There was an article about Upstart in Automotive Digest, an industry publication that is read by the principals in every dealership. It’s subscription so I can’t post the article, but the author was interested and cautiously positive. Good publicity for Upstart, I’d say.
Saul
Hi Chris,
To avoid board clutter, I am requesting this post be deleted.
If you need some background on we we can’t allow posts like yours’, please take a look at this post by Bear from a few days ago that received over 500 recommendations from board users.
https://discussion.fool.com/a-discussion-between-thousands-34977…
In the future, please reply directly to the author by email for questions like this. If you, don’t know how to do this, feel free to reply to me by email and I’ll help you out.
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Lennie
Assistant board manager
Saul,
You got me digging around in Automotive News* (was it really “Digest”)? While there, I found a couple of interesting tidbits about adjacent deals being constructed between Cars.com and CreditIQ:
While I don’t think Cars.com is an interesting investing opportunity, it speaks to the competitive environment that the product formerly called Prodigy is competing in.
CreditIQ uses two products:
ProfitIQ which is explained here:
https://creditiq.com/profitiq-maximizing-fi-profits/
How It Works:
Real inventory data – we pull it straight out of your inventory feed ? real pricing data
Real bookout – we make it easy for you to get the perfect bookout ? Real LTV
Real credit decision – we pull it out of your DT/R1 where you are already desking it
Payoff of trade-in included in profitability
Real F&I product pricing - we pull it straight from your product provider or you can set it up as a dealership product
CreditIQ appears to be F&I manager centric, focusing on which loans/lenders are most profitable for any given deal. More here: https://creditiq.com/profitiq-maximizing-fi-profits/
And,
Digital Retail: https://creditiq.com/contract-ready-digital-retailing/
This product provide online friction reduction and deal promotion specifically to encourage more loans and less cycle time.
These to products are very much in alignment with UPST products in this area, but there is a big catch. If products like CreditIQ are providing multiple lenders, there is strong incentive to stick with the surface profit profile implied by improving deal value. Once again, is the UPST product enough to switch? How much better is Upstart Auto Retail than the competition?
Put simply: Once a dealer is seeing repetitive messaging that they are gaining X dollars or Y percent additional by working and improving the deal flow, the manual process is a continuously updating marketing ploy to reinforce the value of their product. What does Upstart Auto Retail show?
Upstart Auto Retail state 59% improvement in PVR for every sale on their page. I assume this is from baseline. What is the difference between a product like CreditIQ using the traditional methods and widening the spread while automating all of the frictional processes? Since UPST doesn’t show much detail without ‘requesting info’, I cannot really dig into it further.
*https://www.autonews.com/finance-insurance/upstart-pairs-ai-…
To view the entire article, click on the print hyperlink at the top right of the text.
Hi, G Davenport,
The article was in Automotive News under Finance and Insurance on Oct 6th. It was called “Upstart pairs AI loan decision tech with auto retail platform.” I believe the author was John Huetter.
Saul
What I gleaned from the article:
-Upstart can fund auto loans within a business day, which apparently is what dealers would really love as that would significantly improve their cashflow
-DGDG that is prominently displayed on Upstart’s dealer page, is huge, ranking number 76 in the nation based on sales numbers. Hopefully that helps other auto dealers to want to sign on too.
-Existing lenders won’t be barred from Prodigy’s platform, and will be displayed side by side with Upstart’s partner offerings.
That’s competition, yes, but I assume this means that won’t be a barrier for dealers to sign with Upstart. Meaning that dealers don’t have to cancel contracts or deals they have already made with their existing traditional lenders just to use the Prodigy platform.
Me spitballing numbers here:
If Upstart in 2022 has an average of 1000 rooftops (it was 945 in 2015 but supply chain issues can cut this down!), and on average, each rooftop sells 1000 cars each year, and Upstart powered loans are used in 20% of sales, and suppose the car loan size average is $20000, and that UPST’s take rate is 3%, then that could mean $120M in revenue.
If autorefi does 120000 loans in 2022, and average $20000 car loan size with 3% take rate, then that is $72M in revenue.
Combined is $192M rev from auto.
But I think what Wall Street would care more than the actual numbers is a long, long runway of growth in auto due to the massive TAM.
If UPST can demonstrate accelerating rates of adoption throughout 2022, the actual revenue obtained is trivial compared to a highly anticipated, sustained and durable future hypergrowth pathway.
Just my two cents.
Sources (from a quick search. if someone can find 2021 numbers let me know):
Cars sold per rooftop in 2015 https://www.autoremarketing.com/retail/franchised-dealer-cou…
Average used car price was around $20000 in 2018 https://www.carprousa.com/blog/car-dealerships-behind-the-nu…
If Upstart in 2022 has an average of 1000 rooftops (it was 945 in 2015 but supply chain issues can cut this down!), and on average, each rooftop sells 1000 cars each year, and Upstart powered loans are used in 20% of sales, and suppose the car loan size average is $20000, and that UPST’s take rate is 3%, then that could mean $120M in revenue. – jonwayne
Additional Key Points
My views:
It will be key for UPST to develop the used car market because there are no subsidized loans from the automakers in that market… leading to some very high interest rates. Not only are the loans unsubsidized, you have… in general… a lower credit population being served. Prime real estate for Upstart!
The Company can make enormous headway by signing some of the mega-used-car dealers, but in reality it’ll be a question of years in the trenches to lure BOTH big guys and Bob’s Used Car Emporium in Dodge City, Kansas (made that up). No matter. The market is ripe for an UPST harvest and growth GRADUALLY snowball. Gradual is, at least, my expectation.
But I still expect to see 100%+ growth for a while from UPST. Might start slowing down after it has a market cap over $100 million… I won’t be crying… 
Rob
Rule Breaker Home Fool
He is no fool who gives what he cannot keep to gain what he cannot lose.
I would add that car dealers and especially used car dealers would have a tremendous incentive to get on board. Most banks that fund used car sales hold part of the funds pending getting paid by the buyer, and keep the used car seller on the hook. If used car sellers could accelerate their collections, and reduce their risk it would be a no-brainer to sign on. The down side is most of these dealers are relatively small.
From Winlockdon: “I would add that car dealers and especially used car dealers would have a tremendous incentive to get on board. Most banks that fund used car sales hold part of the funds pending getting paid by the buyer, and keep the used car seller on the hook. If used car sellers could accelerate their collections, and reduce their risk it would be a no-brainer to sign on. The down side is most of these dealers are relatively small.”
Hi Everyone,
First: I can’t thank Saul and this extraordinary board for what you’ve taught me. This board is logical, insightful, energetic and incredibly generous.
I’m a big fan of Upstart (thanks Jonwayne!) and put more of my money where my mouth is than was wise. Regardless, I think Upstart has many years of rapid growth ahead, and so it will continue to be one of my top conviction stocks.
However, I disagree strongly with the quoted post above. My expectations for auto loan contributions are similar to WSM’s (Great Post!!) for Q4.
My hypothesis is that auto loans can not be significant to Upstarts revenue until there is a greater supply of cars shipped to dealers than there is a demand to buy them. Here is my personal experience buying a car one month ago:
I wanted to buy a specific Subaru model that no dealer in the country had in stock (or in transit). After a long, fruitless search, I decided to order the exact car I wanted, which will arrive in January. When I talked to the sales person, he was thrilled to take my order. Dealers have a fixed allocation for the number of cars they will receive from Subaru. Direct customer orders are added to that allocation. So, in this market that means they sell more cars by accepting orders than they could otherwise. Knowing that any car they get will be sold, they couldn’t care less if I cancel my order even after it arrives, and will happily refund my $500 deposit. They know that they will get to sell 1 more car than they would have with my order irrespective of whether I purchase. As an aside: the potential for dealers to abuse this option to artificially increase their allocation is taken so seriously by Subaru that they audited every sale this guy made to ensure that these were genuine customer orders and not faked ones by the dealership.
While talking price, I tried to get it reduced by offering to pay cash. He was adamant in his desire that I not do that. He told me that a lot of the dealership income comes from financing. He wants the car to be financed and NOT paid for by cash.
So, my belief is that dealerships don’t care that Upstart could increase the number of potential customers because their cars are guaranteed to sell without doing anything. The power of Upstart is that it enables financing to people who would otherwise have been denied due to their FICA score. In other words: Upstart can enlarge a dealer’s available pool of buyers. That isn’t helpful to dealership sales volume right now.
When dealers receive more cars than they can sell using their current financing, they will be strongly motivated to find ways of bringing in more customers. In this situation Upstart can increase dealership income, and undoubtably Upstart’s penetration will rapidly increase.
I don’t believe that growth of Auto loans will be significant for the next year…not until there is an opportunity for dealerships to sell more cars than they would be able to otherwise.
Larry
Long Upstart but trying to be more realistic than I was before Q3 earnings
PS: This is a n=1 story, about a specific car brand, but I believe that my experience is common.
Just to point out what the backend means to dealers. Here’s a list of publicly owned dealerships that list their F&I numbers. This is per vehicle retailed which may mean different things at different dealers. It should mean every car that is sold except for Fleet & Government which are accounted for separately. Some dealers may only include vehicles that were financed which would make these numbers higher. Either way there’s no doubt that the F&I end of the dealership while being a small part of their revenue is a large part of their gross profits.
One other thing not in these numbers are charged backs. For example you come in trying to negotiate the price of your vehicle by saying I’ll pay cash. Yes it means nothing and they talk you into financing by offering you something. In 30 or 60 days you payoff your loan. No charges to you to do that. But the bank or finance company will charge back the dealership. It’s a very common occurrence.
Would Upstart get charged back in the same scenario?
(Sorry trouble formatting) The First column is Q3 2021 Second Q3 2020 Third % change
AutoNation
Avg. F&I gross profit per vehicle retailed $2,573 $2,156 19%
F&I % of revenue 5.50% 5.20%
F&I % of gross profit 27% 28%
Sonic Automotive
Avg. F&I gross profit per vehicle retailed $2,152 $1,723 25%
F&I % of revenue 4.30% 4%
F&I % of gross profit 24% 25%
Group 1 Automotive
Avg. F&I gross profit per vehicle retailed $2,268 $2,035 11%
F&I % of revenue 4.90% 5%
F&I % of gross profit 24% 27%
Asbury Automotive Group
Avg. F&I gross profit per vehicle retailed $1,955 $1,800 8.60%
F&I % of revenue 4.50% 4.40%
F&I % of gross profit 22% 24%
Lithia Motors
Avg. F&I gross profit per vehicle retailed $2,009 $1,647 22%
F&I % of revenue 4.80% 4.40%
F&I % of gross profit 24% 30%
Penske Automotive Group
Avg. F&I gross profit per vehicle retailed $1,771 $1,418 25%
F&I % of revenue 3.60% 3.30%
F&I % of gross profit 20% 21%
The entire industry is changing and dealers understand that. The financing of a vehicle used to always take place in the F&I office after you found a car and agreed on a price. That is changing quickly.
-A new J.D. Power survey of 10,462 people with recent auto loans or leases found that 45 percent of customers do some research online prior to buying a vehicle. Among Generation Z, defined as those born between 1995 and 2004, that proportion rises to 62 percent.
-Sixty percent of consumers who shop online for auto finance apply for preapproval, according to the 2021 J.D. Power U.S. Consumer Financing Satisfaction Study.
My take on what this all means for Prodigy and Upstart.
-Todays market is a nominally because of the chip shortages and few other factors affecting supplies. Dealers understand this and know it’s a short term thing. Of course dealers want tools to help them attract customers, sell more vehicles and maximize profits. They know the profit margins of today are a very short term thing.
-I agree with Rob that the used car market is right up their alley. I think their chances of landing a huge mega used car dealership is very good. They seem to be marketing themselves to the big mega dealers before the small corner guy. Dave Girouard said in a statement. “Upstart Auto Retail will provide millions of consumers with a car buying experience worthy of 2021, including that all-important financing step.” MILLIONS of consumers and CAR BUYING EXPERIENCE it’s sounds like so much more than just financing a car.
-Upstart entered the space starting with refinancing last year. Soon those customers will need to replace their vehicles. If they had a good experience they are likely to start their search with Upstart.
-Even though there are over 18,000 new dealerships across the country it’s still a small close group. Dealer principals get together with others on a regular basis and talk about what works and what doesn’t work. If Prodigy is something different and solves a problem for them others will be quick to jump onboard.
I appreciate everyone’s effort in trying to model and or predict the near-term potential of the auto loan business. I posted that I think it’s really impossible to model anything and that I will be content to wait to see what Upstart actually reports before I try to think of auto loan revenue as a driver (pun intended) of future revenue growth.
I post to offer a slightly more jaded view of the value Upstart provides dealerships. Sure, faster payment by banks is great. Sure, an easier interface is great. But anyone can do those things. Upstart is offering something no one else seems to be able to do.
First, this article has a table of rates for the prime to non-prime to deep subprime. https://www.businessinsider.com/personal-finance/average-aut…
And a third of Americans have a subprime credit score according to this: https://www.experian.com/blogs/ask-experian/research/subprim…
Upstart provides value to dealerships simply because they increase the loan amounts non- to sub- prime borrowers not because they expand the pool of borrowers or have better experiences. Sure, lower loan costs to more people is a great mission - and one I applaud.
But I think the reality is that consumers consume. I know, it may sound counterintuitive to those who are fiscally responsible that read this board. We think that’s great, the consumer will have a lower payment. The dealer doesn’t really get anything out of that. But they do because dealerships don’t sell cars - they sell payments.
When a typical consumer comes into a dealership, they aren’t deciding to spend $15, $20, or $25 grand on a car - they are shopping for monthly payments. Look at print and media advertising - do they advertise the price of the car or do they advertise the payments? This is where I think UPST can provide real value to the car dealer. A $1,000 loan for five years at 11.03% (FICO-subprime average rate) is about $22 per month. That same $1,000 is only $20 per month at 6.61% (FICO-nonprime average rate). So if UPST really finds more credit-worthy consumers from that vast "un-"prime rated populace and is able to offer lower rates to more and more of them, those consumers have significantly greater buying power. In the example above, 20% more. And they will use that buying power. And that increases not only the gross revenue for the dealership but more importantly, the finance fees on the loans as well which pretty much go to the bottom line.
I admit that this view of the auto loan product Upstart has is somewhat antithetical to Upstart’s mission. Or maybe it’s not - why shouldn’t consumers get to have nicer things? Upstart’s process of lowering rates will likely translate into dealers selling higher-priced cars to consumers, not more cars to more people. And getting higher fees on the financing. This is one reason I don’t think modeling any revenue at all for auto loans will work yet - we don’t know how many people Upstart will upgrade in creditworthiness, we just have a vague notion that they can do better for 1/3 of borrowers. And we don’t know what the credit limit is on the people they can do better for. And we have no idea of what fees Upstart will have on these loans and the split with the bank and the dealership. Even with the models created recently on the board, I still think that attempting to approximate X dollars per loan to Y borrowers at Z fee percentage to $ to Upstart really can’t be done, at least not yet.
T.