Like many here, I reduced Upstart after hours on Nov 9 when their disappointing numbers came out. Unlike most, I reduced it to 0% and I haven’t bought any back.
Why was the quarter such a disappointment?
Some of us were expecting Upstart to do $250m (https://discussion.fool.com/upst-current-beliefs-34965083.aspx) or $261m (https://discussion.fool.com/i-posted-my-math-on-my-assumptions-o……and) then there were those like me who actually expected $280m or more. They turned in $228m – but the disappointment did not stop there. If the beat was simply worse than we expected, we could have admitted that we just got carried away, and/or that the huge stock price run to $400 got us overexcited. The thing is, I think Upstart was disappointed with this result.
Here’s the cadence of their FY guidance:
Q1 update: 600m (100m raise)
Q2 update: 750m (150m raise)
Q3 update: 808m (58m raise)
Who does that intentionally? How could that be seen as anything but a disappointment? They trained us to expect huge raises and then they ran into a wall and couldn’t give one.
This highlights several things I don’t want in an investment (Yes, we knew some or all of this, but we were willing to overlook it as long as revenue was exploding…it did not explode in Q3 and we don’t know the future.)
Lack of visibility. They are simply unable to know what even the next quarter will look like. They’ve been open about this, explaining that they will be conservative, and sometimes they will beat by a lot if things go well, and sometimes they will beat by less if things don’t.
Vulnerability to external forces. Whether fraud attempts, or lower demand for personal loans (or lower amounts), or changes in monetary policy, etc…things they have no control over will have outsized effects on them. Consider Cloudflare or Datadog – in a recession or huge panic like Q2 of last year, they might see a slight slowdown, but Upstart experienced at least a temporary Armageddon – revenue was down 70%+ sequentially in Q2 2020.
Because they have almost no recurring revenue, the law of large numbers looms very large. This is what I talked about a year ago with Peloton when it was at $125/share (it’s at…checks notes…$51 now): https://discussion.fool.com/why-i-reduced-pton-again-34660974.as… But Upstart has a huge TAM! you say. Great. They may grow for a long, long time – but that doesn’t mean they can stave off the slow down. Jon estimates they can maybe pull in close to $200m in 2022 from auto (https://discussion.fool.com/what-i-gleaned-from-the-article-upst…). That would be good for just under 25% revenue growth – in other words, they’ll still be dependent on personal loans if they hope to keep growing at 100% or anything close. (I predict they won’t be able to…they might even have to guide sequentially down for Q1. Then for Q2 to approach 100% YoY they would have to do close to $400m for the quarter.)
Sorry, but I just don’t want to be invested in Upstart. Like Peloton still might, Upstart’s brand may become huge someday…but getting there will be difficult and may take longer than most people think. I’m rooting for them, but not with any of my portfolio.