Upstart: 50.50 double or nothing type of investment
$Upstart (UPST.US)$ Upstart was priced for stellar growth, but now appears to be incremental growth going forward. Accordingly, the price multiples will need to come down more in line with current growth expectations.
UPST is a great stock, no doubt about it and I agree with the bullish points everyone is making, but seams to me no-one is considering bearish points. Consider:
Consider: that UPST is addressing an underserved demographic of subprime loan qualification. It is possible that UPST addressed the low hanging ripe fruit and had explosive growth due to pent-up demand. That pent-up demand is being satisfied and may mitigate.
Consider: that UPST algo cannot replace FICO “unless it has a variable rate” as no one is going to pay UPSTs onerous fees and interest rates, if they can qualify for FICO. I don’t see how banks could drop FICO for UPSTs algo completely. I have not read anything anywhere to suggest that UPST has variable fees and interest depending on the applicants score. I remain sceptical of FICO replacement.
Consider that someone invented FICO which became banking industry standard. Possible UPST algo could become in the public domain and a ubiquitous standard. UPST has no patents and no protection over any of its qualifying process. The algo could be copied, hacked, reverse engineered, approximated, stolen, or even spread around by a disgruntled employee, even sold for bribe. I agree it has a first mover advantage, but that can be challenged. Lots of fin techs addressing this area
Consider: UPST has to approve increasing numbers of loan each qtr as it does not have reoccurring revenue.
Consider: that UPST has incredible comps to compete against and even must compete with its past self. No way can it grow at 1000% like 2nd qtr. Or even 250% in this 3rd qtr will be difficult. It may have Incremental growth going forward and multiples to match. Further the law of big numbers will work against upstart.
Consider: That its customers cure their own poor credit standing. When they successfully repay their loan, now have improved credit scores and can qualify for FICO loan with lower fees and interest. So Upstart will not have a repeat business as much as is thought. Over time Upst may need to move down the risk strata in order to approve increasing loans each qtr.
I agree UPST is an incredible stock, but I think the risks are not being considered such as to chase a super high multiple. Buying a stock with a super high multiple is a binary investment. I don’t like to invest in a 50.50 double or nothing type of investment. For those who are shaking their head at this comment, consider that purchase at $400. Binary or greatest fool?
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what doyouwant : I guess that entry into auto loans will unlock a massive new market as it starts to lap this year’s numbers and in 2 years time then mortgages will help as it laps Auto..
I am robot : You don't understand machine learning/artificial intelligence. The "algo" is not a linear piece of code that just accepts a static input and spits out an answer. The Upstart "algo" is a complex model that has been trained on millions of events and data points. It can't just be "copied" or hijacked. Further, the model is not static, every loan application, acceptance, rejection, payment, etc is used to further enhance and train the model. For all intents and purposes, Upstart's AI constitutes an unassailable moat which has been honed over nine years of experience and data collection.