Company Updates & Weekly Activity (August 7th-11th)

Company Updates, Weekly Activity, & Portfolio Review

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Company Updates

This past week was one of the most volatile weeks for my portfolio… EVER. I don’t want to go too much into it since I’ll be talking about it below, but with the combination of UPST and MGNI’s drawdown, my portfolio almost took a 10% decline. So, this was pretty rough to stomach, but I reminded myself to not let my emotions dictate my decision-making; also, that many of the businesses that took the haircut were significantly overextended. Despite what you’ll see on social media, both quarters were definitely not as bad as it’s made out to be. Let’s take a dive into this week’s rollercoaster of earnings.

1. Upstart (UPST)

• UPST’s fee revenue rose to $143.7M, a 23% increase over Q1 2023 (these increases are all that matters in this difficult and uncertain climate), surpassing its forecasted $130M. This growth was facilitated by a shift towards institutional funding and enhanced take rate strategies.

• Despite the fee revenue growth, an $8M net interest loss reduced the total revenue to $135.8M. This interest loss, which is notably larger than anticipated, primarily originated from unexpected adjustments in their R&D portfolio, especially in early vintage auto loans.

• The company witnessed a sequential 30% rise in loan transactions, with the average loan size growing to $11,000. However, this figure declined slightly due to the proliferation of small-dollar loans.

• UPST reported an impressive contribution margin of 67%, showcasing the efficiency of its business model (this is overlooked).

• In a positive turn, operating expenses decreased to $169M, reflecting a 35% annual reduction, thanks to strategic restructuring by the management.

• GAAP net loss remained stable at $28M, mirroring last year's figures, even with a 40% YoY decline in revenue, indicating the company's efficiency improvements.

• Adjusted EBITDA, accounting for non-cash items and singular costs, stood at $11M, doubling from the same period last year. This highlights management's adept handling of expenses amidst lending challenges.

• A record 88% of unsecured consumer loans were fully automated, emphasizing the company's commitment to streamlining finance and positioning itself for sustained success (bears refuse to look at this).

Balance Sheet

• The company concluded the quarter with a balance sheet loan value of $838M, marking a decrease from $982M in the previous quarter.

• Of the total loan amount, R&D loans, mainly auto, constituted $493M.

• After the quarter's close, the company executed a unique $200M ABS transaction. This involved selling Q2 loan vintages in the ABS market, effectively diminishing its balance sheet loan position post-quarter.

• Disregarding the ABS transaction, the cash position stood firm at $510M.

The Future For Upstart & Macro

• The company's recent loan batches are meeting or even exceeding anticipated outcomes (My oh my!).

• Upstart holds the view that its underwriting techniques are aptly fine-tuned for the current economic landscape, leading them to initiate a balance sheet funded ABS deal. This move aims to recalibrate market perceptions about loan performance.

• Older auto loans, specifically those penned around 1.5 years ago, have seen a rise in Charge Offs. Sanjay Datta attributes this trend to those loans originating in a distinct economic climate, using a model still in its refinement stages (something to watch).

• While such fluctuations might be anticipated within an R&D loan portfolio, they currently challenge the net interest income line. Despite these headwinds, the company is confident about the significant improvements in its modeling over the years.

• Current banking trends indicate heightened caution, with banks and credit unions prioritizing liquidity over aggressive lending.

• The institutional funding landscape is challenging, primarily due to the diverse yield options available in the market.

• The lending environment is likely to remain stringent until potential rate cuts by the Federal Reserve, anticipated perhaps in the latter half of 2024 or beyond.

• Post the quarter-end, an additional capital partner was onboarded in July. However, the magnitude of this partnership might not be significant enough to warrant a public announcement. Current forward funding capacity hovers around $500M per quarter.

• UPST is currently test-launching its HELOC product in Colorado, with plans to extend the pilot to Michigan. Key selling points include online approval within 10 minutes and a closing process under 5 days (we will see).

• In auto retail lending, there's notable growth, with a rise from 39 dealerships in Q1 2023 to 61. However, this increase isn't significantly impacting business volume yet (Not that significant but still positive).

• The company's small dollar loans are making strides, with 90% getting automated approval. Previously offered to applicants not qualifying for personal loans, this product will soon be universally accessible in Q3.

My Take