He said most lending systems are at a 2. [on a scale of 0 to 100]
One possible interpretation: the CEO, as the main salesman for the company’s stock, is dramatically misrepresenting the capabilities of competing underwriters, overstating his company’s relative capability, while also painting an overly optimistic picture of the untapped potential for the future.
Rob
To address Contribution Margins and how they might be considered like Gross Profit Margins as was suggested on Saul’s last post on this thread I went back to the S1. I get the feeling that this is true?
From the Upstart S1 page 97: Contribution margin from banks initiating loan process is 67% due to less customer aquisition costs; Contribution margin from loans initiated on The Upstart.com is 44% (so that’s a big slice going to Credit Karma?).
The last nine months the average contribution margin increased from 15% to 31% to 44% due to a mix of increased efficiencies. Upstart does see a ‘medium term’ future of more loan origination coming from banks. So that’s good.
I assume that with improvement in Upstarts product and the scaling of their customer base of contribution margins will improve. I wish I knew why they don’t break out Gross Profit Margins in the call?
Best Jason
FYI: The three area where Upstart collects revenues is on page 96. Maybe I’ll finish the rest of it eventually🙃
Best,
Jason
FYI Upstarts 10k uses the same verbiage but doesn’t break out the percentages for each area of revenue contribution (not that I could find?). I was able to copy a bit from the 10k (unable to copy S1, weird right🤔 I took pictures and had to transcribe, that’s why my explaination in my last two posts were truncated).
IMO, There wasn’t really anything in the 10k that was in the S1 that I thought needed to be shared at this time. Just wanted to point out that what is in the 10k is factually equivalent; but, without updated numbers since last September.
Best
Jason
An earnings report/guidance bump like this causing a drop in the stock price is pretty nuts… these stocks just keep tracking the implosion in the ARK funds.
Bnh
“these stocks just keep tracking the implosion in the ARK funds”
This is an excellent point that I don’t think many pay enough attention to… not much of the movement in any Saul stock is due to the actual fundamentals of the individual stock… I believe most of the movement you see is due to trading in the ETF’s that own the stocks… in Saul stock’s case, probably mostly the ARK funds. As people/funds withdraw 100’s of millions from the ARK funds, Cathie is probably just hitting a sell button that is selling these stocks across the board.
I also suppose further, that there are several managers on Wall Street that do not appreciate the attention Woods receive last year for her stock picking… and probably sell/and/or/short the ARK funds just to make her look bad…
And even further… it was Bill Hwang of Archegos (he of record setting margin calls just a while back) that provided all of the seed money to Woods to start the ARK funds… so you can probably suppose that he was a big holder of the funds. I don’t know if it’s been said, but I think we can suppose that his liquidation has probably meant much selling of the ARK funds. So I think we can safely assume that a lot of the weakness in the Saul stocks lately have nothing to do with the companies, or even interest rates, or inflation, or COVID… but just because some crazy trader put on some super crazy margin bets that went bust.
So I’m just pointing out… on days when all these companies seem to move in lockstep, it has nothing to do with these companies being worth 4% more or less than yesterday, but that someone just invested or withdrew $100M from an ARK fund…
I also suppose further, that there are several managers on Wall Street
that do not appreciate the attention Woods receive last year for her stock
picking… and probably sell/and/or/short the ARK funds just to make her
look bad…
Wondering just how that would work. And what would be the
ramifications for them going forward. Risking funds under
management just to make another fund manager look bad?
Doesn’t seem like a very prudent (or responsible) way
to proceed.
If resulted in a loss or a reduced gain, well, just a “Sorry, my bad”?
Sounds like young (or not so young) punk MBAs on steroids.
vez
“these stocks just keep tracking the implosion in the ARK funds”
Another thought provoking idea. Seem like there is a new one every few hours. And every few hours my portfolio hits a new low for the month. Now half my holdings are underwater and I’m down about 18%YTD.
The situation calls for keeping perspective. Things may get even worse but its a short term phenomenon at least relative to an investment time horizon. Since I subscribe to the proposition that quality will out I plan to ride it out. Selling now would be the worst thing to do. I am also resisting the urge to pick up bargains even though I have an ETF portfolio in reserve. Catching a falling knife is dangerous for one thing and making a dent on average cost per share for any of my holdings requires a major further commitment.
So I’ll check things out again in a few weeks, or months or maybe next year. No crystal ball available…Hang in folks.
cheers
draj
not much of the movement in any Saul stock is due to the actual fundamentals of the individual stock… I believe most of the movement you see is due to trading in the ETF’s that own the stocks.
. and probably sell/and/or/short the ARK funds just to make her look bad…
With all due respect, I’ve pointed this out before (and got axed for being off topic).
It would be naïve to expect these stocks to go up infinitely at the rate of 5% per day (why should they be worth more on Tuesday than Monday and then more on Wednesday than on Tuesday?
I make a good part of my income by selling, at a profit, stocks I have previously bought when I feel they are overvalued and then trying to find a bargain to put the chips on. No bargain? I hold the chips until one comes along.
I’m guessing there have been a growing number of people who watched their ARK holdings going up to irrational levels (everything does have a finite value) and became nervous about continuing to play musical chairs and simply cashed in before the rush. This is not about making Cathie look bad, this is about making/conserving money.
Remember, the stock market can remain irrational longer than you can remain solvent (Economist John Maynard Keynes).
Jeff
I picked up some more UPST yesterday ‘on the cheap’ as I found their results reported this week (particularly Rev growth) to be outstanding. In the meantime I found this info on Seeking Alpha which may have accounted for the drop yesterday:
“Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), and U.S. Bancorp (NYSE:USB) are among a group of banks that will start providing customer deposit account information as part of a government-supported initiative to give more people access to credit cards, WSJ reports. The idea is to use alternative data, such as bank account information, to determine credit risk for those people who don’t have a traditional credit score. The pilot program is expected to start later this year and about 10 banks have agreed to exchange data.”
So competition may be on the way slowly, very slowly I would say.
… and for what it’s worth, I added to my small ARKW holding yesterday too. When I no longer have the the inclination to manage a tech portfolio, I want ARK to do it for me
A few posters have brought this up above, but mostly, the discussion got lost in the value of AI and diminishing returns of more experience. By “this”, I mean simply that there is limited ARR tied to this revenue model. Their revenue model seems highly transaction-driven, i.e. fees for loan origination. They need to be involved in more and more loan processing to achieve growth. Right?
The pandemic and associated stimulus have put more cash in consumers’ pockets, and we see that credit card balances are down overall. Mainly because people aren’t traveling, vacationing, etc. So the need for these types of consumer loans will only go up as the credit card balances become higher, as things reopen.
But what effect would rising interest rates have in general on the number of loan originations? Both for consumer loans as well as car financing growth to come? Could new loan apps dry up say 10-20% if we saw meaningful rises in interest rates?
Seems that an unreal ER was followed by an inflation report scare, that hammered UPST more than the general SaaS stocks. Inflation → higher interest rates → less lending?
See below from 10-K on how they make money. Seems like there has been a lot of questions on this and the 10-K is pretty clear. They make money on fees from origination but they also make money throughout the life of the loan..
“Our revenue is primarily comprised of fees paid by banks. We charge banks referral fees for each loan referred through Upstart.com and originated by a bank partner, platform fees for each loan originated, regardless of its source, and loan servicing fees as consumers repay their loans.”
I wouldn’t say recurring revenue is a large majority of their revenue but it is there.
Also in an interview I recently watched the CEO, he mentioned that the current guidance is solely based on AI improvements, not an increase in bank partners. When you think about the potential of numerous banks partnering with them and expansion into other verticals (auto, mortgage, etc) on top of AI improvements, there is a LONG runway that is currently undersold by management. I don’t personally worry about a slowdown from rising interest rates and I certainly wouldn’t let the potential of rising interest rates keep me from investing in this disruptive company.
-Junomean2
Long UPST
I certainly wouldn’t let the potential of rising interest rates keep me from investing in this disruptive company
I agree with this, particularly because any raise in interest rates in the medium term is gonna be 25 - 50 bps so hardly a deterrent to anyone intending to purchase a car
No. of Recommendations: 3
See below from 10-K on how they make money. Seems like there has been a lot of questions on this and the 10-K is pretty clear. They make money on fees from origination but they also make money throughout the life of the loan…
Yes, but it appears to me that the recurring fees are not the major source of revenue and are rather a smaller percentage. Has this been broken out definitively?
I need to remind myself sometimes that UPST is not SaaS. Unlike ZM or CRWD or NET they do not have as much recurring revenue and you can’t just assume this quarter’s revenue as a base for next quarter. When we look at most SaaS companies we just think about sequential growth as if there’s no way they’ll actually go down in sales. That’s just not the case with UPST. For the upcoming quarter I’m not so concerned, but for the latter half of the year it could be an issue.
Last year when ZM guided to flat revenues in Q3 and Q4 after their blow-out Q1 earnings, we all knew it was a complete low ball because the customers who signed up in Q1 and Q2 were not going to leave en masse within a few months. That revenue was almost guaranteed.
UPST doesn’t have such guaranteed revenue. The likelihood of a 2020 Q2 type drop in revenues is much higher for them than CRWD or ZM.
Maybe they have insight on some new deals that are in the works, or the auto loans will start making a meaningful contribution in Q3/Q4, but it’s still much more difficult to predict.
I believe this is all reflected in the valuation, but that uncertainty combined with the fact that it’s a recent IPO with a pending lockup expiration and that it seems to be one of the momentum crowd targets that cause volatility in both directions are reasons that I’m keeping this as a small-medium sized position. If they were true SaaS having reported the same growth numbers and guidance then I would have bumped it up to an oversized position.
I believe UPST’s TAM is massive enough that only a severe economic contraction would cause a decline in revenue. Its just getting started in a very large market, entering a new market [auto loans] 6x times the consumer loan market. And there are other types of consumer loans to enter in this large and growing country. And foreign markets also.
Per their S-1, on origination they get (1) $400-500 per loan for “Referral Fee”, (2)$200-300 for “Platform Fee,” which sound non-recurring, and (3) they also get 0.5% - 1% per year “Servicing Fee,” which does sound recurring, but not much.
My point was even if UPST got all 100% of Prodigy’s current auto loan volume of $800M it will add only about 45% to their current loan volume of $1.7B this Q. Of course, Prodigy can grow its footprint in the auto dealer market and with it UPST’s loan volume can grow but I am not sure how easy it is to penetrate the auto dealership SW market - it may be harder than personal lending where digital fintechs have grown quickly mainly by consolidating CC balances. Remember their typical customer is one with very low credit (i.e. sub-prime loans) and not those with excellent credit who can easily get loans from the auto manufacturer or any other bank. This limits their TAM as well.
Long UPST … around 3%