In addition to my Dividend Portfolio, I’m going to start posting updates to my SaaS portfolio since I follow a barbell strategy of investing in value dividend stocks and high growth SaaS stocks. My most recent purchases have been post-IPO of Lemonade, Snowflake, C3.ai, and Unity. A few weeks ago I started a position in Upstart Holdings after reading their S-1 IPO filing.
Below is my review of the company. In these reviews I’ll go over high level overview, product strategy, financial performance, and leadership as these are the main components that I generally look for in SaaS companies.
Upstart Holdings S-1 Review
Upstart is a company that I had heard of in passing through reading articles on TechCrunch and evaluating peer to peer lending competitors. While Upstart is not a Peer to Peer lending company, like a LendingClub might be, it competes directly in the personal loan category.
What differentiates Upstart from Lending Club is its non-credit score, AI driven, underwriting algorithm and their partnership strategy with banks. Upstart began by originating direct to consumers. This makes Upstart’s marketing costs high as they are paying for very competitive keywords and marketing channels. The partnership strategy does two things that are interesting. It switches them from a fee-based origination company to a platform based subscription + add-on company.
As a former banker, this is a very disruptive approach that makes Upstart a potential acquisition target to credit scoring companies like TransUnion, large banks that want to bring this knowledge in-house, or a core banking platform like Fiserv. The exit strategies are endless.
The graphic above shows the potential for ROI to partner banks. What excites me about this approach is that in my opinion, AI-based credit scoring will become table stakes for the industry meaning that every bank will need to use Upstart or another option.
If you’re not familiar with Artificial Intelligence and Machine Learning, it is basically taking a set of known data, splitting into a training set and a validation set, building and training a model with the training set and then running the model with the validation set to determine that the model works as expected. What is nice is that the more data you run through the model, the more accurate it can potentially become. By partnering with banks, Upstart gets access to millions of data points from real loans and their outcomes. This means over time they will get smarter and more effective at underwriting as they grow.
Additionally, with credit underwriting, it is entirely possible that other loan types like auto and mortgage could be underwritten through AI with higher profitability and zero human interaction. This expands the potential loan volume and underwriting fees significantly. The follow on effects of this are huge for loan originators because they could sell these loans for securitization at higher quality which means increased revenue.
Partnerships also lead to stickiness because Upstart offers white labeled solutions that make it easy for Banks to roll out their app to existing customers very quickly. This type of value add is tech heavy and hard to replace. So I would expect most churn to come from banks being acquired rather than switching to a competitor platform.
Financial performance has been impressive. Over the past two fiscal years Upstart has grown at 89% and 52% respectively. The last twelve months has seen 44% growth. Strong, but not outstanding and likely reflects their shift from direct to consumer and into partnerships with banks. Their Gross Profit Margin is in the upper 80s which is great for a SaaS company.
Revenue has been tracking loan volume. I’ve highlighted in the red circle what I believe will be the next driver of growth for Upstart, auto loans. The auto loan market is over $1 trillion in the US. If Upstart can make any dent in that market I’d expect loan volume to grow exponentially from here. Beyond that, the mortgage market looks very juicy and something I’d expect them to announce over the next year or two.
Upstart prides itself on its tech pedigree with two of its cofounders being execs at Google, Dave Girouard (CEO) and Anna Counselman (People & Ops). Their product cofounder is a Thiel Fellow and has extensive algorithms background making him an ideal technical leader for a machine learning tech shop. I know very little about these people other than what is described in their S-1 and website, so I did some digging on Glassdoor to see how employees, past and current view the CEO.
I like using glassdoor to get a pulse on what’s going on in a company. Upstart is highly rated at 96% and has a nice 4.3 star rating.
In summary Upstart is a business I want to own for the long haul for the reasons below:
- Product that banks will NEED to stay competitive
2. High Revenue Growth
3. Huge and Expandable Total Addressable Market (TAM)
4. Strong Founder Leadership
To review the Upstart S-1 yourself follow this link
If you’d like to learn more about my process of finding and evaluating SaaS stocks, check out my upcoming book Intro to SaaS Stocks. I’m 9,000 words into this at the time of writing and would expect it to fall in the 12-15,000 word range. Enough to get all the basics in and short enough to not bore you to death. During presale it will be $10 before settling at $17.