No. of Recommendations: 16
Upstart Wikipedia notes:
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Upstart is an AI lending platform that partners with banks and credit unions to provide consumer loans using non-traditional variables, such as education and employment, to predict creditworthiness.
The founding team includes Dave Girouard, former President of Enterprise Google, Paul Gu, a Thiel Fellow, and Anna Counselman, former Manager of Global Enterprise Customer Programs and Gmail Consumer Operations at Google.
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https://en.wikipedia.org/wiki/Upstart_HoldingsThey were founded in 2012 and embarked on the current business model in 2014. They espouse some high-minded ideals about improving the fairness of lending and opening up access to affordable credit by better calculating the risk of loaning people money. The business of loaning people money is enormous, so if they can significantly improve the process for both lender and borrower, as they claim, there is a lot of money to be made by them.
Their 'About' page on their consumer facing webpage has some interesting comments:
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- Our mission is to enable effortless credit based on true risk.
- Four in five Americans have never defaulted on a credit product, yet less than half have access to prime credit.
- The results ... from the access to credit comparison show that the ... [Upstart] model approves 43.4% more borrowers than the traditional credit score only model, and yields 43.2% lower average APRs for approved loans.
- Upstart model vs. traditional bank model: 53% fewer defaults at same approval rate, 173% more approvals at the same default rate.
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https://www.upstart.com/i/aboutThere's a lot more there, like: in the most recent quarter reported, 75% of loans processed were fully automated from start to finish, which is the highest percent fully automated that they've achieved so far.
Of course they're going to post only exciting positive stuff on their 'About' page.
All over their consumer facing website, www.upstart.com, is a big green button 'Check Your Rates', and they assure that your credit won't get dinged, and it will take only minutes. This is one of the main sources of customers for them, but they also provide a similar interface for the credit unions and banks they partner with, without any Upstart branding.
They entered the loan business with personal, unsecured loans. Their site offers loans from $1,000-$50,000. Also available through their site are automobile refinance loans (starting at $9,000), which they rolled out about a year ago, and small business loans ($5,000-$200,000), which are a very recent addition. They also partner with auto dealerships for new car loans, if I'm not mistaken. And, they plan to eventually enter the home mortgage market, which is enormous.
They aim to be a market place, not a lender: a borrower coming to their site would ideally be matched with a partner who lends the money, and Upstart walks away cleanly with a chunk of the vig on the loan. In the past year, many of their partners drew back from funding these loans, scared of what rising interest rates and a possible recession would do to their results, and Upstart stepped in with funding from their own balance sheet, which was cash heavy from stock offerings and loans they took out themselves.
The stock market had a highly negative reaction to this news, as ScottPIck described from his personal standpoint in a prior post here. Upstart executives at first responded by saying, okay, we'll stop doing that, but then they decided they didn't want their corporate actions to be driven by the stock market, and they resumed funding some loans off their own balance sheet, while also seeking to set up long term agreements with partners to provide funding through the entire business cycle which would allow them to move back to more of a pure market maker.
From the beginning they used their own funds for loans as they developed and proved the products/process they were offering, so they would have history of success to convince partners to come on board. They had moved away from that in their personal loan business, reversed by the recent events discussed above. Ongoing funding of new loans for 'R&D' purposes of their new products is happening in the auto and small business categories, and I understand they're starting up a small-dollar loan product as well.
As of Dec 23rd, 2022, UPST stock is $13.20 with a market cap of $1.09 billion, basically trading at/near an all time low the last couple days the market was open. It traded as high as $401 last October! Trailing 12 month sales are $1.04 billion, and the most recent reported book value of the company was $8.80 per share, down from a high of $10.41/share a couple quarters ago. The last two quarters combined, they reported net losses of $1.05/share, while the prior 4 quarters they reported net earnings of $1.96. If they could get back to that level of earnings, the current share price is ridiculously cheap, but we can expect more losses before that happens.
The last report showed $1.915 billion in assets, including $684 billion in cash, vs. $1.197 billion in liabilities, mostly composed of $919 million in long term debt.
I read some alarming commentary a few months ago about how the bond market was pricing their bonds so low it indicated a high probability of the company failing, but their books look strong so far.
The rising interest rate environment over the last year has dried up deal volume and crushed the value of loans they were holding on their own books, for a double whammy. When interest rates start coming back down, they'll see a strong tailwind from both those effects reversing, assuming they can stay a going concern to see the business cycle through to better times. Estimates of future earnings are pretty brutal: -$.97 next quarter, -$.56 the following, and -$1.64 for the fiscal year ending 12/23.
Aside from the losses, another area of concern for me: like many early stage tech companies, Upstart has made stock options a big part of their employee compensation, so the stock has seen some significant dilution: 72 million shares outstanding 12/2019 vs a recent high of 84 million. The last report puts that number at 82 million as they've been buying back shares.
On the whole, I remain impressed with Upstarts technology, business model, and potential. I don't see any signs of imminent demise, but they are losing money at a fairly rapid clip, so that's worrisome.
All numbers are drawn from aaii.com and cross-checked to some extent with yahoo.com and the company's latest 10-Q and earnings press release.
I will note that cash flows from operating activities look fairly alarming: $433 million in the red over the last 12 months, with $101 million outflow the last quarter. A lot of that is funding these loans held on the balance sheet. With $684 million in cash, that size quarterly outflow won't cause a liquidity crisis too soon, but it's obvious they can't keep this up for too long without change.
In their last earnings call they describe a 'favorable liquidity position' with $830 million in cash and $431 million net loan equity, so it appears they sold off a sizable amount of the loans they had on their balance sheet at end-of-quarter to bolster their cash on hand. They further comment that they don't anticipate any liquidity problems even if the macro environment drastically deteriorates and at this point they continue to invest heavily in product development and building the business. They say that with their current financial structure, they would only burn $15 million in cash per month to cover fixed expenses, without bringing in any new money from their business.
Their latest 10-Q:
https://ir.upstart.com/node/8196/htmlEarnings press release:
https://ir.upstart.com/news-releases/news-release-...Earnings presentation:
https://ir.upstart.com/static-files/45ff4876-df0f-...Earnings call transcript:
https://www.fool.com/earnings/call-transcripts/202... 