UPST: potential upside for Q3 report

Investment Analysis Clubs Saul’s Investing Discussions
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Some reasons for potential Q3 UPST report upside.

  1. High frequency/alternative data proxies of borrower traffic/activity for UPST in Q3 appear robust.
    The data I’ve tracked for Q4 so far is also strong, which means FY2021 and Q4 guidance (for whatever it’s worth) may also be lifted.

*2. Notable insiders have NOT sold a single share outside of their automatic rule 10b5-1 trading plans that were adopted several months ago in May.
It could be construed as ‘bullish’, they know business is strong and have decided not to sell any additional shares - even when UPST shares reached $400 in October and gained 20x since IPO.

  1. No FICO minimum since September, at least by Finwise bank, which originates about 30% of loans for UPST.

**4. Expecting an increasing number of repeat borrowers contributing meaningfully to revenue.

***5. Spanish personal loan platform release on Sep 1, expands hispanic/spanish speaker TAM.

****6. Recent lending competitor earnings and loan aggregator earnings indicate a favorable personal loan growth environment in Q3.

  1. Favorable personal loan seasonality at Q3 time period each year (peaks are typically in July: https://trends.google.com/trends/explore?date=all&geo=US…)
    Also, average personal loan size on origination fell from Q1 to Q2, but perhaps it may rebound or stay steady in Q3?

  2. Macro environment still turning favorable as stimulus fades and reopening continues

  3. Record bank deposit high is spurring increased bank appetite for lending, plus continued loosening of partner FICO requirements as indicated by leaders in lending podcasts. Bank partners may be increasing their demand on the UPST platform.

  4. Increased number of bank partners since Q2, at least 7+ are known (Telhio, Patelco, WSFS, WPCCU, Abound, Four Corners, Berkshire Hills)

  5. Upstart reviews and customer tweets complaining of long customer service hold times supports the idea that business is booming.

  6. Doubling of staff at Columbus HQ2 and increased linkedin headcount/job list on website likely means management anticipates business to still expand like crazy

  7. Possibility of a further increase in conversion rate due to further positive modifications to their AI models or automation rate increasing.

  8. Possibility of an upside surprise in auto refi revenue that contributes meaningfully to Q3 revenue. They only did 2000 auto refi in first half of 2021, but that might be due to the fact they hadn’t rolled out to most states until end of Q2.

  9. Recall that there was a convertible note offering in August that added $645.5M in net proceeds to an already existing 506M cash = over $1B in their warchest. Possibility of an acquisition or official announcement entering into home lending?

  10. Unknown probability, but there is always a chance of a surprise big bank announcement on earnings call.

**Per Q2 conference call: “The number of repeat loans on our platform more than doubled from the first quarter to the second quarter of 2021.” This trend may have continued within Q3.

***UPST launched spanish platform on September 1.
In the 2 months since then, there have been 9 spanish language trustpilot reviews. https://www.trustpilot.com/review/www.upstart.com?languages=…
Prior to Sep 1, for the 2 months from July-Aug, there was only 1 spanish language written review.

****Lending Club reported 14% QoQ origination volume growth.
Lending Tree, a loan aggregator, reported that Q3 personal loans revenue of $33.8 million increased 34% QoQ over Q2 2021.

*My detailed look on insider transactions showing that since August, no insiders are selling outside of trading plans adopted back in May.
CEO/cofounder Girouard: sold 137498 shares on 9/1, 10/1, 11/1 (identical number of shares sold on the 1st of each month).
No other shares were sold outside of this plan.

Head of product/cofounder Paul Gu: sold 155000 shares on 9/15, 10/15, 11/15. (identical number of shares sold on the 15th of each month)
No other shares were sold outside of this plan.
Also, Paul Gu acquired 40000 more shares through option/RSU exercise without disposing of any of them on 10/26, 10/27. This is the same thing he did on 7/13 and 7/14! And the same he did on March 5 (although was still in IPO lockup anyway).
Each time he has done so, it has marked a ‘near term bottom’ to the stock price prior to skyrocketing after the earnings report.
The idea here is that he obviously knows how the business is performing as an insider, and it is in his longer term advantage to acquire shares on any price “dip” but not sell them in the short term, as he only gets taxed on the exercise date price. From my understanding he is immediately taxed on the exercise date price for the calendar year as ‘ordinary income’.
Therefore he takes on risk that the stock price drops below exercise date price but would still owe that same amount of tax - so he has to be confident that the stock price won’t fall.

General counsel Nicoll Alison: sold 22500 shares on option exercise on 8/18, 8/25, 9/1, 9/8, 9/15, 9/22, 9/29, 10/6, 10/13, 10/20, 10/27, 11/3 (identical number of shares sold on the Wednesday of each week). No other shares were sold outside of this plan.

Dan Loeb of Third Point: This is the single largest shareholder of Upstart.
UPST is also his single largest hedge fund position (comprises over 10% of his fund).
His average cost basis is in the $5 to $6/share range.
He sold 7% of his stake in August. He has not sold any more, even when share price hit $400 earlier this month.
And this is all despite having gained 70x on his initial investment!
It’s very possible he hasn’t sold more because he knows Upstart’s business has continued to perform phenomenally in Q3.

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Thanks jonwayne, really helpful as ever. I would also add what I believe will be the single most impactful action they take to smash Q3 numbers. Continuing to over invest in S&M. They highlighted this in their Q2 ER as the main reason (from several) for their over achievement and stated they would continue to over invest in S&M during the second half of this FY.

At some point they will aggressively “push/expand” their auto re-financing and this has surely got to be massive. It is a multi $T opportunity for them. I just don’t know when they will be ready to “hit” the button, hopefully soon.

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Small addition:
Nicoll Alison sells everything she can (holds 4M worth of shares and sell more than that every Wednesday). Effectively she holds only a weekly check, which is close to nothing.
Paul Gu holds 100M worth of shares, however he automatically sell more than that per 3mo. Effectively he holds only a quarter check.
Girouard, Gu and Alison sold ~286M worth of shares from 8/18 to 11/3. It’s automatic but still significant amount. Q2 sales were 194M.
I don’t think Gu and Alison are bullish in this case.
Girouard holds 3.6B worth of shares. Only he is actually bullish.

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Of course, we are all aware that a TON of upside is already baked into the current share price…

In all the time I’ve been following this board, I can’t remember a stock where not just the numbers were great, but every single datapoint or anecdotal evidence is pointing in the right direction, with literally no controversy to speak of. So much so that I’m scared about the issue we could have overlooked - it just nearly looks too good to be true.

Just to remind us of SOME risks (albeit none of them are likely to be featured as part of the earnings release:

  • they could always (again) be challenged on unfair discrimination as result of their decision processes, and any such challenge could slow them down or limit the opportunity
  • there’s an at least theoretical risk that the AI mechanism is less robust in handling the impact of unforeseen economic or other crises - FICO has just been around for a lot longer and weathered more difficult times.

UPST is now my largest holding by far (which tells you I don’t worry too much about the above risks), and I fully expect Upstart to deliver, but I’m also aware that they absolutely have to crush official guidance in order to maintain the current share price or support continued upside.

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holds 4M worth of shares and sell more than that every Wednesday

Sorry for being obtuse but how can you sell more than you have?

Effectively she holds only a weekly check, which is close to nothing.

I simply don’t understand what this means. Can you explain?

The same questions hold for Paul Gu : Paul Gu holds 100M worth of shares, however he automatically sell more than that per 3mo. Effectively he holds only a quarter check.

Again, selling more than what you have?

Anyways, some worry about the valuation and that a lot is baked in the price. I do too. But UPST is growing a lot faster and from a higher base than, say, NET, yet is valued twice as cheap. And I believe their technology is inevitable.

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Sedibald,
They receive stock shares as options as part of the compensation (my guess). Allison holds 4M worth of shares. She receive 7M worth of shares as an option and automatically sell it every time. Similar for Gu. They are not selling more than they have (they are not shorting).
If my response considered OT than mods please delete it.

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RMMM,

I’ve always had trouble calculating how many shares insiders hold. One thing I have found, however, is that I can’t trust data aggregation sites. Not sure where they get the numbers from but they almost always show a lot less than reality.

For example, one site I use to track insider sells and buy is

https://www.secform4.com/insider-trading/1647639.htm

The data you provided matched what this site says. I didn’t believe it so I went to SEC’s site to gather actual data.

Let’s look at Paul Gu from the official Proxy Statement, page 29

https://www.sec.gov/Archives/edgar/data/1647639/000119312521…

As of March 15, 2021,

He has 2,003,542 shares (footnote 4: Consists of (i) 210,000 shares held of record by Mr. Gu and (ii) 1,793,542 shares subject to options exercisable within 60 days of March 15, 2021 held by Mr. Gu.)

Based on page 25, Paul Gu has another 2 million shares of options to be exercised in the next decade. You can say Paul Gu has an equivalent of 4 million shares on March 15.

But from the data aggregation site, it would look like he has sold about 650k units of shares and only holds 500k shares now (this adds up to a total of 1.1~1.2M shares) which is far shorter than the 4M shares+options figure based on proxy statement.

https://www.secform4.com/insider-trading/1647639.htm

My 2c: There really isn’t much information one can get from insider sells alone - bullish or bearish. It certainly has a lot less impact than actual business performance. They are mostly noise for investors.

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Yep.

If you want authoritative Company data, use what the Company files with the SEC (sec.gov).

Don’t forget to read the footnotes.

Rob
Rule Breaker Home Fool
He is no fool who gives what he cannot keep to gain what he cannot lose.

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