To The Moon

$Upstart Holdings, Inc.(UPST)$

This is one stock that is definitely not for the feint-hearted. Since it’s IPO debut a little more than a year ago, we have seen this stock trade at a range of 40+ at its low and 400+ at its ATH. That is a 1000% range all within 1 year! It just goes on to tell you how much the market doesn’t know about the company to properly value it. 

For investors looking to be involved in this stock, here are 9 facts about Upstart that you should know:

1. Their business is about supplying an AI platform for banks to make loan decisions. Evaluating loan applications using their solution results in more accurate risk analysis and hence allow banks to offer more competitive loan rates and / or originate more loans to borrowers that previously wasn’t able to pass traditional evaluation methods. Key is in that the AI predicts a borrowers financial potential that is vastly different from traditional methods that only evaluates a borrower’s financial history.

2. The bulk of their revenue are from fees. Whenever banks use their platform to originate a loan or when they refer a borrower to a bank, they getpaid. When they act to help banks to handle loan servicing, fees are also charged. 

3. This far, their services have only been applied to facilitate unsecured personal loans. They have recently acquired a company - Prodigy, and looks set to expand their services to a much larger Auto Loan market. They are targeting but have yet to involve themselves in the Mortgage Loan market. All these markets are HUGE!

4. Very impressive gross margins (what they call contribution margins) in the 40% to 50% range. They are working on more automation and there is scope for gross margins to expand even further.

5. A rare breed of high growth company that is not only Free Cashflow positive but also profitableon a GAAP basis. Prospects looks good that theycan already independently fund their own growth without external funding. Hence, less likely for shareholders to be massively diluted.

6. Founder led company where its founders have serious pedigree. Former Google execs and a brilliant mind of a Yale grad who is a whiz in quantitative finanance who founded the company are still actively involved in running the business day-to-day.

7. Concentration risks for Upstart are very real. Currently the bulk of their revenue comes from 2 bank partners. The largest bank partner originated58% of loans and is responsible for 59% of the fees Upstart receives. The positive sign, is that these have come down quite a bit from 72% and 64% from a year prior. 

8. Banks are notoriously slow at adopting new tech. So this means, high cost of customer acquisition and a risk for growth acceleration. 

9. Revenue growth have been explosive over the past year. It is estimated that they will end the current FY with 300%+ growth YoY. 

All in all, Upstart has an opportunity to grow to be much larger than what it is today, given the size of the market they are addressing. Continued dilution if customer concentration risk, improving contribution margins and acceleration in transaction volume are all KPI to watch for to see if their value proposition is proving out.

At current valuation of about 18x sales, this is a pretty attractive for a company that is likely to have sustained high growth of 20%-30% for the next few years. 

The key here is to have a long term view, be patient and have the stomach to ride the volatility. If they proce out their potential, I am confident longterm investors will be handsomely rewarded.

@TigerStars