Why I Like the Stock:

As mentioned already, what drew me to look deeper into UPST was its insane growth while also bring profitable. Nearly all growth companies are unprofitable and cash-flow negative when growing at 100%+ YoY as these companies are investing heavily to grow. UPST was able to leverage its relatively low fixed cost business with strong contribution margins to become profitable at an early stage while still growing extremely fast. This allows UPST to have a strong balance sheet to weather storms (like the one it is experiencing now) and the capability of buying back stock. While other high-growth companies generally increase their share count through stock-based compensation early on because of their inability to pay employees in cash, and thus dilute shareholders early on, UPST not only uses minimal stock-based compensation, but also uses its profitability to decrease the share count through buybacks to reward investors holding long-term. The combination of profitability, positive cash flow, and high growth creates an opportunity for amplified shareholder returns over the long term.

     As far as its core business, UPST regularly releases pretty detailed data on its loan performance, default rates, etc. compared to traditional FICO loan performance. UPST has seen consistent outperformance on its loans and also sees it improving over time as its models are refined through more data. Therefore, so far, it has added value to borrowers by giving them quicker and easier access to credit, and to lenders who are able to fund better-performing loans. I am by no means a lending, technology, or fin-tech expert but UPST's growth, financial results, loan-performance data, and continual addition of new bank partners speaks for itself. There has to be some real benefits from its model to be able to grow at such an exceptional pace - it wouldn't just happen by accident.

   UPST continues to add new funding partners such as banks and credit unions. This is significant for multiple reasons. First, this validates that UPST's risk model and algorithm is attractive to lending partners, and offers increased returns with lower risk compared to traditional FICO models. As mentioned earlier, it also expands the potential borrower cohort of the lenders as UPST's model is able to qualify individuals who are 'incorrectly' denied under traditional FICO. This brings in more business for lenders. Second, adding new funding parters, especially ones with large amounts of capital who don't withdraw a large portion of funding in economic downturns, solves UPST's problems of i) not being able to originate a loan because a lack of funding, and ii) funding the loans from its own balance sheet and taking on credit risk. Currently, UPST has said that the lenders it currently works with are very conservative due to macroeconomic conditions, so it has had to deny borrowers who qualify. Overall, the continual addition of new lending partners means that UPST's funding mechanisms are improving and that its algorithm is trusted by lenders.

     The lending market is obviously ginormous. So far, UPST's growth has been solely due to its personal lending services. They are just starting to tap into the automobile and small business loan segments, which have a large opportunity awaiting (launched in 2022). While it will take some time to penetrate these markets, it provides additional avenues of growth.

   Although current economic conditions cause temporary pain for UPST's revenue growth and profitability, it allows its AI model to be refined and tweaked to be better able to assess default risk in future economic downturns, strengthening UPST's algorithm and providing it a further competitive edge.

     UPST's revenue growth over the last several years has been absolutely stellar. In 2018, they had $99m in revenue, 2019 - $164m (65% YoY growth), 2020 - $233m (42% YoY growth even with the pandemic), 2021 - $849m (265% YoY growth!). Something seems to be working for their business, and it doesn't seem to have only been boosted by massive economic stimulus in 2020/2021 as they had strong growth before. Additionally, consumers have less of a demand for personal loans when they are being given stimulus payments and being forgiven for rent. It is during economically difficult times that personal loans should theoretically be in higher demand. Despite UPST's problems obtaining funding for their loans from banks and other institutions, they had $310m in revenue in Q1 2022 (156% YoY growth from Q1 2021). In Q2 2022, their revenue declined to 228m, but that was partly due to a $30m markdown on the loans they held on their balance sheet because of rising interest rates (another problem with having to fund loans through their own balance sheet); however, their fee revenue for Q2 2022, which is a better gauge of their operational success, was actually $258m, up 38% YoY. UPST stock got dinged recently because of their weak guidance of $170m in revenue for Q3 2022. This decline in revenue, in my opinion, is largely attributable to funding constraints and markdown in loans, which are seemingly temporary problems and not long-term thesis breakers for UPST (assuming they are able to improve and streamline their funding process, which they said will happen over time).

    To go in a bit more depth on UPST's balance sheet and profitability, its 800m in unrestricted cash is about 40% of its market cap currently. Even though the company would never do so, they can theoretically buy back 40% of their stock at its current market cap of $2b and probably remain in business if they are cash flow positive, which they have been for most of their recent history. More realistically, they will just use up more of the remaining $275m in authorized buybacks, which at the current valuation, would equal roughly 14% of the company's outstanding shares - that is still a huge buyback. In addition, most of UPST's costs are fixed; therefore, as they grow, their operating leverage will allow them to increase their net margins and FCF margin. UPST can also fund its own growth without the reliance on borrowing money or issuing equity to raise capital, which is a big problem for unprofitable and cash-flow negative companies in 2022.

     The company's balance sheet and profitability setup resembles that of a mature, slow-growing, cash-generating software company - however, UPST is still in its early growth stages and in a truly unique position to provide immense shareholder returns if their business model proves resilient and competitive. That is why I highly stress that UPST is a true risk-reward opportunity. While there are definitely uncertainties, there are promising signs to perhaps overcome those uncertainties - if they are successful in their business model, then shareholder returns (earnings/share, FCF/share, buybacks, dividends etc.) will be unlike that of any recent high-growth company. For comparison, some companies grow at a very fast pace, but do so unprofitably and by using stock-based compensation (diluting shareholders), which diminishes the potential for exponential shareholder returns in the long-term. 

     Another important quality many well-known investors look for before investing in a company is whether it is owner-operated, meaning a founder/significant shareholder is running the company. The reason for this is because they have skin in the game and are highly motivated to make the company succeed. His/her interests are aligned with that of long-term shareholders. UPST's founder Dave Girouard was the former President of Google Cloud and has served as CEO since Upstart's inception in 2012. It's comforting to have a CEO who has a large stake in the company (~14% stake in UPST for Girouard) and has a fire in his belly, which Girouard seems to possess.

     While I can yap on and on about the future which could very well not come to fruition, the bottom line is you are buying a high-growth stock with big upside potential at a very cheap valuation. It doesn't even need to grow nearly at the pace it has in the past to justify a higher valuation multiple. The worst case is you lose 100% of your investment. The best case is probably a ten-fold or more return in the next few years once macroeconomic conditions improve. UPST is worth a look for investors looking to add a relatively small position in a speculative company in their portfolios that can grow to a large position over time.