Upstart (UPST) Earnings Review - March 2021
I first covered Upstart on January 10th, 2021, with an in-depth review of the company’s business, team, financials, and opportunities.
Having made their initial public offering on December 16th, 2020, Upstart had yet to share earnings results as a public company until this week.
On March 17th, 2021, Upstart announced their results for the fourth quarter and fiscal year ending in 2020.
The results were exceptional and the stock gapped up, more than doubling within a few days.
Results & Expectations
In the article covering Upstart in January 2021, I estimated 2020 revenue to be $196 million.
Total revenue for 2020 came in at $228.6 million.
The big news, however, was guidance. Management provided an outlook of approximately $500 million in revenue for 2021, significantly higher than the consensus estimate of $354.3 million. The guidance indicates nearly 120% revenue growth.
Putting this in perspective, $500 million in revenue is in line with 2025 revenue expectations from the January article. The sensitivity analysis is copied below for convenience. These numbers were sufficient to justify an expected annualized return of over 23%.
Because Upstart blew past all expectations, the market adjusted and repriced the company, resulting in the significant gap up.
At the same time, Upstart announced the acquisition of Prodigy, a cloud-based automotive software platform that will give Upstart access to tens of thousands of dealers.
This is a smart play by the management team. Upstart had just recently expanded from unsecured personal loans into auto loans, completing their first auto loan transaction in September 2020. The increased volume from Prodigy will help them calibrate and iterate their auto loan model faster, pulling even further away from any possible competitors.
Looking Forward
A significant jump in the stock price can be startling to investors. There can be a strong temptation to sell and lock in gains. In certain cases where gains may be ephemeral, that may be an appropriate response. In this case, however, Upstart’s fundamentals support continued growth.
I added to positions on the morning of March 18th. I believe there is room for additional gain ahead.
Upstart has demonstrated their ability to execute and maneuver in the lending space, where they are a clear leader and continue to pull away from competitors. Artificial intelligence (AI) and machine learning (ML) models lend themselves to network effects that lead to a virtuous cycle suggesting a “winner-take-all” outcome. As Upstart gains more volume, they have more high-quality data. The data fine tunes the models, which lead to more predictive results. Customers are likely to go with the best solution, which leads to more volume -- and the cycle continues.
The sensitivity analysis below provides a lens of the potential over the next five years.
Even at a share price of $125, an investment in Upstart could yield annual returns of 25% over the next five years, assuming a revenue compound annualized growth rate (CAGR) of 30% and a future multiple of 15x EV/NTM revenue. See the table above for other possible outcomes.
Closing
Upstart delivered big time with their first earnings release as a public company.
Dave Girouard, Upstart’s CEO, is a first and foremost a manager. He and the management team know what they are doing.
Upstart is well positioned to become a significant player in the lending industry.
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Federico Torre
Torre Financial
federico@torrefinancial.com
https://torrefinancial.com
https://torrefinancial.substack.com
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