Transcription
[Music] Welcome to the latest Motley Fool scoreboard. I'm Chaka Loon. We've got longtime Fools Matt Frankel and Jason Hall giving a 1 to 10 rating to FICO score disruptor, Upstart Holdings, ticker symbol UPST. We'll talk about the strength of Upstart's business first, including factors like industry and competition. A 10 is invincible; a one is hopeless. Matt's got a six. Jason, you're at a seven.
Yeah. The reason I went a little bit lower is there's tremendous opportunity, and we're starting to see the seeds of Upstart's disruptive capability starting to sprout. But the biggest challenge is that Upstart doesn't control the pace of business on its platform. Lenders are in control of that for the most part.
Yeah. Um, well, they can control it if they're willing to hold, uh, loans on their balance sheet, which is a no-no. Um, you know, they don't want to have too many loans on their balance sheet. So, I give it a six. This third-party dependence is certainly a negative factor, but for me, it was more about competition. Um, you know, there are—are you—we keep hearing about Upstart getting more and more partners, but there are so many personal lenders that don't use Upstart's model that have a lot of traction. Um, and it's—it's a very competitive space that Upstart already has a pretty decent share of. So really, they're going to need to capture share of new verticals that they're—they're going into. Uh, auto lending and home equity lines of credit are the two big ones right now, and they really need a robust lending market to be profitable. And it—as we saw, they went from a very profitable company when everyone was borrowing money to the complete opposite in 2022 and 2023. And for those who don't know, uh, lenders use Upstart's kind of system in—in lieu of a FICO score, or maybe in conjunction with, but—and the theory is, hey, there are more approvals, and those are lower-risk approvals. That's—that's the dream case. Did I miss something, Matt?
No. Um, they—they do make some of their own loans right now. They have about $800 million of loans on their own balance sheet, which is down from over a billion a year ago. Um, so they do make their own loans, but yeah, it's—it's used by lenders to—to theoretically do a better job of underwriting loans than just using a FICO score.
Yeah, the majority of the loans that they carry are not—they're—they're not specifically for investment gains, but as they're testing out different loan products and as they're making changes to the algo, they use those to measure the result before they roll those changes out. Kind of like a restaurant franchisor having a few company-owned stores to experiment with, but it's a franchising model.
Uh, let's talk about management. A 10 is Warren Buffett; a one is Homer Simpson. Jason, both of you have eights.
Yeah, I think the—the reason I gave a business that really struggled so much over the past few years an eight is because after some initial missteps after going public, management was really quick to navigate, uh, and resize the business, um, based on the environments while continuing to focus on getting in front of as many of the lending customers as they could to continue to expand their partnerships. And now, as—as the appetite for some of that lending is starting to increase a little bit, it's starting to show up in the results of their business.
Yeah. Uh, Dave Girouard is a very highly invested founder/CEO. There were three co-founders to this business; I believe only two of them are still involved, uh, today. But there are some things like you kind of alluded to that he could have done better in the 2020-2021 growth-at-all-costs mentality. But really, I—I would give him a nine in terms of navigating the tough environment. Um, so, uh, combine the early kind of, yeah, questionable decisions with, uh, the past couple years, and I would—I would give him an eight just overall and just how—how well he's kind of navigated this business.
For financials, a 10 is a fortress; a one is yikes. Jason, both of you have sevens.
Yeah, let's start with the balance sheet because again, the—before this last quarter that we saw, which was wonderful growth and projecting that to continue through this next year, total ending was down, revenue was down, uh, losses increased, and the balance sheet itself though has really held up. If you look at the year-over-year, total assets are roughly flat; that's pretty impressive considering how they could have really just burned through a tremendous amount of cash. And then you bolt on that economic potential of its operating business starting to go. Um, and it's—this has gone from what I would have said a five, uh, six or eight months ago to—to a seven for me now.
Yeah, a pretty strong balance sheet. I mentioned—I mentioned they do have a little over $800 million of loans on the balance sheet right now. Uh, but they have—they have almost that much in cash. Uh, the loans on the balance sheet have gone down. Um, about $1.4 billion in debt, which most of which is convertible, which has pros and cons. Convertible debt is generally at a very low interest rate. Um, I think theirs is like 1% interest or something silly like that. Uh, but it could potentially dilute investors over time, and we—we're seeing a lot of the stock-based compensation really dilute investors. Um, the share count's up 8% over the last year. Um, you know, so it's come—it's getting better. Um, so I would call it a seven and improving, but I—I can't really give this more than a seven right now, but it's on probation from the uh, share-based comp police.
It is. Uh, I mean, right now it was $133 million in share-based comp, uh, last year, which is down significantly. So it's heading in the right direction. So the—the police are—are backing off of them.
All right, Matt, let's talk valuation now. How well will Upstart stock do over the next 5 years? And how safe is it? 10's a sure thing; one's a lottery ticket.
I said 10 to 15%, but I'll put a big asterisk on that. Um, I don't see any scenario over the next five years where Upstart just does okay. This is a very volatile stock. Even regardless of whether it's going well or going poorly for the company, uh, just look over the past 12 months; the stock's been as low as $20 a share and as high as $96 a share in a 12-month period when the business was generally doing pretty well. Um, so a lot of volatile; expect a big roller coaster ride over the long term. Um, the secret sauce will be if Upstart can grow into those new verticals, which are both bigger lending markets than personal loans are. Um, that will be what takes it to the next level. Um, it could be—it could do 30% annualized gains if things go right, but it could be below zero if they don't. So, I—I kind of put in the middle with that and said 10 to 15%.
Yeah, I directly—I agree with Matt. I think, uh, there's still potential for a little bit more of a binary outcome where there's a pretty reasonable amount of risk of permanent losses if—if the platform as a tool for better origination doesn't deliver. Um, I—I've moved my safety score up on this company over the past year though because that database of evidence is growing that their process works, uh, that their algo works, that they deliver better, uh, outcomes with the—the loan products. Um, so my safety score is a six. I am very much leaning more towards that evidence backing up outsized returns, and I'm—I'm expecting, uh, 15-plus percent returns over the next 5 years. Uh, but again, there's still, uh, like Matt said, a chance that if it doesn't go well, it's going to go wrong.
Yeah, to Matt's point on volatility. Oh, I mean, he said $20 to $96 over the last year. That feels like a tight range compared to where it was, you know, during like 2021 and stuff like that. If you look at the five to 400, right?
Right. And then back to 20. I think it was back to like 13 at one point.
Yeah. Right. And now it's back to around 50. That's like about a double from five years ago, but it's been a wild ride.
Let's talk about topic. Matt, is there a company in this space that you like better than Upstart?
Yeah, this won't be a surprise to people who've—who've listened to me on—on shows before. Uh, SoFi is probably my favorite in the space. It's not really a direct competitor in the—in the sense that they don't have their own like underwriting method or anything like that. And SoFi actually partners with Upstart as part of its new third-party lending platform. It directs loan traffic to Upstart. Uh, but as far as in the personal loan space, I just like kind of their all-in-one ecosystem. I like they have much higher credit standards than Upstart. Upstart's designed for people without, you know, great credit. Um, so I—in especially in an economically uncertain time, um, I prefer SoFi's methods a lot to Upstart. Now the thing that's interesting though is that SoFi is becoming a little bit more of a competitor. You mentioned that third-party platform; they're trying to expand it, and uh, Upstart isn't—isn't the only other lender that—that they're partnered with on that. So it is becoming more of a plat—competitor. Um, now I—I do think that within the—the spirit of thinking about pure play focusing on lenders and platforms, Upstart is special and unique, and like I said, I think we're just starting—beginning to see, uh, its ability to be a disruptor shine through. So it's—it's my pick in this category despite the fact that I love SoFi, but for different reasons as well. Upstart's one I'm always kind of looking at and it—but like I've never bought it. It's what Matt said a bit, right? It's, oh well, SoFi directs the people that they don't want to lend money to over to Upstart, and Upstart's like, yeah, sure, apparently it works, but I'm—I'm not—I want, you know, by the time the track record comes out where I'm like, oh, okay, their—their method makes sense, it'll probably be too late for me—be like 10 years from now.
Thanks to Matt and to Jason; they've given Upstart a solid overall score of 7.2 out of 10 despite uncertainty about its business. May have to look in further. Uh, all joking aside, uh, look out for a new scoreboard every market day at 7:00 p.m. Eastern. Next up is Realty Income. Till then, Fool [Music] on.
When the stock was trading at like $400, and this guy went on CNBC to talk about how great the stock was doing and stuff like that, and then the host says, "So, what does Upstart do?" when he starts freaking out because he doesn't know and starts doing the "I can't hear you." Google that video if you haven't.