Upstart's expansion plan

Investment Analysis Clubs Saul’s Investing Discussions
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Last week a new poster brought this great interview to the board: https://discussion.fool.com/new-interview-with-upstart-ceo-34855…

Many have mentioned several of the promising things the CEO said, but this one passage (around 23:45) was so good I figured I would type it out:

We’ve built what we consider to be very a sophisticated AI model in one particular product area and one particular market which is generally unsecured personal lending in the US. That represents in the grand scheme of credit, like, a rounding error, right? If you think of all the products and all the places in the world. Our view generally is that AI will enable pretty much all flavors of credit everywhere because the economic advantage of it doing so is so huge…so if you’re sitting where we’re sitting and you’re going, wow, we have what we feel is a compelling advantage in this one category. It’s gonna take a lot of work to port into more categories and take it outside the US, etc, but at the same time even the two categories we’re in right now, which is unsecured personal lending and (increasingly) automotive lending, which is our newest category – we could grow into those for the next 5 years without even coming close to running up against a TAM ceiling, if you want to call it that – but the bigger question for is, yeah you might be able to grow into these two categories because they’re already enormous, but are you just gonna vacate the rest of it and just let someone else fill in the blanks in other markets, or do you want to plant flags and establish yourself much more broadly? So you get into this question of like, you can do things incrementally or you can place some big bets and say look, We want to be the biggest player in AI lending in the world. And that player is necessarily gonna be an extremely large company in 10 or 20 years operating globally and in many flavors of credit. So that’s the kind of thing where we sit here and say look, we’ve had some success, we’ve gotten where we are, but let’s not be incremental. The opportunity for AI in lending is so enormous, we need to leverage our strength into becoming what we think will be one of the biggest fintech companies in the world.

Just thought it was really cool to hear him lay it out. I really like the approach. We’ve done well with companies that are in land-grab situations where the only constraints are how fast the companies themselves can scale up and grow. That’s kind of what AI lending seems it could be.

Bear

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I know this is conjecture but if I use a little imagination, where I see the big opportunity is non-traditional bank peer-to-peer lending. Savers currently make close to zero but it’s hard for a saver to lend money directly, especially because there is no way to measure risk. If UPST can come up with a platform to match savers with borrowers and provide value for both parties, that is probably an enormous opportunity, especially considering risk can be decreased by creating pools of credit.

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big opportunity is non-traditional bank peer-to-peer lending

I agree. The model already exists on a smaller scale and without AI. https://www.kiva.org/

KC

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Kiva is a charitable endeavour and lenders don’t earn interest on the loans they make, so I’m not sure that this is a comparable model.

Alex

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I agree. The model already exists on a smaller scale and without AI. https://www.kiva.org/

Don’t disagree with the thought but the example is probably off. Kiva is for the unbanked in less developed countries where I doubt you will have enough data points. I think the better example is the OG Prosper.

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“We’ve done well with companies that are in land-grab situations where the only constraints are how fast the companies themselves can scale up and grow.”

Good timing Bear! Upstart today issued a press release showing their scaling up efforts, partnering with NXTsoft a “market leader in secure, comprehensive and complete API connectivity.”

While I don’t understand the technology well, this quote from the PR seems to sum up the goal of the partnership:

“NXTsoft is excited to partner with Upstart to streamline and scale their ability to onboard new partners…"

Sounds good to me!

Best,

Brian

Today’s PR https://ir.upstart.com/news-releases/news-release-details/nx…

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This interview with Girouard was originally posted on June 13. I first listened to it within a day or two of that. As I listened to it, it occurred to me that Upstart is postured to be a runaway investment like Zoom was last year.

But the primary difference is that Zoom’s growth has an upper limit and that limit has pretty much been reached. They’ve got nothing to keep the momentum going. Upstart has a virtually unlimited TAM. Like Girouard said (and Bear quoted) their current primary market, unsecured personal loans amounts to a rounding error when it’s stacked up against all the potential lending categories.

If I could hold only one stock, it would be Upstart. They have no viable competition with a business model in which first mover is an enormous advantage. And even if they did have competition, the market is so large there’s room for several competitors to be very successful.

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I know this is conjecture but if I use a little imagination, where I see the big opportunity is non-traditional bank peer-to-peer lending. Savers currently make close to zero but it’s hard for a saver to lend money directly, especially because there is no way to measure risk. If UPST can come up with a platform to match savers with borrowers and provide value for both parties, that is probably an enormous opportunity, especially considering risk can be decreased by creating pools of credit.

There is already a company doing this called LendingClub. The company has not been doing well lately, and the stock has been in a downtrend for years. I notice though over the past year it has gone up significantly despite continued deteriorating financial results. I agree it’s a good concept, but it doesn’t seem to be working out financially.

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But the primary difference is that Zoom’s growth has an upper limit and that limit has pretty much been reached. They’ve got nothing to keep the momentum going. Upstart has a virtually unlimited TAM. Like Girouard said (and Bear quoted) their current primary market, unsecured personal loans amounts to a rounding error when it’s stacked up against all the potential lending categories.

brittlerock,

its all true and happening rapidly.

In todays announcement Upstart describes its efforts to expand it banking connections to whit,

BIRMINGHAM, Ala. & SAN MATEO, Calif., June 23, 2021–(BUSINESS WIRE)–NXTsoft (nxtsoft.com), the market leader in secure, comprehensive and complete API connectivity, and Upstart (NASDAQ: UPST), a leading AI lending platform provider, today announced a partnership that will enable Upstart to more efficiently implement its all-digital AI lending platform to any U.S.-based financial institution.

the full press release is here:

https://www.businesswire.com/news/home/20210623005369/en/

This is a follow on to Upstart recent announcement of an agreement with the Nat’l association of Credit
Unions.

There have been a variety of comments on the Board about potential competition to Upstart from banking institutions. The press release offers a perspective on this question.

Upstart was created to help solve the massive inefficiencies in the credit market. For thirty years, the industry has relied on credit scores and a handful of variables to make lending decisions, resulting in very inaccurate assessments of a borrower’s true credit worth. As a result, only 48% of consumers in the U.S. have access to prime credit even though 80% of them have never defaulted on a loan. This disparity is a direct result of the limited information available to financial institutions to make better credit assessments.

In other words Upstarts business exists BECAUSE banks have been unable to gather enough of or the most critical data and have been unable to apply adequate and effective analysis to the process of making lending decisions. Upstart isn’t very concerned about competition from bank or credit bureaus and I believe they should not be.

I have added significantly to my Upstart stake which is now trading at 20% above my average cost per share. It has a huge TAM and a seemingly clear field. Adding more will bring Upstart close to my largest holding and adding more will require me to break into my ETF piggy bank because there is nothing I care to trim at this juncture in my 10 component hypergrowth portfolio…

As always nothing is straightforward. How are others faring?

cheers

draj

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This is a very crude measure to track loan origination but interesting nonetheless. Go to google trends and search “upstart loan” and then compare to “lending club loan”. Over 12 month and 5 year time frame the difference is stark. One trend is growing just as much as their earnings suggest while the other is stagnated just as their poor earnings indicate.

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Jumping on this UPST thread…Full disclosure, I completely missed the boat on Upstart early, even missing Saul’s, “I’m buying all I can of UPST in the $80s” post. (in my defense, I was on vacation :blush:). Bear, Gaucho Rico, and others saw UPST’s attractiveness well before I did. That said, I really think UPST has some legs even now, at current valuations, and I’m doing my best to not “price anchor” on the ~$80s.

As I’ve written before, when I evaluate a company, I typically look at revenue growth, recurring revenue, and then gross margin, then if that checks out, I keep evaluating. So I put UPST through that filter and here’s what I got…

Revenue growth: UPST has this in spades: they hit 90% YoY and are guiding towards 157% growth for this coming year, and guiding 28% sequential growth for the next quarter, and will likely beat both these considerably.

Recurring Revenue: technically, none of UPST’s revenue is recurring in the same way that some of the other companies that we follow CRWD and NET have recurring revenue, however, UPST does have differentiators that likely drive repeat business from the banks (customers)they serve. So even though they don’t quantify their recurring revenue, they have their version of it and it’s good enough for me to keep evaluating.

Gross Margin: I typically like to see something greater than 70%, but UPST doesn’t explicitly call out gross margin in their announcements, rather, they reference contribution margin which is different than gross margin. Gross Margin measures the amount of revenue that remains after subtracting costs directly associated with production whereas contribution margin is a measure of the profitability of various individual products (like it accounts for “product costs”. To calculate Gross Margin %, you really need to identify the “Cost of Revenue”. I always try and go directly to the source for financial information, but when that source doesn’t have it, I look around. Saul graciously pointed out that Seeking Alpha estimates it under “Financials”, and for the quarter ending in March 31, 2021 (the latest reported quarter) it gives Total Revenue as $121M, and Cost of Revenue as $17M and Gross Profit as $104. $104 divided by $121 gives you a Gross Margin % of 86% which is well above 70%!
Here is the link: https://seekingalpha.com/symbol/UPST/income-statement#figure…

Something else that was not clear is UPST’s TAM… On slide 6 of UPST’s investor presentation, they report total mortgage and credit card originations ($1.3T), Total auto loans ($626B), and Total unsecured personal loans ($93B), sort of as proxies for their universe of opportunity.

Here is the link: https://ir.upstart.com/static-files/ac83e54b-34ba-4f83-bdbb-…

If we do a quick ratio, we see that UPST made $121M on ~$1.7B of loans or about 7%. If we apply 7% to $93B, you get $6.5B annually, or about $1.6B/quarter. Now that assumes that UPST is getting all of the unsecured personal loans, which is not a reasonable assumption. Let’s assume UPST gets 20% of the unsecured personal loans market: that equates to about $1.3B of annual revenue or $326M of revenue per quarter, a little over twice the revenue they have today. And that is probably what they are seeing/modeling now, (which accounts for them addressing larger markets and growing their market share of those markets), which suggests a 200+% YoY revenue CAGR…

Now there is some risk with UPST’s revenue, especially if the economy shuts down again. But even if interest rates begin to rise, while not ideal, the loan market is so huge that even if it cools down some, it’s still a very large number that UPST could continue to penetrate.
I hope this helps other understand UPST.
Thanks,
Gary

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I like what UPST is doing and have a small/medium sized position from ~$100. The company mission is strong and the CEO is a visionary in my opinion.

There is alot of bullish-ness floating around on this company. I think the enthusiasm needs to be tamed some. This company will most likely never trade at a high multiple relative to it’s growth vs. other SaaS business. There is no recurring revenue, and there are big debates on how well their AI algos actually can predict the risk of default on their loans because nobody really knows if they work or not. There will always be fear that if the economy turns south and credit dries up/their loans have risk of defaulting if the AI isn’t good and it will cause their rev to fall off a cliff. Just some thoughts… I would not make this my largest position in the group of CRWD/NET/DDOG.

Long UPST
Bnh

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Bear said:
where the only constraints are how fast the companies themselves can scale up and grow. That’s kind of what AI lending seems it could be.

Recently I found an article written by UPST CEO well resonates this.

https://review.firstround.com/speed-as-a-habit

Zoro

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Excellent article. Thanks!
Also this one:
https://review.firstround.com/fresh-off-ipo-upstarts-ceo-sha…

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Thanks!

Some great highlights from your shared article. CEO Girouard:

“Right when I left, I got introduced to Paul. We got on the phone, and he was this kid in New York who was building something similar to what I was thinking about. I knew he was in Peter Thiel’s 20 under 20 fellowship, but I remember he was telling me about how his parents came from China, and I was asking how old they were, and I had the realization of, ‘Oh my God, I’m older than your parents,’” says Girouard. “He emailed his whole model to me, which was an Excel macro. And I remember thinking, 'Wow, this guy must trust me. Then on a Friday, he flew out to hang out with me for half a day to figure out if we could work together — and he ended up flying back to New York and coming back with his possessions on Monday.”

-What luck!

“I remember just fast activity and intensity. Over a Christmas holiday, I talked to 20 different banks about working with us, just smiling and dialing.”

-That’s the ‘speed as a habit’ execution at play.

“The second is my philosophy of management by exception. With Upstart, I’ve had this view that I’m trying to build this thing that’s going to be around long after I’m gone. So I feel like decisions should be made as far down in the company as they can. I should be doing things that only the CEO can do. If I have to do people’s jobs for them, I always ask them why that is. If I have to make a decision that I think somebody on my staff should be able to make, it makes me wonder why that is. And it doesn’t mean that I’m looking to just kick back and read TechCrunch or the First Round Review. Rather it’s that I want to be thinking about how the company is operating. The management by exception construct is that I’m trying to build this engine that just runs really well. I want to be observing it in motion, and I want to say, ‘Did that happen the way it’s supposed to happen?’” says Girouard.
“That machine requires incredible talent at the executive level. It requires good direction and coordination. And it always has to grow and mature and get better at what it does. I want the people who work for me to feel stretched and to be in a place where many of them could take my role, and the company really wouldn’t miss a beat.”

-Wow!

“for whatever reason, people didn’t seem to believe that you could apply a modern cloud computing and data science to create a dramatically better product,” says Girouard.
“People would say, ‘Yeah, is your lending model really going to be any better?’ It’s almost like everything they’ve learned about computer science and the potential of the software, they threw out the window when they looked at a lending-related business and said, ‘Nah, that’s just a human instinct business. All the software and data in the world won’t make a difference.’ I feel like that’s the way some in the industry to this day still think about it,” he says.

Perhaps that’s one reason why the stock is still so volatile. If they continue executing, it won’t be long before the skeptics are turned believers.

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