I’m extremely frustrated in that I had composed a rather lengthy post on this subject which somehow just got blown away when I poked the “Submit Message” button. But, oh well. Here’s the condensed version.
Upstart will post earnings Feb 15 after the market closes. They provided revenue guidance for the present quarter with the high end of $265M. I am expecting a beat at least on a par with 3Q21, 6% yielding revenue of $280.9. That would be sequential growth of 23% and 223% for the same quarter a year ago. If I’m right, those are very good numbers. Yes, I know, analyst’s consensus is below the high end of guidance. I think they’re wrong. CEO, Dave Girouard said something to the effect that Upstart will blow everyone away this year. I don’t think he was just blowing smoke. I think he meant it. I think we will see the beginning of that this quarter.
But to be honest, that’s not the only reason Upstart is 8.5% of my portfolio. Unfortunately, the aforementioned lengthy, lost post provided my arguments for holding this large a position. I’ll try to summarize.
A scientifically validated risk assessment model disrupting the 30 year old FICO score which is based on a weighted average of five “common sense” components.
Upstart does not lend money. They do not compete with banks. They partner with banks and collect a fee for service.
An unassailable moat. Not just the AI model, but having pre-addressed regulatory hurdles.
- Hidden prime borrowers of personal loans
- Competitive rates for actual prime borrowers of personal loans
- Purchased auto loans
- Refinanced auto loans
- Micro loans (disrupting payday lenders)
- Web interface for Spanish speakers
- Mortgage loans (on the horizon)
- Business loans ???
70% of personal loans fully automated obviating the need for borrower to produce copious documents and underwriters to process the documentation.
There’s more, but those are some of the more important ones.
But yes, of course, there’s a downside. Here’s why my position is only 8.5%.
- No ARR. No subscriptions, no recurring revenue. Every quarter they start over, so to speak.
- Cross River Bank and Frontier Bank originates about 84% of their loans despite a growing number of partner lending institutions.
- Credit Karma accounts for about 45% of their traffic
- Fraud, they beat back an organized fraud attack in Q3, but it was a drain on resources requiring a lot of manual effort.
- Rising delinquency rate of Upstart loans. This was anticipated and previously addressed, but it is a valid concern. But, the target is profitability, not zero delinquencies.
There’s more, but that’s enough . . . Despite the downside, I think the positives significantly outweigh the negatives. We’ll see if I’m right when they report. If I get disappointed, I will likely sell about half my position and buy BILL with the proceeds. I had kept my position in BILL very small because I had difficulty understanding the company and it seemed a bit like Lightspeed to me (which I also had trouble understanding).
If you want to learn more about Upstart let me suggest you read the linked document below. This link was to posted to the board previously, but I don’t recall who posted it. I am appreciative, but unable to give credit.