I’ll be the first to admit that trying to forecast Upstart’s revenue a quarter out seems daunting or foolish, given that others have tried and missed last quarter.
However, I’m going to give it a bash. Albeit with a generous sprinkling of assumptions, which may turn out completely wrong, of course. Still, I think we may have most of the pieces to make an educated guess. I’m going to discount auto entirely, and assume zero revenue contribution from that. Also, I’m only going to try to get to an estimate of revenue.
Let’s start out with what we know.
Rev$m Q1 Q2 Q3 Q4 2018 24 2019 20 33 49 62.6 2020 64 17 65.4 86.7 2021 121 194 228.4
Number of loans originated
#Loans Q1 Q2 Q3 Q4 2019 30,998 41,211 64,259 78,654 2020 84,214 11,873 80,893 123,396 2021 169,750 286,864 362,780
$Value of loans originated
$m Q1 Q2 Q3 Q4 2019 369 486 825 1,044 2020 1,123 164 909 1,249 2021 1,729 2,795 3,130
That’s what they gave us and we know these numbers probably backward by now.
To get a better picture of what’s cooking, I calculate the average loan size, the average revenue Upstart generated per loan, and Upstart’s revenue as a % of the average loan size, per quarter. This is what that looks like:
Average loan size
Avln Q1 Q2 Q3 Q4 2019 11,904 11,793 12,839 13,273 2020 13,335 13,813 11,237 10,122 2021 10,186 9,743 8,628
QoQ growth average loan size
Q1 Q2 Q3 Q4 2019 -1% 9% 3% 2020 0% 4% -19% -10% 2021 1% -4% **-11%**
Upstart revenue per loan
Rev/ln Q1 Q2 Q3 Q4 2019 645 801 763 796 2020 760 1432 808 703 2021 713 676 630
Revenue per loan as % of average loan
Rev%ln Q1 Q2 Q3 Q4 2019 5% 7% 6% 6% 2020 6% 10% **7% 7%** **2021 7% 7% 7%**
A couple of things stand out for me here. First is that Upstart’s revenue per loan has stayed pretty stable at around 7% of the average loan for the last several quarters, with only 1 exception and that was the Covid quarter. I think that for purposes of Q4 we can therefore safely assume a similar level.
Secondly, and more importantly, the average loan size has decreased from $10,186 in Q1 and $9,743 in Q2 to its lowest point yet in all quarters of the past 3 years, to $8,628 in Q3.
Because revenue per loan stayed stable at around 7%, the decline in average loan size is therefore the key reason behind Upstart’s revenue growing by less that the loan volume growth in Q3. Loan volume growth was 26% qoq, but revenue growth was “only” 18% qoq, caused by them originating loans that were on average 11% smaller that the quarter prior to that.
Put another way, had the average loan size not decreased, but stayed stable from Q2, revenue for Q3 would have been around $245m for Q3 in stead of $228m.
WHY DID THEY ORIGINATE SMALLER LOANS ON AVERAGE IN Q3??
Only one analyst asked about this - Michael Nicholas of Goldman. He asked:
“I was just wondering if you could talk a little bit about the loan sizes - average loan sizes in the quarter, and how we should think about that going forward into 4Q and then into 2022.”
The CFO’s answer was very thorough - he must have been expecting this question. His answer was, as others on the board have pointed out, basically that there were two things going on. He called one “optical” and the other “real” (both are real imo!) - so I guess he means the one is a bigger factor than the other - the “real” one being the biggie. These are the two things he called out:
- A mix shift of their total loans towards smaller loans as banks allow them to increasingly target the lower end of the credit spectrum by loosening their FICA guardrails. I.e. they are indeed generating smaller loans as a % of the total, because banks are increasingly allowing them to move to underwriting the lower end of the credit spectrum
- Actual loan size demand across the board coming down since the end of “last spring” ie from Q2 2020.
Indeed, the ave loan size in Q2 2020 was $13,813 vs $8,628 in Q3 2021. That’s a 37.5% reduction in average loan size in the last year.
In Q2 an analyst also asked about loan sizes and the answer was pretty much the same, but much shorter. In Q2 the CFO said:
“what that means is, we’re expanding downwards on the prime spectrum in terms of our capabilities. And of course, that will have an effect on loan size mix as well. And then we think that 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.”
If there was one thing that they probably got wrong in Q2, it is the part I highlighted above. In Q2 they thought the decrease in loan size demand was moderating but in the end it didn’t moderate in Q3. Which is why his answer to a very short analyst question in Q3 was so thorough - it probably surprised them a bit (had it indeed moderated as he expected in Q2, then revenue would have been substantially higher in Q3).
Given how important this is for getting to an expectation for Q4, it’s worth looking at his response in Q3 about the “real” impact and what he expects going forward, in full:
”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. And so we’re on a crystal ball as how this is going to propagate going forward, but I do think that as I called out in my remarks, I do think we’re starting to see the signs in terms of the macro economy of normalization in the economy with respect to savings rates, with respect to credit balances. And so if that is really accurate, what we would expect to see is a stabilization of loan size and then ultimately a gradual return to larger loan sizes as savings rates go down and credit bonds has come back up. So that is – I wouldn’t call that a prediction that’s maybe more of a thesis. That’s where we stand right now with respect to loan size.
Great. I’m going to put that into my expectations for Q4 then. A stabilisation of loan sizes. I don’t think that he will get this one wrong again (if he did indeed get it wrong in Q2, as I suspect).
So the assumptions for Q4 up to now are as follows:
- Average loan size: $8,628 (stable - same as Q3)
- Revenue per loan $630 (7% of average loan size, same as Q3)
All that’s left is coming up with an estimate of loan volumes, and then Bob’s our uncle to estimate revenue.
HOW MANY LOANS WILL THEY ORIGINATE IN Q4?
I’m starting with fish13’s analysis, where he splits out loan originations between Credit Karma and non-Credit Karma as part of his thoughts on diminishing concentration risk (here: https://discussion.fool.com/upstart-concentration-numbers-349782…) , and going a bit further from there.
If we add the full-year split that Upstart give for originations from Credit Karma in their annual report of 58% for the full year 2020 to fish’s analysis, we can complete the quarterly picture, as follows:
**CK** Q1 Q2 Q3 Q4 2020 40,423 6,660 44,947 82,188 2021 89,968 133,773 136,793 QoQ Q1 Q2 Q3 Q4 2020 -84% 575% 83% 2021 9% 49% **2%** **nonCK** Q1 Q2 Q3 Q4 2020 43,791 5,213 35,946 41,208 2021 79,783 153,091 225,988 QoQ Q1 Q2 Q3 Q4 2020 -88% 590% 15% 2021 94% 92% **48%**
From this I see an acceleration of non-CK originated loans at 48%qoq growth and a stabilisation of CK originated loans in Q3 at only 2% qoq.
I’m going to assume therefore that CK originations for Q4 will come in flat vs Q3 - zero growth, or 136,793, same as Q3.
And here is where I’m going to go out on a limb and make a key assumption, which may be true to a greater or lesser extent:
I’m going to assume that the number of bank partners of two quarters prior to the reporting quarter drive, or at least correlate with, to a large extent - the bulk of the non-CK loan originations.
Upstart had the following number of bank partners, from what I could gather:
2020 Q3: 10
2020 Q4: 12
2021 Q1: 18
2021 Q2: 25
2021 Q3: 31
Upstart further tells us that they expect their bank partners to incrementally contribute to loan origination as well as that getting a new parter up and running takes about 6-15 months. I’m going to go with 6 months (2 quarters), assume and calculate the correlation over the last 2 reported quarters (not before as the business was a very different animal back in 2020 vs 2021), and use the number of bank partners in Q2 of this year to forecast the non-CK loan originations for Q4:
Estimated average originations per bank partner per quarter:
Q2 2021: 153,091 non-CK loans from 12 bank partners in Q4 2020 = 12,758 per bank partner
Q3 2021: 225,988 non-CK loans from 18 bank partners in Q1 2021 = 12,555 per bank partner
→ Average for the two quarters of 12,656.
So for Q4: number of bank partners in Q2 2021: 25 x 12,656 per partner =
Q4 non-CK originations est: 316,405
Q4 CK originations est: 136,793
TOTAL Q4 ORIGINATIONS EST. 453,198
Putting it all together gives my guesstimates for Q4:
Total # of loans: 453,198
Loan volume $m: $3,910
Revenue per loan: $630
If Q4 Revenue came in at $285.5m that would constitute a 7% beat to their guide of $265m, a 25% qoq revenue growth vs 18% in Q3 and a 229% yoy Q4 growth.
Show me another one of “our” companies with anything similar to that…
Also, I see upside to this guesstimate. From auto, which I have not included at all, from the macro environment improving for credit origination and potentially leading to an increase in loan sizes (vs being flat as I’ve assumed), and an improvement in their models targeting higher FICO customers leading to higher loan sizes being included in the total mix, thereby potentially improving the average loan size.
Saul gave an estimate of $281m Revenue based on a 6% beat which is not far from my guesstimate above.
Would welcome any other takes on where they may end in Q4.
(Still pretty long UPST)