Upstart: Clarifying some calumny.

[SaulR80683]

For some reason Rakesh really has it in for Upstart. Is he short Upstart? If so, poor guy! For example:

At the mid-point of guidance, with $210M of revenue for Q3 2021, the QoQ growth would slow from 60% to 8%. With FY 2021 guidance of $750M, taking into account the actual results from Q1/Q2, and the $210M guidance for Q3 the company is implying $225M of revenue for Q4. This would represent 7% QoQ growth compared to the $210M guidance for Q3.

Now I don’t want to sound flip or making fun, but this is plain silly. Upstart raised their annual revenue estimate by $100 million (20%), after Q1, and by $150 million after Q2 (25%), but Rakesh is postulating that that annual revenue won’t rise a dime from that last estimate during the last two quarters. Really???

And that after rising sequentially by 34%, 40%, and 60% the last three quarters, sequential revenue growth will suddenly slow to 8% and 7%!!! Sorry, but let’s call a spade a spade, that REALLY IS silly, and the chances of it happening are really, really, really, low.

The customer has to show up, every day, every quarter

Rakesh is reminding us that Upstart is not a SaaS company. I think that all of us are well aware of that, but just in case: No, Upstart is NOT a SaaS company. But we are investing in it because it is growing so fast that it will probably come close to quadrupling its revenue this year, and is profitable besides.

They can buy revenue, just like they spent $71M in Q2 to buy $169M of revenue (excludes servicing fee revenue). Spending 42% of your transaction fee revenue on borrower acquisition costs is not a sustainable model

He calls Sales and Marketing expense “buying revenue” trying to attack the company by using a pejorative word. I’d suspect that almost every company we invest in, or even look at, spends something like that on S&M. For example, Crowdstrike had $338 million intotal revenue last quarter, and spent $154 million on S&M, so Crowdstrike spent 46% of total revenue to “buy” it. What a lot of baloney: “buying” revenue!

And since when is spending 42% of your revenue on S&M not a sustainable model??? Crowdstrike and Upstart are both quite profitable.

And actually Upstart’s total revenue was $194 million, but Rakesh just decided not to count the recurring revenue that comes from servicing the loans, and thus cut it back to $169 million. So in reality, Upstart’s S&M expense was only 37% of its TOTAL revenue.

And he also didn’t tell you that Upstart’s Contribution Margin is rapidly improving. It was only 31% in 2019, 46% in 2020 (in spite of Covid), and was 52% last quarter.

If UPST earned 60 Million last quarter, LC also earned 40 Million last quarter. However LC, being a bank, had to make an upfront provision of 33 million.

Here Rakesh inadvertently pointed out one of the best things about Upstart. It’s a clean tech company, a software company. It’s not a bank!!! It doesn’t carry the loans on its books so it doesn’t have to make upfront provisions in case of loss or default.

Hope that clarifies things a bit.

Best,

Saul

[Oracleoo]

I see an opportunity in the S&M spend today for Upstart to make its moat even stronger eventually.

Today Upstart is not a household name like iphone or Tesla - the latter which has zero advertisement budget. So though it has a great product which can benefit millions of potential borrowers with a lower interest rate then competition, it has to spend on referral fees to aggregators like Credit Karma or increasing its brand awareness through other means. With increasing brand awareness marketing spend as a percentage will likely trend downwards, which means either more profits or if Upstart passes on the benefit to consumers - even greater barriers to entry!

S&M spend today is a potential opportunity as the flywheel gathers speed !

[buynholdisdead]

The problem with letting shorts run wild on this forum is that it’ll create chaos. They don’t tell truth. They use lies and distortions. Their objective is to drive down the price of the stock using any methods. (MWK, ATER says Hello!) It’s pointless to argue with shorts because they are not based on truth.They are based lies and exaggerations most of time. BTW buying put option is not a true short operates. True shorts take a direct negative position on the stock and hold it for long time even in the red. Because if they are waiting for the stock to drop in order to start shorting, their convictoin to short is weak!

This is complete irrational, emotional, bull pucky. Just because someone disagrees does not make them deceitful or a liar. This board was built on respectful discourse but many people here are starting to get the idea that having a different opinion on a stock is somehow deceit. This used to be one of the chief tenets of this board. To allow everyone to have an opinion and to discuss all sides of the stock.

Andy

[jwiest]

It’s beneath this board to dive into conspiracy theories about burner accounts and shorts (does this board move prices?) just because someone has a different opinion.

That’s not what’s going on. Some patterns are obvious if you’ve been on these (or any other) boards long enough.

Rakesh’s argument may have had some holes – though that would be subjective – but they came with numbers and an argument, not a mindless opposition.

Numbers that were wrong, arguments that were misleading, all spread over half a dozen posts to create clutter. I’m all for sincere counter arguments, but if you can’t see the red flags here…SMH.

[buynholdisdead]

That’s not what’s going on. Some patterns are obvious if you’ve been on these (or any other) boards long enough.

Fair enough Jwiest, point me to the posts you are talking about.

Numbers that were wrong, arguments that were misleading, all spread over half a dozen posts to create clutter. I’m all for sincere counter arguments, but if you can’t see the red flags here…SMH.

Again, if the posts have been deleted than how can we have a discussion about that what is not here? SMHX2

Andy

[XMFBreakerTinker]

There is a real and material difference between a short and honest discussion on negatives, and that is the short lies and scares.

For UPST, my largest holding and I’ve made enough profit on it to retire to Portugal anyways, I have no illusions. The price will crash when the financial cycle changes. They all do. Their market is subprime borrowers (lending to this group has never ended well in a down cycle).

However, as Saul brought up (1) follow the numbers. As for me I’ll add (2) who is their real competition? Answer, well no one.

I’ll bring up another negative, and that is they only have 25 bank partners at this time and high revenue concentration and large dependence on one referral source. And yeah, I’ve brought up before the auto business is going to more likely than not take longer than we’d like for it to develop.

Positives and negatives. Honest discussion of both. But these are not lies and distortions and fear mongering and half truths that you will find from a short.

In May (was it) I bought and then sold UPST because it was clearly a short covering. Then I was fortunate enough to be correct and able to buy back in. This time it is not a short covering. As discussed, UPST is doing better than Zoom did!

Of course Zoom came back to Earth. UPST has a larger market opportunity. This said, I’m out of tricks in regard to UPST. Played the short covering and mow it is all follow the numbers and I have no idea where that takes us. The short (and he is a short, not someone here to create legitimate analysis) doesn’t t either.

Btw, it is perfectly legitimate to be a short. What I mean by “short” in this context is someone being dishonest and trying to influence opinion and not honestly discuss the why of their position. And btw/ yes, this board does influence share prices. I actually don’t like that it does. But it does.

Tinker

[XMFBreakerTinker]

Btw just to be clear, I meant made enough to retire to at least Portugal in the Ratcatcher 2 style in The Suicide Squad doe those familiar with the genre.

I should also add UPST only has 25 bank partners. The CEO is on record stating he expects a few hundred in the next few years.

Will he be right or wrong? Will the auto business take off or not?

Will UPST start the mortgage business (as they are already hiring in regard) and if so will that succeed or not?

All good questions but none this short person has bothered to ask.

Tinker

[1poorguy]

Btw, it is perfectly legitimate to be a short.

I disagree. That’s not investing, it’s gambling. Which I guess is “legitimate” (at least in some locales), but it’s definitely not investing. And it’s not in the Saul Method. I’ve read his knowledgebase a couple of times, and nowhere does he mention shorting in a positive way. I assume he doesn’t engage in it, as I’ve never seen it in one of his updates.

But I will agree that there’s being a quiet short, and there’s being a dishonest player trying to influence the price by spamming message boards.

The price will crash when the financial cycle changes. They all do. Their market is subprime borrowers (lending to this group has never ended well in a down cycle).

This is one that I “follow the numbers”, as Saul says. Privately, at least one poster tried to explain UPST to me. And I get the basics, but I’m not a banking/fintech guy. However, the numbers were compelling. That said, I do have the concern you voiced above. More specifically, how will UPST recover from a downturn? There’s always a downturn, but the question is whether the stock can recover from one. I didn’t follow them, but Countrywide didn’t recover. They went out of business (or was bought-up). Saul has chided people on this board for bailing, pointing out that he profited tremendously when the markets rebounded. Will we have enough warning from the numbers to bail at an appropriate time, or will it be hindsight? When is declining revenues a market downturn versus a fundamental problem with the company? Some other companies I own I could answer that question because I understand them better.

Perhaps that’s a question borne out of my lack of knowledge of the intricacies of the business.

1poorguy (long UPST, currently up 49.46%, but relatively small allocation)

[JabbokRiver42]

Their market is subprime borrowers (lending to this group has never ended well in a down cycle).

I think one of the overlooked pieces of Upstart’s mission is that they are, essentially, trying to redefine who is considered a “subprime borrower.” Their whole thesis is that the way financial institutions have identified such borrowers in the past has been faulty.

Upstart is a disruptor to how lenders think about credit risk. They have jumped in with their thousands of data points and amazing AI developers to claim that there are other sets of information that can serve as better indicators of “prime” and “subprime” borrowers. I think they would argue that they are not serving “subprime” borrowers. They are serving borrowers who are very likely to pay back loans but who have been ill-served by a faulty FICO system. Upstart claims to have built a better mousetrap, and lenders appear to agree.

Hard economic times will always hit credit markets; but a highly refined and accurate means of identifying those likely to pay back loans could also have the effect of making that hit less severe. A more reliable pool of borrowers in good times will also be more reliable in bad. Until now, in rough times, the people most in need of expanded credit were the very ones FICO banned. Upstart looks at an expanded and more granular set of data to give more people access to credit, which can also help keep economic downturns from being as severe as they otherwise might be.

My only real question about Upstart now is why it is only 19% of my portfolio.

JR

[solishu]

“A more reliable pool of borrowers in good times will also be more reliable in bad.” I don’t know if that is necessarily true… Just a simplified thought experiment here:

Maybe Upstart underweights one of the traditional measures of credit-worthiness, income, and overweights something else: whether the borrower grew up in a two-parent household (this is purely hypothetical). In this hypothetical scenario, Upstart’s data shows that children who grow up in a two parent household receive more direct parental teaching on managing money and feel a stronger ethical push to prioritize paying back loans. So, during times of economic plenty, these people put their loan payments third on their list of expenditures, right after rent/utilities and groceries, whereas someone with a higher-income who grew up in a single parent home has paying utilities as their 6th financial prioritization and he’s less conscientious about doing so (so less likely to set up autopay or procrastinates writing the checks). And because times are good, the Upstart picks are faithful repayers of the loan. However, when times are bad, these borrowers’ incomes shrink to where they just don’t have the money after rent/utilities and groceries, and they start skipping payments. However, the other borrower who has a higher income can still make the payments because even though paying back the loan may be lower on his list of priorities, he still has the means to do so. He’s still somewhat irregular, but his repayment rate hasn’t dropped off as much as the Upstart pick.

Huge oversimplification, but it’s just a thought experiment to imagine how Upstart’s model could theoretically pick people who are likely to repay their loans in one environment, but unlikely to repay them in another.

[brittlerock]

Tinker, over the years I have been following this board your posts have consistently been very astute. You very consistently perceive the plusses and minuses of various investment opportunities and have an uncanny knack for “timing” the market, which for you is probably more like reading and interpreting the variables than actually “timing” in a technical sense.

In any case, for this reason, I put your posts in the group that I always read. This board has grown to the point such that there are just too many posts, I can no longer read them all and still have time for other activities. But given that I hold your thoughts in high regard, I have to take issue with your comment, “The price will crash when the financial cycle changes. They all do. Their market is subprime borrowers (lending to this group has never ended well in a down cycle).”

As others on this thread have pointed out, the entire basis for Upstart’s business model is the fact that lenders, bound primarily to FICO scores for risk assessment have failed to properly identify subprime borrowers. Upstart does not indiscriminately endorse loans for borrowers traditionally identified as “subprime”. I don’t have the stats, but I am confident that they also reject a significant number of these would be borrowers as truly unworthy credit risks.

It’s also worth pointing out, as johnwayn did in an earlier post, the average income of an Upstart endorsed borrower is in excess of $86,000. These folks are not poor by any definition of the word. They have been deemed “subprime” for other reasons embodied in the FICO score.

In the end, you may be right. Upstart’s market may crash in a down cycle. But it won’t be for the reason you cite.

[XMFBreakerTinker]

But given that I hold your thoughts in high regard, I have to take issue with your comment, “The price will crash when the financial cycle changes. They all do. Their market is subprime borrowers (lending to this group has never ended well in a down cycle).”

Since UPST is nearly 50% of my port at this time, I do hope your taking of issue with my opinion proves me to be completely in error :)). Do as I do, not as a I say? Well, no. Look what happened to the lending market in 2020. It fell off a cliff and so did UPST share price. We have already seen the cycle at issue.

This said, it really is not bothering me, obviously, at present. UPST is disrupting and not mature enough to be dependent upon macro-economic growth. So I just brought up the issue as a counterpoint to the now dismissed short.

I don’t know how big the personal loan market can get (there has to be a limit here as to those who are good credit risk. But how large that is, I don’t know). The investing thesis is that the auto market loans will take over when the personal credit market matures, and the mortgage market will then kick in, etc.

So I’m good with that narrative, and the numbers support the narrative. I have found fighting a narrative that equates to real world facts and numbers is not a good thing to do. Just helps to understand what has the nay sayers so worried.

Tinker