Upstart TAM: View by a banking industry veteran

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This is my first-time post to Saul’s board and I hope it is of benefit to the other members. I have been observing this board for about 9 months and want to thank Saul and the other long-term members for their wisdom, insights and wonderful analysis of various stocks. I have learned much over this time.

For my background, I have been in the retail/commercial banking market for over 35 years, half that time as a banker and the other half working for major vendors in this space. I have managed technology/operations groups at various banks and have had responsibility for lending operations.

Upstart has a current install base of about 25 banks and credit unions. It appears one of their larger clients is Associated bank with an asset size of $35B.

One of the proxies in looking at the opportunity for Upstart’s lending solutions is to look at bank asset sizes. The larger the bank, the larger their customer base and the larger number of loans. The same is true with Credit Unions.

Here are statistics regarding the asset size of the banks and credit unions in the U.S. Take this as directionally correct because you will find slightly different numbers depending on the source leveraged.

Banks – 4,983 banks and savings institutions in the U.S.
4,011 have assets less than $1B
707 have assets of $1B-$5B
104 have assets of $5B-$10B
64 have assets of $10B – $20B
64 have assets of $20B-$100B
33 have assets greater than $100B

Credit Unions – 6,293 credit unions in the U.S.
5,961 have assets less than $1B
322 have assets of $1B - $10B
10 have assets greater than $10B

Given Upstart’s current install base of about 25 clients, which likely tends to be smaller size firms, there is a very significant upside opportunity for market expansion. Also, as they move up market to larger size clients, their loans per bank or credit union will increase.

I am sure in the months/years ahead they will bring on many more banks and credit unions (both domestic and international) as well as expand their offerings into different loan types. All signs are very positive.

Long on UPST

Bob

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Thanks Bob, it’s always valuable to our board to get an opinion from someone with experience in the industry. Appreciate you taking the time to post.
Best wishes,
Saul

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Saul, thank you for your nice note and it is a pleasure to meet you virtually. You and your board members have really had a positive impact on some many people’s financial lives. I look forward to contributing more going forward.

Bob

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Something else to ponder on potential future TAM is the area of decentralized finance (DeFi). It is my opinion that in the coming decades the overall banking/financial world is going to get disrupted by blockchain technology and DeFi in much the same way that newspapers and media have been disrupted by the internet. I can envision a future state where people don’t apply for loans with centralized banks - they will apply for loans with DeFi “organizations”. Those future DeFi structures are still going to need a 3rd party for determining who is approved for loans. UPST will be perfectly positioned to fill that role. This is very hypothetical at this point, but the TAM could be much bigger. (I think the topic of blockchain/crypto is probably off-topic here, so please don’t start any replies to that subject specifically - my only point in bringing it up is that “if” it does happen, UPST is the only company I know of currently positioned to fill that need).

Another random thought on UPST. I think this company fits into the category of “he who has the most data wins”. I’ve heard/read comments from the CEO indicating that they are not aware of any competitor currently working on a competing product. UPST has been working on and refining their product for 7 or 8 years (I think). If we estimate that it would take a potential competitor at least a year or 2 to get something ready to launch, then they would have to do testing with a limited number of partners to prove that it works, it seems like UPST has a virtual monopoly for several years - during which they are going to be getting hundreds of thousands (maybe millions) of additional data points to help refine the algorithm. That’s going to be a powerful moat for many years to come.

Long UPST - largest stock position

Thanks again to contributors on this board. I never would have invested in UPST when I did if it were not for all the input here. Luckily, I got fairly aggressive with it (for me) just before the last ER. Holding all shares with no intent to sell any time soon.

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Analogkid,

Please be careful with the DeFi vs conventional mindset. Although it is true that these models are competing against each other, the Total Addressable Market of loans for all purposes does not change based on competing products.

Unless UPST and DeFi invent an entirely new vertical or modify to expand an existing one, there is not TAM market change. (merely the players and market shares change).

This is not absolute in that there are unbanked who may find their way to DeFi or other non traditional banking products to satisfy their NEW need for loans and loan related services. However, I would argue that unbanked also do not have electronic records and credit histories that would fit the current AI models.

This would be an interesting study for how “adjacent” that market actually is.

As per usual, we must take care to invest in CURRENT results and CURRENT expectations.

Although these discussions help us to reprice UPST for future growth and opportunity, this should be the icing, not the cake.

Long UPST (#2 holding)

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