With the Q3 results, it now becomes increasingly more clear the fruitless nature of adding more bank partners into the Upstart Referral Network. Partner additions keep growing, and the number of loans per partner keeps shrinking.
In the 10-Q disclosures, 88% of loans by # still flowed to CRB and Finwise on a 9-month basis, which implies ~84% on a quarterly basis. At first glance this seems like a small improvement based on the prior trend around 88-90% levels, but when you factor in the massive ramp up of bank partners from 42 to 83 over the past year, and factor in the shrinking number of originations, it implies a massive decline in the average number of loans per real bank partner, ignoring the CBR and Finwise conduit structures. Even if you adjust the number of bank partners by factoring in a 2-quarter lag to get up and running on the platform, it is the same conclusion:
Adding more bank partners is just adding more mouths to feed off a shrinking pie of desirable borrowers. The incremental cost of adding bank partners is now likely negative as fixed costs of implementation and enterprise sales staff probably vastly outweigh any possible benefit of stuffing more partners into the channel. I’ve been saying this for a while but the latest set of numbers only makes the reality more stark.
That is interesting point.
Although when the tide does turn, and macro improves and # of loans increase as a result, it would probably be better to already have those partners in place.
The saying goes “you can’t cut your way to growth”. Or as SPG and other companies approached covid, you gain market share when things are weak.
I actually philosophically agree with this, in the sense that why are we ok with buybacks at peaks and not valleys? Unless you think a company is literally going to bankrupt themselves, a downturn can be an opportunity to distance oneself from the pack.
Understand your point though.
Dreamer
This viewpoint would seem to assume that the bank partners are competing with each other. These credit unions ( I believe mostly credit unions and few banks) are very local and are not competing for the same customers.
I do agree that the payback of the cost to add a new partner is likely lengthening. But, this situation will not last forever. When the macro moves to a better point in the cycle, these new partners will contribute. This is not a story for this quarter or next or next. This is a story and situation for when interest rates start to come down, or more to the point, when capital becomes more available.
UPST’s time has not yet come. I still believe that. On the other hand, $13.9999 was a price worth paying, IMO. To invest in UPST one has to believe that the platform works throughout the credit cycle and that it works for auto and small business loans as well. I do think that my p/e of 20 is not correct. My logic here goes back to my experience with LGIH, the entry level home builder. Also a cyclical industry. It was a Saul growth 1yrpeg story. The p/e’s ranged from 7 to 16 as I recall. I think that range needs to be plugged into a UPST model–which I have not yet generated.
KC, who just got power restored so does not know what happened Thursday. Jeez, spent the day counting chickens and cows. It is true, there is always a bull market somewhere.
I am a little troubled by this:
"“KBRA assigns a preliminary rating to a single class of notes issued by SoFi Consumer Loan Program 2022-1S Trust (“SCLP 2022-1S”), a $440.0 million consumer loan asset-backed securities transaction. Credit enhancement is comprised of overcollateralization, a cash reserve account, and excess spread. SCLP 2022-1S has an initial credit enhancement level of 26.98% for the Class A notes.”
Why is UPST not able to float an asset-backed securities transaction? Or, is it good in that the loans are being purchased without the need for ABS? Or is it good just for the fact that ANY company is able to securitize their loans? Dunno.
KC, basking in the glow of artificial light, miracle of civilization.
Wait until KC discover air conditioning…
UPST just can’t catch a break.
Auto was supposed to be a catalyst, but carmax and others imploding due to higher-cost of financing plus general sense of weak economy coming (less buyers period).
New car prices have been a joke for past few years.
I honestly don’t understand how/why people pay as much as they do (either cash or car payment, plus high insurance costs due to increased replacement cost of these new cars factored into premiums, etc).
I am a fairly simple guy when it comes to cars though. I haven’t bought a brand new car since 2000. Always used. My current car interior still nice, nice sound system, runs smooth, heat and air work great, plus third row for all the kiddos and their occasional friends or for hauling all our crap for family vacations, plus bike rack.
Would I like to drop the kids off at school in a brand new Range Rover? Sure! But not worth it to me to spend money on that stuff.
Anyway…that is a tangent. Point is, the higher rates and soft economy should mean less total loans, which has already been the trend for UPST, and this trend is not a friend and appears to continue for a while.
Maybe they turn the corner in Q3 2023? Which would be possibly forecasted on ER call around Aug. So is it dead money until then? How low can it go?
Already near 52 wk low now. I am tempted, and it is probably fine long-term if you assume they stay in business over the next year. But thinking more bad news to come on at least the next ER call, if not next 2 ER calls. Will see.
Dreamer
- Probably
- Yes
- Lower
I will most likely be at my 5% of portfolio limit come Saturday. I have those $14 puts plus I bought a smidgen at $13.35 today. I am still at 54% cash. That ol’ denominator keep on a-shrinkin’. Bought some GLBE today. Splurged on-hold on to your hats–10 shares of ESTC yesterday. Just a spending fool.
So, no, market-wise things are not getting better until there is bad economic news which, due to the stubborn employment strength, will take further tightening to convince the Fed, so we will have a recession and you are right about the high interest rates and cyclical auto market. So I continue to position myself. Looking for 50% by year-end. 90% by end of March.
I had VFC in the green a while a go. No all red except for the puts.
UPST $13.27. Help me out a little, Dreamer. Just a few shares. Won’t hurt…
KC
totally funny…I also bought some GLBE and UPST about an hour ago.
started thinking about DOCN a bit, if it can get closer to $20.
Dreamer
You must have bought at $13 +/- $0.10. Nice. Didn’t hurt, right? And you didn’t, like, inhale.
I now own a bigger slice at $14 minus $0.20 premium… $13.80: a calculation my pre-coffee brain can handle. My CRWD calls expired so I can subtract another $0.10…$13.70.
DDOG puts were unloaded on me, too, but I had a strangle on so I’m up $0.45/share on that. I’ll leave UPST to stand on its own legs rather than prop it up with DDOG riches. Do like my $13.35 small purchase better than $13.70 but the new battle cry is 2023! or is it 2024!?
$12.88 is the new 52-week low. How low can it go?
KC
I got in just under $13. Small allocation though.
I think i would like a bmr present to run up for xmas break, then i pocket some gains and/or increase the shorts.
I still expect a capitulation, but no idea on timing. Do think the bottom hits at some point in 2023.
Enjoy the holidays!
Dreamer
Obviously, I didn’t know what day it was when I posted above about having those options put to me. So, a wee gloomier on this “now I know it is Friday” market opening. I’m sort of doubling down. I have orders at $12.88 and $12.01. I’ll have the $13.80 put to me and if the day gets stinky, I’ll average down with those orders. “How low can it go?” All together now, “LOWER!”
Season’s Greetings, All from wet, soggy, gray, chilly-for-the-tropics outpost.
KC
I put in a few limit orders when Nasdaq down almost 1%, but market reversed with my final keystrokes (of course).
Going to leave them there. Let’s see how chaotic today’s action is. I have crap to do, dontcha know…getting ready for fun weekend!
Dreamer