UPST - Upstart Holdings, Inc.

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  1. Upstart

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    Upstart Holdings, Inc. operates a cloud- based artificial intelligence (AI) lending platform. The company's platform aggregates consumer demand for loans and connects it to its network of the company's AI- enabled bank partners. Its platform connects consumers, banks, and institutional investors through a shared AI lending platform. Upstart Holdings, Inc. was incorporated in 2012 and is headquartered in San Mateo, California.

    Upstart aims to fill a need in the lending space: four in five americans have never defaulted on credit products but only half have access to prime credit. It's clear, that traditional lending based on credit scores can be improved, and traditional lending is very much inferior to Upstart's underwriting process. Upstart’s AI/machine learning underwriting algorithms achieves 75% fewer defaults at the same approval rates of large US banks, and 173% more approvals at the same loss rates, yet 70% of their loans are fully automated without requiring any human interaction from Upstart - which provides massive operating leverage.

    AI-based credit scoring will become **necessary** for the lending industry in the future. Banks who *do not* utilize this more efficient and ROI increasing form of underwriting *will fall behind*. It means that eventually, every bank will need to either use Upstart's services, build their own technology, or choose a competitor (of which, there are currently exactly **zero competitors** even close to what Upstart is doing). Even though banks have the billions of loan and consumer data points to work with, they lack the highly specialized technical personnel and years of data crunching to construct a truly competing platform.

    Upstart initially began with a direct to consumer model but have moved into bank partnerships.

    Banks pay Upstart fees, and Upstart provides the underwriting of consumers looking for unsecured personal loans that they will then receive from the bank, if approved by Upstart. They make loans of $1,000 to $50,000 with interest rates ranging from 8% to 36%.

    Upstart is not a bank, it does not have lending risk as banks hold the loans, not Upstart.

    They are now moving into auto lending with recent acquisition of Prodigy, and eventually will expand into mortgage, credit cards, etc with a massive TAM and industry to disrupt.


    HYPERGROWTH COMPANY
    • Q1 FY21 results:
      *Total revenue for the quarter was $121 million, an increase of 90% from the first quarter of 2020
      * Bank partners originated 169,750 loans, totaling $1.73 billion, across our platform in the first quarter, up 102% YoY
      * Conversion on rate requests was 22% in the first quarter of 2021, up from 14% YoY
      *Raised guidance. Previous FY2021 guidance of $500 million revenue. New FY2021 guidance of $600 million revenue, which is 158% YoY growth
    ALREADY PROFITABLE
    • Company is profitable.
      * Diluted adjusted earnings per share was $0.22 based on the weighted-average common shares outstanding during the period
      * Contribution profit was $55.8 million, up 117% from in the first quarter of 2020, with a contribution margin of 48% compared to a 38% contribution margin in the first quarter of 2020.
    FIRST MOVER AND STRONG MOAT
    • Their models incorporate more than 1,600 variables and benefit from a rapidly growing training dataset that currently contains more than 9 million repayment events. The network effects generated by constantly improving AI models provide a significant competitive advantage—more training data leads to higher approval rates and lower interest rates at the same loss rate.
    • They have 8 years of head start. There are no platforms out there today that are even close to what they do. Upstart is the only platform of its kind to receive CFPB No Action letters. From last earnings call “While Upstart is now in our second three-year No-Action Letter with the CFPB, we know of no other lending platform that has received a No-Action Letter from the Bureau related to fair lending.”

    CLEAN BALANCE SHEET
    • As of March 31, 2021: 488M in cash and other assets, with 168M in total liabilities
    VALUATION / ANALYST ESTIMATES
    **Analyst price target changes on 5/12/21:**
    • JMP Securities analyst Ronald Josey raised the firm's price target on Upstart to $149 from $111 and keeps an Outperform rating on the shares after its better than expected Q1 results. The quarter saw conversion rates expanding by 480bps from Q3 while the management also raised its guidance as revenue and EBITDA came in 3% and 37% above the high end of prior forecasts, the analyst tells investors in a research note. Few, if any, companies are approaching lending in the same AI-driven fashion as Upstart, Josey adds.
    • Piper Sandler analyst Arvind Ramnani raised the firm's price target on Upstart to $152 from $143 and keeps an Overweight rating on the shares following the "robust" Q1 results. The company's artificial intelligence-powered solution is redefining the framework for personal lending and has similar potential in the auto space, Ramnani tells investors in a research note.

    LEGENDARY MANAGEMENT
    • All three confounders continue to lead the company
      • Dave Girouard, CEO.
        • Formerly President of Google Enterprise and built Google's billion-dollar cloud apps business business into 1 billion dollars in revenue. Before that, he was a Product Manager at Apple and an associate in Booz Allen's Information Technology practice.
      • Paul Gu, Product and Data Science Lead.
        • He is a prodigy. Dropped out of Yale while double majoring computer science and economics to cofound Upstart with the support of Peter Thiel. Previously worked in risk analysis at the D.E. Shaw Group and has been recognized as one of Peter Thiel's 20 under 20 Fellows, Forbes 30 under 30, and Silicon Valley Business Journal's 40 under 40.
      • Anna Counselman, People and Operations Lead
        • Previously led Gmail Consumer Operations at Google and launched the global Enterprise Customer Programs team. Received a White House Champion of Change award and was recognized as one of Silicon Valley Business Journal's 40 under 40.
    STRONG COMPANY CULTURE
    • Glassdoor ratings 4.3, 97% approve of CEO.
    • They list their company values (https://www.upstart.com/careers):
      -Every second counts
      -Do the right thing even when it’s hard
      -Make clever use of numbers
      -Be smart and know you might be wrong
      -Don’t assume it can’t be done
    • Upstart was named to Inc. Magazine’s Best Workplaces for 2020. This list reflects a comprehensive assessment of private American companies that offer vibrant work cultures, deep employee engagement, and stellar benefits.
    INSIDER OWNED
    • Executives and board of directors own 28% of stock. CEO owns 18%
    • Third Point hedge fund (famed billionaire Dan Loeb) has Upstart as its largest single stock position as of 3/31/21 13F filing.
    RISKS
    • Customer concentration risk, although trend is in right direction. From latest 10Q: “Cross River Bank, or CRB, a New Jersey-chartered community bank, originates a substantial majority of the loans on our platform. In the three months ended March 31, 2020 and 2021, CRB originated approximately 81% and 56%, respectively, of the Transaction Volume, Dollars. CRB also accounts for a large portion of our revenues. In the three months ended March 31, 2020 and 2021, fees received from CRB accounted for 79% and 60%, respectively, of our total revenue.”
    • Supplier concentration risk. “A significant number of consumers that apply for a loan on Upstart.com learn about and access Upstart.com through the website of a loan aggregator, typically with a hyperlink from such loan aggregator’s website to a landing page on our website. For example, for the three months ended March 31, 2020 and 2021, 48% and 53%, respectively, of loan originations were derived from traffic from Credit Karma.”
    • Recession risk. Banks are less likely to lend in a recession, which would decrease Upstart’s loan underwriting volume and its revenue.
    • Volatile stock. IPO lockup expires June 18, 2021.
    • Vulnerable to interest rate hikes. Valuation multiples may contract under such market conditions.
     

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