4wheelfool,
I earlier stated “If 12% QoQ is what they did in Q3, and then that decelerates from there through 2022, that growth won’t cut it!”
I’m going to clarify what I meant. Looking at a Q4 earnings beat alone is not sufficient.
I’m not saying that Q4 report is going to be an even smaller QoQ fee revenue growth than Q3’s. I am saying the general trend could continue to decelerate through 2022.
The QoQ growth trend is already decelerating– just slowing faster than I want it to be.
I wanted Q3 to show at least 30% QoQ, but they came in at 12%. We know UPST is bound to be lumpy in its growth, but the overall speed of decelerating growth does matter.
Here’s the trend.
Q4-20 Q1-21 Q2-21 Q3-21
Fee-rev QoQ 34% 38% 61% 12%
If they do 18% fee revenue growth QoQ from Q3 to Q4, how can you be so confident that they will guide (and actually grow) at around an average 18% QoQ in Q1 and the rest of 2022?
Their Q1 and FY22 guidance for personal loan and auto, will matter MUCH more than a one time Q4 earnings beat.
1.) Remember they have stated that Q1 is seasonally weakest for UPST.
2.) Whatever management actually guides, you can’t expect massive beats anymore.
From Q3 call:
“Private investor: We had three quarters to kind of play with, but still the magnitude of the beat has diminished. I mean, are you kind of entering a phase where you’re sort of – what you’re guiding to and what you’ll deliver, do you expect that sort of accuracy to increase and thereby that magnitude of beat to be lowered as a result?
CEO: Yeah, I would certainly expect that. Our goal is to provide accurate guidance and so for sure, the more we can understand about the out-quarters in our business, the more I would expect us to be reasonably conservative but I’m trying to provide real transparency into what we know and expect about our business. So, I would just attribute that to us having a good sense.”
3.) I’ve said the following a dozen times already:
autorefi loan numbers have been disappointing so far,
4.) COVID and inflation could also be cited by management to avoid giving strong guidance for the year,
5.) and you don’t know the loan size trends. You don’t know what the loan sizes are like in Q4 and beyond. All we know is the sizes in Q3 plummeted faster than the loan transaction numbers could keep up and the trend since Q1-2021 is down.
6.) Finally, you don’t know the take rate will be the same in 2022. You cannot expect an increase in their ability to reach above-prime customers to pad their fee revenues at the same take rate that they have been grabbing so far.
I will flesh this out below:
You can’t count on above-prime folks to artificially boost the average loan sizes…because I am skeptical that their take rate from large above-prime customer loans could possibly be the same as the below prime customers.
We know the fee take rate has been remarkably consistent at 6.7% of the loan size….but what about when my wife checked her rate as I posted about previously?
She got $50,000 loan at 5.55% APR at 5 year term (or 5.61% APR at 3 year term). With no origination fee.
It’s great for my wife, but how in the world can UPST take 6.7% of that loan to its revenues from her loan here? The math doesn’t work! The bank would be losing money over the life of the loan (6.7% is greater than the APR!)
And if you look in the screenshot (https://ibb.co/jTGMS34), you can see in the fine print that Cross River Bank is offering this. If Cross River Bank is agreeing to offer this, you better believe they will be taking a nice cut before the loan gets sent back to UPST for securitization. If UPST can only collect, say, 2% upfront fee from this kind of loan (while the retaining bank or institutional investor collects the rest as loan APR), even though the loan size is much bigger than usual, the fee revenue would be still nowhere as incremental as you expect.
You also cannot rely on above-prime customers at smaller loan sizes either. The APR offered looks just as low as the large $50000 loans. For example my wife selected a $1000 option and it was 5.91% APR (no origination fee) at the highest. Screenshot (https://ibb.co/qsbFsd3).
So, if personal loan growth decelerates faster than auto loan growth can kick into its own S curve, and it takes all of 2022 or even longer for auto to ramp it up, then keeping UPST in a concentrated portfolio may be a long period of opportunity cost.
I don’t see anything wrong with waiting for more certainty (concrete numbers and guidance) from the upcoming Q4 report to decide if its worthwhile to jump back in as a long-term holding. They need to prove to me they are likely to sustain a hypergrowth status again. That being said, I find it attractive to trade UPST at its current oversold state in an earnings run up - but the details of how I plan to execute that is off topic for this board.