Earnings Roundup 5.21.2022
Commentary on the macro environment, review of recent earnings activity, recap of earnings from Palantir and Upstart
Macro environment
The macro environment remains challenging, particularly for technology companies.
Alex Clayton at Meritech Capital compiled an analysis of the situation alongside a comparison to the 2008-2009 financial crisis in his article 2022 SaaS Crash.
Crises are an inevitable part of the markets.
Benjamin Roth, a lawyer in Ohio, chronicled his experience through the Great Depression in his book The Great Depression: A Diary by Benjamin Roth. A concise summary of the book is available here.
Curiously, many of the experiences and learnings Roth had back in the 1930s seem just as relevant and applicable today. The market is ultimately driven by human behavior, which is difficult or even unlikely to change.
Bill Miller identified three competitive advantages for investors: informational, analytical, or behavioral. Of these, he finds behavioral advantages to be the most durable.
“The field of behavioral finance is still in its infancy yet has already yielded results that can be incorporated profitably into a sound investment process. The best part is that such results are likely to be systematically exploitable and not able to be arbitraged away as they become more widely known. That is because they represent broad findings about how large groups of people are likely to behave under well-defined circumstances. Until large numbers of people are able to alter their psychology (don’t hold your breath), there is money to be made from prospect theory, support theory, cognitive psychology, and neuroscience.”
It is in moments of crisis where advantages like this become most valuable.
Investors can benefit by focusing on their behaviors, paying particular attention to key traits like patience, prudence, conviction, and sticking to their plan.
While it is important to keep an eye on the macro environment, investing in equities is ultimately about investing in businesses. With a business owner mentality, investors can hone in on fundamentals they understand and invest in the companies in which they believe. It is particularly valuable to invest in companies with large addressable markets and durable competitive advantages.
Q1 2022 Earnings
The table below summarizes the performance of portfolio companies thus far. Earnings and revenue results are assessed against consensus estimates.
Over the last two weeks, two portfolio companies reported earnings: Palantir and Upstart.
Palantir
“Palantir builds software that empowers organizations to effectively integrate their data, decisions, and operations at scale.”
Palantir provides mission critical solutions for intelligence agencies and governments around the world, as well as large enterprises. Palantir organizes their operations from many disparate sources into a common data model to not only provide insights, but model outcomes and enable action.
For Q1 2022, Palantir reported total revenue of $446 million, up 31% year-over-year, slightly above the $443 million guidance that was shared in the fourth quarter.
Palantir has faced significant pressure from investors regarding their stock based compensation practices that exploded, in part due to the impending expiration of employee equity grants, in the years they went public. While it seems to be subsiding, it remains elevated.
On the positive side, Palantir has a very durable and antifragile offering, one that may even benefit from crises. They are generating free cash flow, showing increasing operating leverage, and have a strong balance sheet. Palantir generates over $525,000 in revenue per employee.
Looking forward, Palantir is guiding to a base case of $470 million in revenue for Q2, with a call out towards upside potential.
The company reiterated their long term plans of 30%+ revenue growth through 2025, implying revenue of over $4 billion in 2025.
Highlights from the earnings call with founder and CEO Alex Karp:
“In Q1, revenue grew 31%. Commercial revenue grew 54%, accelerating for the fifth quarter in a row. U.S. commercial revenue grew 136%, also accelerating for the fifth quarter in a row. We added 40 new customers, growing customer count 86% year-over-year.”
“We had GAAP operating margins of negative 9% versus negative 33% a year ago, reflecting our continued march to GAAP profitability. And we had adjusted operating margins of 26%.”
“ As our customers confront an extraordinarily significant and rapidly escalating conflict in Eastern Europe, runaway inflation disrupted supply chains and a new wave of refugees, our products have become more essential than ever.”
“Real-world events are driving enormous and long-term opportunities for growth. We are on the front lines, seeing what needs to exist, hearing from commanders and users and building now what is needed and what will power the next decade of U.S. and allied defense programs.”
“We believe Apollo will fundamentally change how software is deployed, anticipating a future where multi-tenant SaaS is dead and is clearly dying in the present, a trend that is accelerated by geopolitical events. Every software company will need to be able to deploy their software into their customers' environments, requiring them to manage fleets of heterogeneous environments across public clouds, on-premises, sovereign clouds and growing data jurisdictional boundaries and to do all of that seamlessly.”
“The greatest opportunity for Foundry continues to be the application development infrastructure platform. … What AWS was in the last decade, Foundry will be in the next.”
“We are uniquely positioned for unstable times. We work with some of the most crucial and important institutions in the world.”
“We combine the resilience of the defense industrial sector with the growth of a software company.”
“Overall net dollar retention was 124%”
“Our customer acquisition continues to accelerate. We added 40 net new customers in the first quarter, up from 34 in the fourth quarter.”
“We expect government bookings activity to increase for the remainder of the year, resulting in stronger government revenue growth in the second half of 2022.”
“To solve these problems, you cannot operate on software that was built to assume a stable world. In the stable world you can make plans and you edit it occasionally. The plan is static. The assumptions are fixed and immutable. In the real world, in this world, you only make a plan so you can change it. You need all of your data ontologized into your digital twin, flowing into dynamically delivered applications that connect to each other. You need your AI to move faster than the rate of disruption. When something goes wrong, it needs to tell the person at the coal face what to do next.”
“Literally, every function of every business is breaking under the stress of these events, events where the aftershocks are strong and more profound than the initial earthquake. And Foundry was built for this.”
Upstart
With a mission to enable effortless credit based on true risk, Upstart is a leading artificial intelligence lending platform looking to facilitate loans with reduced risk in comparison to traditional models.
For the first quarter, Upstart announced revenue of $310 million, up 156% year-over-year, and GAAP net income of $32.7 million for a net margin of 10.5%.
Upstart’s business has been affected by the rapidly evolving macro environment. When interest rates are rising rapidly, investors have less appetite for bonds.
The impact is more so from the rate of change than higher interest rates. Investors would rather wait until rates settle, knowing that they are lending money at a steady rate.
The management team knows that their business is cyclical. Different from other technology companies that have predictable recurring revenue from subscriptions, Upstart’s model is primarily usage-based, or per transaction.
While Upstart primarily originates loans for other institutions, this quarter, Upstart announced that they had kept some loans on their balance sheet in order to provide service to their borrowers. This was not very welcomed by the markets, and Upstart later announced they are reversing course.
Last quarter they announced a $400 million share buyback program. Given the strong negative reaction to earnings, they began repurchasing shares this week.
At its low point of the week, $27, Upstart’s market capitalization was roughly $2.3 billion. The $400 million represents 17% of the float at that price.
Upstart closed the week at $45, with a market capitalization of $3.8 billion. The buyback represents over 10% of the float at the current price.
A year ago, in April 2021, Upstart sought to take advantage of the increasing share price. They issued a follow-on offering, raising $276 million at a share price of $120.
As for forward guidance, Upstart lowered guidance for the year from $1.4 billion in revenue, implying 65% year-over-year growth, to $1.25 billion, implying 47% year-over-year growth.
Given the difficult environment, Upstart seems to be navigating well.
Upstart is a profitable business on GAAP, adjusted, and free cash flow measures. As stated in the introduction, the combination of strong fundamentals, competitive advantages, strong execution, and a significant addressable market make a unique investment opportunity.
Highlights from the earnings call with co-founder and CEO David Girouard:
“The Upstart team just delivered our seventh consecutive profitable quarter and our fourth straight quarter with triple-digit year-on-year revenue growth. As the recognized innovator in AI lending, we continue to expand our leadership position in personal lending and are now off and running in our auto lending product as well.”
“Today, we have more than 500 dealerships on Upstart as well as 57 banks and credit unions, which is up from 42 when I last updated you in February. At this point, we're adding about a lender per week. This is real progress, considering we had just 10 lenders on the platform when Upstart IPO-ed in December 2020”
“Additionally, we now have 11 lenders with no minimum FICO score in their credit policies, up from 7 the last time we spoke”
“In the first quarter, we transacted more than 11,000 auto refi loans on our platform, almost twice as many as we did in all of 2021.“
“If you've been following Upstart for a while, you know that we've been through several disruptions in our industry over the years, and each time, Upstart gained market share and emerged a stronger company. When the economy gets turbulent and nimbleness is at a premium, the advantages of a founder-led company with a closely knit and tenured leadership team become apparent. And that's what you have in Upstart: three founders involved in the business day in and day out and a proven leadership team, half of which have been with Upstart almost since inception.”
“Without question, our early progress in delivering loans through our retail software has exceeded our most optimistic expectations. While lending has enabled in just a handful of dealerships in California, the uptake and win rate for the loan product, technically termed a retail installment contract, has been far better than anticipated.”
“I'm happy to share that our small business lending team is likewise making impressive progress and is aiming to have their product in the market within a few months. I'm excited about our SMB product for two reasons. First, business lending is central to far more banks than is consumer lending. So our bank partners are ready and waiting for this. And second, despite the interest banks have in business lending, the FDIC data suggest that 77% of large banks and almost 90% of small banks have no online application process whatsoever.”
“We represent a secular change that the financial services industry desperately needs. Artificial intelligence will reshape the economics of lending in ways that will reverberate for decades. We're today pursuing opportunities that represent more than $6 trillion in annual origination. So there's little question about the scale of the addressable market. We see a clear path to building a company with more than $10 billion in revenue in the coming years and are maniacally focused on achieving that goal.”
Closing
There are many different styles of investing – investors may focus on different traits, risk-reward combinations, have different time horizons, and have unique objectives.
When investing from a business owner’s perspective, it is important to focus on the company’s fundamentals, the durability of the business, and the business’s outlook.
The volatility in the markets can become a distraction, and even a liability. Yet, just because the market is offering a specific price does not mean investors have to act.
“Who would think of buying or selling a private business because of someone’s guess on the stock market? The availability of a quotation for your business interest (stock) should always be an asset to be utilized if desired. If it gets silly enough in either direction, you take advantage of it. Its availability should never be turned into a liability whereby its periodic aberrations in turn formulate your judgments.”
– Warren Buffett
As for the latest turn of events, high-growth companies have started to show some signs of strength recently.
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Torre Financial is an independent investment advisory firm focused on emerging and established compounders.
Federico Torre
Torre Financial
federico@torrefinancial.com
https://torrefinancial.com
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