtick in loan size decrease in Q2 call, on expanding down prime segment and macro.

Q2 call: “there’s probably some macro effects continuing in the economy, and those are a little bit harder to measure…But we have seen since certainly the onset of COVID, a pretty clear trend that I think is moderating, but it’s still sort of visible, which is that loan sizes and demand for loans in terms of what’s being requested has moderated downwards in the last 18 months.”

Then in Q3 call:
“The real effect is that loan sizes in real terms have been coming down pretty consistently since pretty much the end of last spring. And that has been through – pretty much through the end of this past quarter. And we attribute that or I guess we call that the suppressed loan demand, and we originally attributed to the stimulus in the economy.”

As we all know, macro is very very difficult to predict. They admit in Q3 they have no idea what’s really going on to the loan size trend. Management can’t know what will happen to loan size demand over time- they can only guess, like us. The numbers we have to date show no sign of stabilization/turnaround so far. Which is why I prefer waiting for concrete Q4 numbers and guidance.

(I will note: It’s also totally fine for loan sizes to fall if it’s due solely to going down the prime segment loans…as long as you transact enough of them - which they didn’t in Q3)

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Hi StocksandStouts,

I’m struggling to understand what impact [inflation] this would have on Upstart’s long-term prospects.

Do you mean Upstart’s prospects long term, like 5 years from now? I guess that might not matter so much necessarily. But my goal for my portfolio is achieving the highest return CAGR. Things that influence a business performance over the incoming quarters for an unknown duration, should always matter.
Do I really want the potential opportunity cost of holding a stock that goes nowhere because its business is proven to be negatively hit by macroeconomic effects in the near term?

If I ask it another way: Is anyone here seriously still holding Lightspeed just because macro stuff happening over the next couple quarters won’t likely “impact its long term prospects?”
Remember, they got hit hard by supply chain issues, COVID shutdown/macro slowdown, staffing problems. All really supposed to be transitory, in the context of long term projections, right? Yet I don’t see anyone still invested in LSPD.
Going back to UPST, you have to be concerned about guidance they give when they report Q4. If they cite inflation/covid/macro as uncertainties, I would suspect the market would not like that news.

What is the takeaway here? Does it matter if average loan size decreases (temporarily or permanently, I don’t know) if volume increases? That to me is the beauty of a high margin business. Upstart’s originations increased 244% last quarter.

I’m a little perplexed by your statement here. If you reviewed Q3 results for UPST, you would know that the volume did NOT increase enough to make up for the average loan size drop in Q3, not even close. Dollar loan volume originations increased 12% QoQ…remember, I am looking to invest (with the intention of holding long term) the best HYPERgrowth stocks for the highest portfolio CAGR.
If 12% QoQ is what they did in Q3, and then that decelerates from there through 2022, that growth won’t cut it!
(keep in mind to separate out fee revenue/dollar loan volume from interest income/securitization sales - which is not the revenue that matters).
A non-SaaS, heavily macro-influenced stock must sustainably grow faster than that for me to hold it. Especially for UPST which is expected to be lumpy growth.
Otherwise, I feel like I am just buying into a “Growth at a reasonable price” company business, not hypergrowth.

Also - I am not sure what you’re referring to regarding the ‘beauty of a high margin business’? (I note that their contribution margin is about half of our highly prized SaaS stocks’ gross margins discussed on the board - it’s not really that ‘high’ in that context)

Jon

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In a previous post, I wrote to someone who had said that Monday’s TTM Revenue was up 40%, the following, figuring that a glance even at just their last two quarters when revenue was up 94% and 95%, would show that 40% was impossible

…where did you get that nonsense figure, saying Monday’s revenue was up 40%. Monday’s revenue of the TTM is up 129.9%, up 130% to round it out, more than doubling, from the TTM before that…

Well I was wrong too! I looked at all the quarterly revenues but made a mistake in calculating. Monday’s TTM Revenue was up 90%, almost doubling, not 40% as the other person had stated, but not 130% as I stated either. My mistake. And thanks to Peter for pointing it out to me. I tried to figure out what I could have done to get the higher figure, and the only thing I can think of is that maybe I only counted three of the previous four quarters, and then when I got a figure higher than the last quarter’s growth I must have subconsciously figured that they were slowing down as most companies at 95% growth are, instead of accelerating as they were. Again, my carelessness.

Saul

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However, with respect to the TAM of Upstart’s personal loan business, I have to disagree with you. The idea that $100 billion represents a limit of any sort seems rather ludicrous to me. Most people are unaware that a bank will give them a personal loan. If they knew that, there would be far more personal loans. Upstart has just gotten started and has only a few bank partners. How can they possibly have a significant fraction of the real TAM?

One more point to add.

Selling shares because UPST is dominating and capturing TAM quickly ? This is exactly opposite of what you should be doing. Dominating and executing well are much more important.

If UPST executes well and cash starts gushing in, isn’t that a great problem to have ? Management can figure out which direction to turn in - international, acquisitions, insurance, auctions and many more.

TAM is fluid. What was AMZN’s TAM when it started ? How about TSLA or GOOG or FB or AAPL or many other successful businesses ? They are creating and finding $1T opportunities.

Upstart is a baby and has a long long run way to go.

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I’m a little perplexed by your statement here. If you reviewed Q3 results for UPST, you would know that the volume did NOT increase enough to make up for the average loan size drop in Q3, not even close. Dollar loan volume originations increased 12% QoQ…remember, I am looking to invest (with the intention of holding long term) the best HYPERgrowth stocks for the highest portfolio CAGR.
If 12% QoQ is what they did in Q3, and then that decelerates from there through 2022, that growth won’t cut it!
(keep in mind to separate out fee revenue/dollar loan volume from interest income/securitization sales - which is not the revenue that matters).

They have guided $255M to $265M for the fourth quarter. From Q1 to Q3 they have beat their guidance by 6%, 25% and 8%.

Also, from Q1 to Q3 fee revenue as a percent of total revenue has been 96%, 97% and 92%.

If we take the midpoint of guidance, use a 6% beat, and assume fee revenue drops to 90% of total revenue we get this:

$260M * 1.06*.90 = $248.04M.

If fee revenue is $248M next quarter, that is accelerating to 18% growth QoQ from the $210M fee revenue this last quarter, and 294% growth from the fourth quarter last year (which was $84.421M by my calculations)

4wheel.

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I was just looking at Trustpilot Upstart reviews (24k total) and it blew me away.

14 reviews in the last hour (yes 1 hour!!) - 13 5 stars and 1 4 star

104 reviews within a day - 101 5 stars, 2 4 stars and 1 1 star

Just to have a baseline comparison, I was checking some other companies like Credit Karma (only 367 total reviews and lot of them bad) and LendingTree which was a good comparison as they have 10k+ total reviews.

Lending Tree - 4 reviews within a day - 1 5 stars, 3 3 stars

Upstart must be really prompting their customers to leave them a review as their numbers are so high relatively speaking (hopefully this is not a case of many fake reviews).

This level of customer engagement and satisfaction can only mean very good things for the business.

-T2SP

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Aggregate Trustpilot ratings as of today:

Total 5 star %
Upstart 24,647 97
LendingClub 2,702 90
Affirm 4,465 84
SoFi 2,529 78

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