Upstart Is Just Getting Started & We’ll See You At $650/Share (NASDAQ:UPST)

Mature man laughing and smiling on video conference

10’000 Hours/DigitalVision via Getty Images

“The Death Of FICO”: Additionally, we now have 11 lenders with no minimum FICO score in their credit policies, up from 7 the last time we spoke. I’m confident that our momentum and pipeline for both dealerships and lenders has never been stronger.

This section is the very concise, abbreviated version of this note. We believe these three questions are at the heart of ownership of Upstart (NASDAQ:UPST). Everything else is panic-stricken noise and F.U.D. Will the business be linear? No. But so long as we can answer yes to each of the questions below, the thesis for Upstart will remain intact.

1. Does Upstart’s AI outperform traditional models?

Yes

As can be seen below, Upstart outperformed in every category of borrower aside from “639 or below” (FICO) and “E-” (UPST). We believe this underperformance is due to “training” associated with pushing out on the risk curve. Upstart will learn from this and become better.

Upstart loan data

Upstart Investor Relations

2. Is Upstart’s credit decisioning API working its way into more sectors of the economy, expanding the distribution of Upstart’s superior underwriting in the process?

Yes

Upstart just grew bank partners and car dealership rooftops at its fastest rate ever, as can be seen in the two charts below.

It cannot be overstated the degree to which distribution matters in finance.

One can have the “Manna from Heaven of financial products,” but if one does not have massive distribution, it simply will not create a large business outcome.

We know Upstart has a clearly superior financial product, i.e., its credit decisioning API.

It’s simply a matter of achieving massive distribution for this product, which is unequivocally no small feat.

Notwithstanding this challenge, Upstart is achieving massive distribution.

We actually had a phenomenal quarter, significantly our best ever in terms of signing up new lending partners and deploying them as well. So doing exceptionally well, particularly with credit unions. So I think both in terms of what we signed up and deployed onto the platform as well as what our current pipeline looks like has never been stronger. So we’re extremely pleased with the progress we made. We’re adding about one lender every week. And I think there’s certainly an opportunity to accelerate from there. So lender adoption has certainly been a highlight.

Upstart data

Upstart Investor Relations

And, as we all know by now, auto distribution is accelerating also, led by Michia Rohrssen, who is the auto platform’s original founder.

Upstart data

Upstart Investor Relations

3. Is Upstart successfully expanding into new credit verticals and finding distribution for these new products?

Yes

By 2023, Upstart will have launched and scaled its auto loan and auto refi product, as well as its small dollar lending business. Upstart is creating massive distribution channels for these products via what can be seen in the charts above.

By 2024, it will likely have launched and scaled its SMB lending and mortgages businesses, which it will more easily scale by way of the established channels it’s building, illustrated in the charts above.

Upstart’s better credit decisioning API, which will get better and better with each passing year, will be applied to personal loans, auto loans, auto refi loans, small dollar loans (potentially traditional financial institution BNPL at some point), SMB lending, and mortgages over the coming 3-5 years.

If Upstart can sustainably do $1B+ in revenue on personal lending alone, it will very likely achieve $10B+ in high margin revenue and then some via its expansion into all of the credit verticals/flavors illustrated above.

Notably, Upstart has operated profitably while growing its personal loan business at staggeringly high rates while simultaneously expanding into all of these new verticals. Such expansion, R&D, headcount growth, etc., is not free! Notwithstanding, Upstart has stood up teams that have created, will launch, or are in the process of these two acts as of today.

Through this very simplified lens, we have never felt better about Upstart, and as such, we will continue to accumulate it at these levels with the understanding that this is a very long term bet on the revolutionizing of the credit industry.

Introduction: Considering Our Time Owning Upstart

In January of 2021, we originally purchased Upstart, and we purchased a rather large position of it at that time.

For the next 12 straight months, we listened to virtually every word spoken by every single representative of Upstart.

Hours and hours and hours of podcasts, investor presentations, earnings conference calls, interviews, etc.

We, additionally, read every word of content published by Upstart. We closely monitored their loan data published by 3rd parties, and we decided that everything was satisfactory on this front.

What’s more, Upstart consistently outperformed the expectations they set forth. If Upstart told us they would do $x in revenue, contribution margin, and net income, they could do $x+.

Before we begin to highlight the positives of Upstart’s report and the company broadly, we feel it’s fair to illustrate the negatives, which we believe are creating the staggeringly large decline today.

While we’ve seen and heard nothing but good things from Upstart thus far, this recent report was a notable shift in tone and management of expectations by the company.

Our Frustrations With The Last Report

Over the last six months or so, during which we’ve seen rising delinquencies, I have fully acknowledged in my mind that Upstart might overshoot in its pushing the lending frontier, i.e., in order to better train its models, it would push as far as it could go, while still profitably lending. This would entail lending to riskier borrowers, and, ultimately, it would entail experiencing potential, near-term losses, from which the company would learn, grow and become stronger/smarter.

Indeed, the journey on which Upstart finds itself is, at minimum, a five-, 10-, and 20-year journey.

A new paradigm of AI-based lending can only truly be built over 10-20 years one economic cycle and one borrower at a time.

There are simply too many variables with which Upstart has not yet been confronted to declare that Upstart’s model is fully and wholly superior to FICO, though, in the fullness of time, Upstart proving its superiority to not just FICO, but all lending models is inevitable (in our eyes).

So we’re OK with difficulties in personal loan performance! It’s a required aspect of the model training.

The model simply cannot improve without experiencing setbacks.

We get it!

But this is not the aspect of the report with which we took issue.

The central aspect of the report with which we took issue was the reversal in guidance alongside the omission of language regarding Upstart’s $400M share repurchase program.

Well, considering Upstart was not prepared for significant shifts in credit pricing, and as such, had to bridge loan originations with its balance sheet while recalibrating pricing for its funding channels, we understand that they would no longer highlight the $400M share repurchase program.

But herein lies another issue! Why were they not prepared? We explore this later in this note.

To put it bluntly, the recent report left us asking, “what?” On this note, we will now discuss the issues with the most recent report:

What’s Causing The Cataclysmic Stock Decline?

  1. Management’s completely disastrous management of expectations
  2. The very rapid repricing of credit, which caused the company to use its own cash to fund its operations
  3. Self-avowed underperformance of recent securitization “vintages”

We will explore each of these one by one.

Management’s Completely Disastrous Management Of Expectations

As I briefly alluded to above, two of the most noteworthy aspects of Upstart’s Q4 2021 report were the $1.5B in auto lending volume for 2022 as well as the $400M share repurchase program authorization.

In the span of 90 days, unforeseen events unfolded (interest rate shocks, as it were) in such a way that Upstart effectively walked back both of these exciting elements of their business performance in 2022.

It’s not so much that they walked these two elements back as is that they did not foresee precipitous rises in interest rates and were, correspondingly, not prepared to price in these new credit pricing realities, which is what has led to poor unit economics for the loans where they had to “bridge the gap.”

With raging inflation and a very high correlation between risk free rates, namely the 10-year, and inflation over the last 100 years, anybody could see that interest rate shocks were on the horizon!

Upstart should have been preparing for this since they bottomed out in 2020!

But alas, they were caught flat-footed, and, as a result, management has suffered a blow in terms of investors’ trust.

Only through sustained, gritty execution from these depths will this trust be regained, though we, as partners to management, plan to continue on this journey with them in revolutionizing the credit system with robust, ubiquitous AI-underwriting.

Now, all of this was precipitated by the second issue Upstart faces presently, which has been the rapid repricing of credit.

The Rapid Repricing Of Credit

As Jason Zweig, of the Wall Street Journal, recently wrong, “It’s the Worst Bond Market Since 1842.”

We have also illustrated the degree to which we’re experiencing Once in 50 Year Economic Events.

Government bonds on track for worst year since the Marshall Plan was enacted - MarketWatch

BofA Global Research

And when we experience these interest rate shocks, well, we experience Upstart “bridging its funding via its balance sheet” simply because the unit economics no longer make sense on the loan relative to what investors in the credit markets have come to demand in light of the cost of credit broadly in the economy. Dave remarked on this reality,

As I said in February, lending is a cyclical industry and always will be. So we expect volume and pricing in our platform to vary accordingly. As a result of increased risk in the economy as well as the corresponding higher returns demanded by banks and credit investors, the average loan pricing on our platform has increased more than 300 basis points since October. In addition to increasing rates for approved borrowers, this also has the effect of lowering approval rates for applicants on the margin. Given the hawkish signals from the Fed, we anticipate prices will move even higher later this year, which will have the effect of reducing our transaction volume, all else being equal.

I would say the most noteworthy comment in that excerpt is the idea that they are accounting for “prices (moving) even higher later this year, which will have the effect of reducing our transaction volume, all else being equal.”

In this light, it appears that Dave & Co. have come to see the light of just how bad this year could yet from a pricing/macro perspective.

Certainly, we could be wrong here, and they’re still not pessimistic enough, but as of today, I believe the market is pricing in future pessimism from Dave & Co. for them.

Self-Avowed Underperformance Of Recent Securitization “Vintages” [= Packages Of Loans]

We delved deeply into Upstart’s loan performance data in the past, specifically in this note:

  • Upstart: The Bears Only Make Us Stronger | Seeking Alpha Marketplace

In that note, we illustrated that Upstart’s AI-underwriting clearly outperformed FICO-based underwriting.

It was quite clear to us. We intuited and inferred it to be the case, and as of today, we have straightforward data illustrating it to be the case, which we share with you earlier, and which you can review once more below:

Upstart loan data

Upstart Investor Relations

Notably, we noticed the relative underperformance of their latest securitization vintages in 2021. This underperformance was specifically shown in their Pass Through Trusts, facilitated by Jefferies. Management commented on this reality stating,

I kind of — I know you’re — sort of the direction you’re heading in. But the effect was broad. As Dave said, it was maybe slightly more on high-risk loans than low-risk loans. But the real relationship to cohort performance is on timing. And by that what I mean is, if you’re sort of the – if you’re an investor buying happily or a bank sort of originating happily across the past couple of years, what you’d see is probably 12 vintage quarters of overperformance. The ones that were timed right around the injection of the stimulus, so call it, late ’19, ’19 to sort of early 2021, those will overperform dramatically, so maybe kind of like 2 times the return target.

And then the sort of the two or three vintages that were right around the time of what we call the reversal of the loss trend, and you could see this in our investor deck, it was sort of like the Q2 and the Q3 2021, will marginally underperform into the tune of, we’ll call it, 20%. So really, the underperformance we’re talking about, it’s tempting to kind of want to relate to the change in mix we’ve had over the last year, but really what it is, is it lines up almost exactly with the injection and the sort of the evaporation of the government stimulus. And as Dave said, there’s marginal differences between the low and the high end of risk. But I think that’s the secondary story. It’s not the main driving effect here.”

In short, investors in Upstart’s later 2021 vintages will experience ~20% underperformance relative to what they anticipated.

Management further elaborated this over/underperformance situation in stating,

Since our prior earnings release, the level of uncertainty in the macro environment has continued to grow. After remaining at historically low levels for the past 18 months, loan default rates rose quite abruptly toward the end of last year and are now back to, or in some cases above, pre-pandemic levels. This is a dynamic we have observed consistently across the full breadth of our portfolio although one which appears to be disproportionately impacting higher-risk tiers, which are generally composed of borrowers who one might assume have a greater exposure to loss of government stimulus.

As a way to keep investors abreast of such credit trends, we have introduced new information in our investor materials, which shows in aggregate for all historical vintages the in-period loan defaults compared to the aggregate defaults that were predicted across those vintages at the time of their origination. The drop and subsequent reversal in developed trend that is shown on the chart are in our view a function of the injection and subsequent waning of the government stimulus. And as a consequence, virtually all of our pre-2021 vintages will substantially outperform their return targets while the two or three vintages most adjacent to the reversal in trend at the end of 2021 are set to underperform.

My specific thoughts, as I looked at these lower quality tranches of loans (the latter half of 2021 vintages) were (which I shared earlier),

Over the last six months or so, during which we’ve seen rising delinquencies, I (Louis) have fully acknowledged in my mind that Upstart might overshoot in its pushing the lending frontier, i.e., in order to better train its models, it would push as far as it could go, while still profitably lending. This would entail lending to riskier borrowers, and, ultimately, it would entail experiencing potential, near term losses, from which the company would learn, grow, and become stronger.

Indeed, the journey on which Upstart finds itself is, at minimum, a 5, 10, and 20 year journey.

A new paradigm of AI-based lending can only truly be built over 10-20 years one economic cycle at a time.

There are simply too many variables with which Upstart has not yet been confronted to declare that Upstart’s model is fully and wholly superior to FICO, though, in the fullness of time, Upstart proving its superiority to not just FICO, but all lending models is inevitable (in our eyes).

So we’re OK with difficulties in personal loan performance! It’s a required aspect of the model training.

The model simply cannot improve without experiencing setbacks.

We get it!

I believe some may think that Upstart was chasing growth via pushing out on the risk curve, and while there may be a kernel of truth to that, I believe the central imperative for Upstart was to see how far their model could go before starting to break.

And, as of today, we unequivocally have an answer, and the data Upstart generates from this will be invaluable to the long run performance of Upstart’s model.

Additionally, I believe that this push outward on the borrower risk curve is what has created Upstart’s relative underperformance to FICO in the “E- section,” as depicted below.

Upstart loan data

Upstart Investor Relations

Over time, we expect Upstart to begin outperforming on every tranche of borrower risk, but it simply cannot happen without Upstart training its model through trial and error.

What the market sees as extremely negative we see as a necessary step in the evolution of Upstart.

Here’s What Is Absolutely Essential To Understand. This Is It. This Is The Entire Thesis.

As the chart above illustrates, Upstart’s models dominate.

Period.

Nobody can say otherwise.

That’s patent reality.

Thus, it’s simply a game of getting Upstart’s models in front of every American in the U.S.

Hence our commentary earlier:

It cannot be overstated the degree to which distribution matters in finance.

One can have the “Manna from Heaven of financial products,” but if one does not have massive distribution, it simply will not create a large business outcome.

We know Upstart has a clearly superior financial product, i.e., its credit decisioning API.

It’s simply a matter of achieving massive distribution for this product, which is unequivocally no small feat.

Notwithstanding this challenge, Upstart is achieving massive distribution!

And Dave remarked on this subject, which is entirely verifiable through KBRA data, as well as the data that Upstart supplied to us yesterday:

With respect to credit performance, we’re pleased how our models performed on behalf of our lenders during this tumultuous period. While not perfect, our model significantly outperformed traditional FICO-based risk models and learned quickly while doing so. For Upstart loans originated and funded by our banks and credit union partners, we saw significant overperformance since the beginning of COVID, which has normalized to on-target performance in recent months. There has been no meaningful underperformance of returns with any of our more than 50 lending partners since the program’s inception in 2018 despite significant periods of economic disruption.

Thus, it is simply a game of Upstart achieving massive distribution of its AI-underwriting model!

And, as we’ve seen, Upstart is doing so!

Using Balance Sheet To Fund Loans (This Has Spooked Investors)

This has been a point of contention, but I believe it’s very straightforward.

Ahan articulated it in this way,

Total loans on balance sheet shot up to $600M (up from $250M last quarter. $514M are R&D loans-related to auto refi business (management expects to sell them by the end of this year once some performance curves are available; however, they expect to replace these loans with new auto loans (R&D)).

(This was how they built their personal loan business.)

Upstart had to step in and buy some loans (~$85M) and hold them on the balance sheet due to quick run up in interest rates, and pricing mechanism issues. The process is not automated on loan buyer side of the marketplace (shocking). They must work on this automation for loan buyer side of the marketplace (increased R&D spending (Sanjay talked about allocating new capital to this product enhancement. It was on their product roadmap, but now they need it right away). Until they can figure out this product, they might have to keep buying loans. (Not sure if we should trust the management on this story).

Notably, only single-digit percent of loans originated through Upstart landed on the balance sheet. Most were sold to investors.

Ultimately, I (Louis) am willing to believe management, as this report has been the first instance where they did not execute perfectly in line with their communication with me. Over more than a year, they have been perfectly congruent in my mind, and, considering the generationally bad bond market, I will give grace to them on this occasion.

Sanjay Datta commented further,

We ended the quarter with $1 billion in restricted and unrestricted cash, down from $1.2 billion at the end of last year as more of our capital base flowed into loan assets in support of R&D programs, primarily in auto refi and some newer segments of personal loans. Additionally, we have started to selectively use our capital as a funding buffer for core personal loans in periods of interest fluctuation where the market clearing price is in flux. Our balance of loans, notes and residuals at the end of the quarter was consequently up to $604 million from $261 million in Q4.

(Remember that this equates to a single digit % of total loan originations, as we illustrated just a moment ago.)

So and then your second question is how we plan to use our balance sheet. And as I said, I mean, historically, our balance sheet has been almost exclusively for the purpose of R&D. We have used our balance sheet in the last quarter to do what I call sort of a market-clearing mechanism. And by that, what I mean is when interest rates in the economy change quite quickly, I think it would be fair to say that our platform, its ability to react to the new market-clearing price, it’s probably not as nimble as we would like. It’s somewhat manual. It requires a bunch of conversations and phone calls.

And so when interest rates smooth and investors are each deciding what their new return hurdles are, there can be a gap or a delay in responding to funding. And that’s a situation where we’ve chosen to sort of step in with our balance sheet and almost sort of bridge to the new market-clearing price. And that is happening often and abruptly. We’ve been sort of playing that role with our balance sheet.

I don’t view that to be a long-term or necessarily sizable activity for us. I think that developing the mechanisms to respond more nimbly to new price discovery as rates change is something that’s on our road map, and it’s something that we want to start to invest in so that it can happen in a much more automated way. At the end of the day, we view our platform as being a platform that responds to risk and rates in the environment. And so the faster we can do that, the faster we’ll be able to deliver the new returns in any given scenario to the investors and not have to bridge it with their own balance sheet. So I kind of — I would view it through that lens.

David Girouard

Look, Sanjay kind of explained this. Generally, we view ourselves as a marketplace where ultimately, price discovery happens and loans are funded or not funded when they make sense by our bank partners or by capital markets, institutional investors, etc. Some of this works very fluidly, particularly on the bank and the credit union side, where they have very direct controls to change their return hurdles, et cetera. We don’t have those mechanisms in place as well on the other side. It’s more of a manual process.

So when something changes as quickly as it did in interest rates and the risk premiums in the market changed very rapidly, then we stepped in to sort of bridge that, but it’s sort of a temporary thing. And as Sanjay said, it’s an intention of ours to make the system more automated and more fluid so we don’t have any need to do that. It’s not part of our business to hold loans generate net interest income from loans in our balance sheet, but we certainly want to make sure there’s fluidity in the system. And we’re definitely going to do some more work so we can do that without any of our balance sheet participation in that.

Sanjay Datta

And Simon, just to maybe put the numbers into context, but I think the amount of the total platform loans that ended up on our balance sheet this quarter was still a single-digit percentage. And of that amount, probably close to three quarters of it is still — was still R&D-style spending on predominantly auto loans and other new products and segments. So it was still a relative minority or a relatively small percentage, but it’s just sort of an important new thing that we haven’t been doing in prior quarters just because of the fluidity of the environment.

The Positives

In staying congruent with our past focus for the Upstart business, here were the Key Performance Indicators that we were monitoring most closely in the most recent quarter:

Delving Into The Most Recent Quarter

Heading into the quarter, here were the KPIs (key performance indicators) I wanted to see:

  • Revenue growth acceleration quarter to quarter (Q1 to Q2). (We did not get this.)
  • Ability to sustain free cash flow generation while growing rapidly.
  • Loan volume (We want this to trend into the millions, then tens of millions)
  • Conversion % and % of loans automated (Paul Gu has said the theoretical limit here is 99.7%, so we’re looking for that number long term!)
  • Number of bank partners added and total number of bank partners
  • Number of car dealerships added and total number of car dealerships
  • Upstart’s progress into expanding into new flavors of credit as well as new segments of credit worthiness (traditionally called prime, subprime, and super-prime)

And these KPIs satisfy our analysis of the three vectors for value creation from Upstart:

  1. Upstart’s consumer brand (B2C) (Example) (Example) (Long term, all flavors of credit and all categories of borrowers)
  2. Upstart’s B2B business, in which it provides AI-based underwriting technology to banks (Example Powered By Upstart) (Long term, all flavors of credit and all categories of borrowers)
  3. Upstart’s “Shopify of Car Dealerships” Platform (Example) (Auto loan centric)

Revenue Growth

As can be seen below, revenue growth has stagnated, likely largely due to the very rapid recalibration of debt pricing in the U.S. economy, which is compressing the total number of individuals to whom Upstart can lend.

But, more importantly, it’s stagnating because Upstart’s distribution expansion (via bank partners using its API and offering personal loans and via Upstart Auto Retail) is not expanding rapidly enough. We will touch on this in a bit.

Upstart loan data

Upstart Investor Relations

Moving on to our next KPI…

Loan Volume and Conversion Rate

As can be see below, Upstart’s total loan volume decreased due to 1) higher rates eliminating total pool of worthy borrowers and 2) seasonal weakness.

The first point contributed to the lower conversion rate.

Upstart loan data

Upstart Investor Relations

Moving on to our next KPI…

Number Of Bank Partners

Interestingly, this was Upstart’s best quarter yet for bank partner adds.

Ya wouldn’t guess it by the share price reaction though!

Dave remarked,

At the same time, we added a huge number of lenders and car dealerships during Q1. 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… I’m confident that our momentum and pipeline for both dealerships and lenders has never been stronger.

Upstart loan data

Upstart Investor Relations

He went on to say later,

Yes. We actually had a phenomenal quarter, significantly our best ever in terms of signing up new lending partners and deploying them as well. So doing exceptionally well, particularly with credit unions. So I think both in terms of what we signed up and deployed onto the platform as well as what our current pipeline looks like has never been stronger. So we’re extremely pleased with the progress we made. We’re adding about 1 lender every week. And I think there’s certainly an opportunity to accelerate from there. So lender adoption has certainly been a highlight.

Number Of Car Dealerships

Again, Upstart executed to absolute perfection on its Upstart Auto Retail business.

Dave remarked on the subject,

One of our most important initiatives for 2022 is the accelerated rollout of our auto retail product. Since acquiring Prodigy in April of 2021, we expanded our dealership footprint from about 100 rooftops at the time of the acquisition to more than 500 today, making Upstart one of the fastest-growing auto retail software in the industry. Upstart’s active dealership footprint over the last 90 days spans 35 different OEMs, including Toyota, Subaru and VW. At this point, we’re also well into Phase 2, which is the introduction of Upstart-powered loans into our auto retail software. This represents the next critical good step in modernizing the car buying experience.

Based on what we now know, we expect the auto retail lending business to contribute meaningfully to Upstart’s monthly transaction volumes by the end of the year, setting us up for a significant ramp in 2023.

Upstart loan data

Upstart Investor Relations

Moving on to our next KPI…

Expanding Into New Flavors Of Credit: Update On Auto

As we’ve shared often, the sweaty panic around Upstart’s superior personal loan business is incredibly myopic.

We’re just getting started! Dave remarked on this subject,

It’s important to realize that the surface area over which we’re implementing AI has expanded dramatically. First, we’re now working on seven or eight unique models that target different aspects of credit targeting and origination. And we’re implementing these different models across five different credit products as of now. Second, the amount and types of data used to train our models has grown exponentially and will continue to do so. As such, the time and processing power required to retrain our models has similarly increased.

On the subject of auto loans, Dave stated,

We continue to make rapid progress with our auto refinance product as well. 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. We also launched our first AI model for auto refi that is partially trained by our own auto lending performance data. This kicks off the process of building and deploying increasingly accurate versions of our model, which is our primary source of competitive advantage in the market. In Q1, we also more than doubled the rate of instant approvals for auto refi applicants, another major step toward increasing funnel throughput and delivering a differentiated product experience.

Small Dollar Loans

I’m also pleased to share that we began publicly testing our small dollar loan product in the past few weeks. I first mentioned this to you in our earnings call last November. It’s designed to help consumers with unexpected and immediate cash needs, think a few hundred dollars repaid in just a few months. But it’s also important to remember that we’re building a bank-ready product at bank-friendly APRs, always operating within the 36% rate cap prescribed to nationally chartered banks and to those who serve U.S. military service members. This is a strategic initiative to our mission to improve access to credit, and we believe it will accelerate the pace at which we can bring more and more marginalized Americans into the mainstream banking system.

What I told you in November that we aim to launch the small dollar loan before the end of 2022, our small dollar team set an aggressive goal to launch the product by the end of Q1, and I’m pleased to report that they achieved this ambitious goal. Of course, we still have lots of work to do to realize the opportunity in small dollar lending, but the team’s ambition is inspiring.

Small Medium Sized Business Lending

Additionally, 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. The first version of our SMB pricing model will include more than 500 variables about both the applicant and the business. It will also feature our loan month modeling framework, which is one of the most impactful innovations added to our personal loan product a few years back. Our initial testing suggests that version 1 of our SMB model will deliver higher accuracy as measured by Area Under the Curve, or AUC, than peer models that have been in the market for years. We’ll begin to cautiously test this new product in the second half of the year.

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’re also hard at work on some fundamental upgrades to the infrastructure that underpins our AI models and how we develop them.

Concluding Thoughts

I don’t know that I’ve ever owned a stock that has gone up ~90% in one day (Upstart in 2021), nor down 70% in one day (Upstart in 2022).

Owning this company will, invariably, be one of the greatest experiences of my life, for better or worse.

I either win or I learn.

-Nelson Mandela

As of today, I do not believe in any sense that the narrative has changed, and in fact, I feel better about Upstart than I ever have.

I’m frustrated with management’s inability to manage expectations, but I do believe they genuinely have a 10x better product that simply requires massive distribution.

In closing, we will see everyone at 500 bank partners, 10,000 rooftops, and $650/share!

As always, thank you for allowing us to guide you in building your business of owning businesses, and have a great day.

When We Will Hear From Upstart Again

Later this quarter, Upstart will be participating in Barclays Emerging Payments and Fintech Forum on May 16; Citi Beyond the Basics Conference, May 24; BofA Securities Global Technology Conference, June 8; and Morgan Stanley Technology, Media and Telecom Conference, June 14. We will also be holding our Annual Stockholders Meeting on May 17.

You may check those events out via the following link:

  • Events & Presentations | Upstart Network, Inc.

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