Upstart’s price action has been ugly. I own a large stake. My thoughts?

Growth is lofty & estimates are rising.

Margins are excellent & expanding.

Optionality with auto/business/micro/home loans isn’t factored into guidance. Pure upside.

32 partners vs 10 in 2020. These partners continue to drop the FICO minimums they’ve used for decades in favor of Upstart’s algorithms.

& it trades for 55X forward EPS estimates that it’ll likely beat.

The company is thriving. Not worried about the stock.
Joey Hirendernath's avatar
"continue to drop the FICO minimums they’ve used for decades in favor of Upstart’s algorithms" - What is favourable about having lower credit score customers? Are these not lower quality?
Bradley Freeman's avatar
@joeyhirendernath dropping meaning eliminating & using Upstart’s method of quantifying risk instead not meaning lowering their acceptable FICO scores. Sorry for the confusion!
Joey Hirendernath's avatar
@stockmarketnerd Oh that makes sense, thanks Brad! Have you ever written something longer form about Upstart?
Bradley Freeman's avatar
@joeyhirendernath coming in January! 🙂
Gaurav Kotak @ Fincredible's avatar
Curious. What gives you confidence their algorithms are significantly better than FICO scores over the long term?
Joshua Simka's avatar
@gkotak I'm a major $UPST bull and I'm curious what @stockmarketnerd will reply but I actually think the answer to this question is: we don't know yet, and we'll need a few years to know for sure that they really are better.
Bradley Freeman's avatar
@gkotak Combination of a few things. A Consumer Financial Protection Bureau study highlighted in the S1 indicating they lower APR by 17% while raising approvals by 27% without impacting loss ratios for bank partners. So larger and more profitable loan books from banks, credit unions and institutions according to 3rd party data not from Upstart internally. Also Kroll Data indicating their pooled loans outperformed loss ratio expectations for institutions. And then all of that partner data I presented above with the partner roster tripling in a year (with now adding one car dealership per day on average to their new auto loan business). 4 banks have now dropped the FICO score they've been using for 40 years. The management team's sparkling track record also gives me more comfort.
Bradley Freeman's avatar
Trying to copy paste Customer Bank (an Upstart partner) data on its impairment charges outperformance vs. the industry and also that outperformance growing during the pandemic credit shock but doesn't seem to be working
Joshua Simka's avatar
@gkotak, I think the premium $UPST investors are paying is less about the quality of its margins or business today and more about the sheer size of the opportunity as it moves now into auto loans and, very soon, mortgages.
Gaurav Kotak @ Fincredible's avatar
@tomato Fair, but imo premium only relevant if tech-enabled solution they offer is significantly better. that's what everyone said about $CLOV compared to $UNH and $LMND compared to 10s of good insurers. Not saying there isn't any value, but some of the valuation suggests these upstarts will completely upend the market, which I'm skpetical of
Joshua Simka's avatar
@gkotak Yep—I'm in total agreement. This one is priced like a total market disruptor. I think it COULD be—there are some promising features—and that's why I'm interested in owning some of this business but I'm sizing my position accordingly and fully prepared that it may not work out.
Gaurav Kotak @ Fincredible's avatar
BTW, I've stayed away from these insurance tech companies so far and even shorted Lemonada for a while. Generally, I think there is some differentiation in tech when it comes to underwriting or customer services but it's still marginal (more hype than substance) and doesn't deserve that 50X+ premium that some of these companies have as compared to the 'traditional insurance' vendors. Ofc, at the right price it could be interesting.
Bradley Freeman's avatar
@gkotak Upstart isn't an insurance-tech company more so next-gen credit company . But I do also own some Lemonade. And I agree it has been ridiculously expensive up until very recently. I've had to keep the position extremely small until these last several weeks of volatility when I've been accumulating pretty aggressively. 20X forward GAAP gross profit (not the adjusted GP number they like to offer) so not nearly so crazy at it has been in the past. Pretty far from profitability but the company is 5 years old so that's really not the focus right now -- entirely focused on more market share. Over a billion on the balance sheet and an LTV/CAC over 2X and the lofty growth all help make that a supportable philosophy for me.
Gaurav Kotak @ Fincredible's avatar
@stockmarketnerd 20X forward GP is totally reasonable if you believe their differentiation is significant and sustainable in the long run. E.g. I pay that for $ABNB (I think around that multiple) ATM, I don't believe that to be the case, but over time will try to learn more.

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