Chit Chat Stocks - Upstart (UPST) with Kris from Growth to Value

Episode Date: December 2, 2021

Upstart is an AI lending platform. The company focuses on using non-traditional variables. Upstart takes into education, employment, and other variables that traditional banks don't prioritize. Kris brings his expert knowledge of Upstart for a great discussion regarding the history and future of the company. Enjoy the show! Our Thursday Deep Dives are sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android  Special promotion through the end of 2021: Subscribe to 7investing with the code "chitchat" and get $50 off your annual subscription: https://7investing.com/subscribe/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Kris's work? Follow him on Twitter: https://twitter.com/FromValue?s=20 Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ  Contact us: [e-mail]  Timestamps Upstart | (4:24) Management | (34:45) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today, we have an interview with Chris, our friend from Growth to Value. You may know him as his pseudonym. And we've talked about his marketplace on here before, potential multi-bagger. So multi-time guests. And we're talking about Upstart, which is kind of a popular company. A lot of people tend to follow it. And we've talked about it once before as a not so deep dive. So you can pair it with both episodes, Maybe if you wanted to listen to that for maybe more of the basics of, say, kind of the income statement, some of the basic valuation numbers, at least at the time, more of the basics in that episode. And this one's more of the deeper dive of kind of the competitive landscape, all that type of stuff. We kind of go for the hard-hitting questions with Chris.

Before we get to that, though, we want to talk about our friends, our sponsor, Quarter. Where you can listen to Upstart's conference calls on. Actually, yes, you can. And that's where I list all my conference calls. It's the most intuitive solution. It's, I think, maybe the only mobile solution. And they have an iPad app that I like to use to read on. Yes, because they have the transcripts.

So they've got all conference calls for basically any company you might want. They've got, so the conference calls, transcripts, and investor presentations. Am I blanking on anything else? No, but they're adding other stuff. They try to make it the comprehensive connect, like any sort of thing that a company puts out, connect that with investors very easily in all one central place. can be difficult on the investor relations page. Some of them are very good, but some of them can be quite poor. So quarter is trying to improve that for you. Yeah. And they're growing really

fast. It's been fun to watch them kind of gain traction among the investment community, but you can download it on iOS or Android. It's quarter, Q-U-A-R-T-R, no E, quarter. And you can also follow them on Twitter at quarter underscore app. Before we get to the show real quick, Let's just mention that you can still use our code, our holiday code, Chit Chat, if you're considering a 7investing subscription annual, you get $50 off. Go ahead, use it. It's so much that we love. Limited time offer.

It ends at the new year. So get it in while you can. Without further ado, let's get to the show. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions

in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. All right, today we are welcomed by, I want to say, almost fourth or fifth time guest now. You've probably heard us talk about his service, Potential Multibaggers, but it's Chris from Growth to Value.

We've had him on the show plenty of times, and today we're talking Upstart. Before we get into what they do and kind of how you came across it, how have you been? It's been, I want to say, six months since we last spoke? No, five, five, I think, yeah. So how have you been? Great. I mean, I'm enjoying the markets, unlike a lot of people, I think. But I see the businesses of the stock that I have picked doing great.

The stocks themselves, you know, they fluctuate, of course. But that's, you know, that's temporary. If you zoom out, you see that the businesses are doing great. And the same trends that, you know, were there in February at the top of this growth market. let's let's call it, uh, are still there. Uh, although people often judge on, uh, on price on price, of course, um, often because they do not have enough other information, uh, about the businesses that they own or part own. Uh, but I think, uh,

you know, I, I keep seeing the same things coming back and back and back. All right. Well, and today we're talking to upstart. How did you, how did you find upstart um and when did you first uh i guess become attracted to it um i often i often look at uh ipos when i mean um when a new company comes to the to the market i um i'm i'm not pretending that i that i read the whole uh s1 or so of course not i don't have the to read everything but um i look at what kind of companies is and what does it do etc and um i never buy ipos by the way because of you know the incentive um you always have you always have to to ask yourself you know um who who's the beneficiary of this and if if you look at ipo

um banks and uh you know institutional holders and so so they hype up a company or stock uh new stock as much as possible you know to be able to sell it at an as high uh of the price should be as high as possible for them because they they are the ones who are selling you uh something so that's one of the reasons that i and another important one is that i you know i want to see some quarterly results um but when i i saw the the um you know the s1 of um of upstart you know i was quite interested in um um in it and i put it on my personal watch list the reason that I was interested in is, I thought, it makes sense to see a business that tackles a problem with AI. A FICO score, first and for all, as far as I know, is only broadly used in the US.

I live in Europe, as you know, and I don't have a FICO score. Of course, banks do have their own systems, which are very untransparent, but there is no FICO score, so that's one thing, or not in the same way as in the U.S., where you You can easily know your FICO score. Then the second thing is it's very deterministic, that FICO score. What I mean is that you get put a number on you, and it can be something of the past. Maybe you have problems paying your student loan for one reason or the other. What does that mean five years later, ten years later?

not that much. You probably have changed a lot, especially from that age. I think it's a problem for people who are consumers in that way, but every problem is an opportunity. I thought But, you know, it would make sense to tackle that problem with AI. And, of course, AI is, you know, it's a buzzword. And, you know, with those kind of hypes, you have two dangers. And the one danger is that, you know, it's already in what I said, people get hyped up. Oh, yeah, AI, AI. The other danger is, you know, the complete opposite.

it oh it's ai you know let's throw it away um you always have to see the gray between the black and white and um and i thought in this case it made sense and you can call it ai you can call it big data you can call it whatever you want but it makes sense to try to make this better with you know data um and and that's why i was interested and then um you know i was uh very impressed by of founders as well especially uh you know uh dave gerrard and uh and paul goo yeah i've had a councilman as well but i mean she came from google so it's not that uh uh she did she is not impressive but um especially gerrard and uh and goo are you know the guys to watch here um and um i it was a combination of those things that you know really made me look at it and then

When those first results came out and they blew the expectations out of the water completely, twice in a row, then I really researched it much deeper. Then I read the S1 completely and all the rest. I missed the interviews, etc. So that's a bit of my story with Upstart. And for any of the listeners that don't know what Upstart does, can you just explain the business model broadly? Yeah, well, Upstart is actually a loan originator. It gets revenue. Its revenue comes from banks who pay a fee to get that loan.

That's probably the easiest way that I can explain. And one of the things, initially, my first reaction was, well, I'm not interested. That was my initial reaction. But because of those great results, I really looked deeper. And I started thinking, because of that link with Google, both from Dave Gerrard and a councilman, I started thinking, well, isn't this much a business like Google in a way that, you know, in a way, Upstart is a form of marketing, actually. So, Upstart doesn't have loans. Well, it has about 2% or 3% loans on its own balance sheet, but only for experiential reasons. So, they first test their AI on capital that they have in their books to show the results to the bank.

So, a bank is a very conservative institution, and they want to see results first before they want to try it out. That's the reason why Upstart takes a little bit of credit, 2% or 3%, and that's for experimental reasons only. But for the rest, actually, you can see Upstart as a connector between people who want to loan and banks or credit unions who want to give a loan. and using AI there to make the best combination of the two really makes sense to me. So I think that's important. And then, of course, the bank who gets the loan gives a part of that, it gives a fee

and it depends on the bank, I think, but just a very small part of that loan is given back to Upstart as well. It depends. It can be 0%. It can be 0.1%. It can be 1% or 2%. I think that's the highest. Upstart, you could say, is actually an algorithm. Google was an algorithm to connect to markets that's that's for me um um you know the the the reason um that um i see i see that you know connection with with google and uh if you if you if you look at what was you know what was the advantage that google had it was i don't remember exactly but a few milliseconds faster than other search engines, right?

And it has better insights. And that's actually what Upstart has as well. So it's not faster, but it has a higher quality of loans compared to its competitors. So that's more or less the business model of Upstart. upstart so it connects um people who you know who look for uh alone and people who or banks institutions credit unions who um you know who grant loans and they try to do that in the best possible way for uh for both so that means that you know if you are a bank you

know if you use Upstart that you have either more people who you can give a loan to or you have the same number of people but with much less defaults. If you know that, you'd probably know that if I would take a loan or you take a loan, we'll probably pay it back, right? But we will have to pay some extra, not for our own credit risk, but for that of others. Actually, the people who pay their loans actually have to pay extra to, you know, to make up for the losses. And, you know, that's how banks and credit unions, you know, make a profit on loans as well. And if you can reduce the number of defaults, you know, you can also reduce, you know, the

APR, so the percentage that you have to pay each year. Right. That makes total sense. And the big advantage that everyone talks about is Upstart's AI-driven underwriting model, the data-driven underwriting model. They talk about the big spreadsheet. I think they joke about that in their conference calls and stuff like that. Let's start things off with kind of a big question that people think about here. How hard do you think it would be for someone to compete with their model and replicate it?

Well, I hear a lot of people say, oh, you're essentially getting a black box or you have to believe it, and to a certain extent, that's true. On the other hand, you can look at secondary parameters to see if the results are good, which they clearly are for Upstart. I think artificial intelligence, AI, is just starting out. I think we'll see much more companies using it. The problem is you cannot see how the mechanics work. If you Google, you see, oh, this is fast.

But on the other hand, there's a big part of Google that you don't see as well. I think that's the same thing with Upstart. I don't use the platform of the Trade Desk, for example. I don't use the platform of CrowdStrike, for example. I hear people using them saying they're good. I have to believe that. I especially look at their results, and the results of the Trade Desk and of CrowdStrike are extremely good, much better than their competitors, especially of the same size.

That's how I look at Upstart as well. I see that. Now, coming back on, is it difficult to to make that AI? I think it is. Paul Gou is a great programmer. He has developed it. Does that mean that he's a saint and that's the reason why um you know you should buy a upstart for your portfolio no i mean um there are lots of great developers who are not you know invest worthy because they don't have enough sense of business now um the the cf the cfpb so um the what was it again the consumer financial protection bureau so that's a government

institution they issued a letter saying in 2017 this AI is good enough and what I mean is we're not going um after this after this one uh to sue it or whatever uh upstart is the only one who has that letter and um the reason is that they um have worked with um the cfbv to um to make sure that there is no bias for any, you know, let's call it taboo, right? So it doesn't discriminate on gender, on race, on the area that you live in, whatever.

so um this is very important to understand because um it's not easy to get that letter now if it would be just that letter okay that that would already be a hurdle but there's a second hurdle i mean um to get that letters is a big hurdle but one of the um one of the things Because one of the conditions, one of the things that Upstart had to do was they had to update the CFPB on a regular basis. That is how it was in the letter. That means that Paul Gu or someone on his team has been sitting together with the committee every week to evaluate.

Each week, they get critical questions. If you're Paul Gu and you are a good programmer and you get constant feedback like that every single week, you will improve your algorithm, AI, or whatever you want to call it. It's great feedback. If people say that Upstart has a data advantage, for me, it's not just, oh, we have this much data of customers. It's much more that it has been criticized every week. There are no biases in that AI.

In the meantime, we have seen that it works and Upstart has done a test and if you take on the same credit risk as what you would do now, there's 75% less chance for defaults. 75%, which is impressive, of course. Could banks come up with such an AI? Suppose one does. We're talking about the big banks then. I think that a smaller credit union in a local community will do that. We're talking about Wells Fargo, JP Morgan, what have you. Suppose that they could do it. suppose that they pass that first hurdle and that they get the same letter. They will still have to, those four years, more than four years of constant questions,

they still would have to do that. But okay, it's JP Morgan or whatever, whoever, over, they could do it much faster, let's say a year or so. Now you have Upstart, which has an AI model that works with it, and JPN that has the same, more or less. This is hypothetical. This is maybe two years, three years out. Now, what will the rest of the big banks do? They will try to come up with their own AI model, of course.

there be another one succeeding? I have my doubts. I mean, yes, they will come up with AI. Will they take those two hurdles as well? I'm not so sure. At the moment that one of the big banks – let's take JPM – at the moment that they have that AI, the other big banks will have to follow. they will have to follow. They can come up with their own AI, which may or may not be as great, or they could even partner with Upstart or take their API because they can also integrate the software of Upstart in the bank like an API. That's a part of the code that you just you know use on your side and then it it's it's all branded like it's your room but you know um upstart would get um or it already has that api by the way um so it would get a you know a certain

part of the revenue you know the twilio model is the same thing there so i mean i think and also Of course, no big bank will go to JPMorgan Chase in the hypothetical example and say, oh, well, I like you. You are my friend. I want to take your model as well. Of course not. I think that people underestimate how difficult it is if you see the full context and if you see if there would be one big bank having their own AI, it should even be an advantage for Upstart

because other banks will have to have their own AI, which is as good as their big competitor, or they will have to come up with something else. It's not something that I'm particularly worried about because of the hurdles, because of the time that it takes to get it to that same level of quality. And yeah, I'm certainly aware that big banks have lots of data, but they don't have the structured data that are used in AI because random data doesn't mean anything. You really have to structure those data. Even if they can do that, I mean, there's still lots more to the picture.

So I have heard his arguments many times before, but I think people underestimate it. how difficult it is if you put it into a context. Right. And that's some great perspective on the competition. And the other big question people have all the time is the quality of loans being originated. People get worried about a financial connected institution or a lender, or in Upstart's case, they're not a lender, but they're enabling lending. How do we track the quality of loans being originated?

One of the things that I have seen some people coming out with, oh, the credit score, the FICO score of some of those loans are very low. Well, that's exactly the point, right? So if you look at their business model, you can either choose. As each individual bank, each customer, let's call it, can choose between two assets that Upstart has. As I said, if you take a certain credit score, let's say 600, if you are a bank and you say, say, oh, I only want a FICO score of 600 and above, and you do that through Upstart, your default rate will go down by 75%.

We cannot completely control that, but even if it's 50%, the banks can get the insights easily because it used to take months, six months or longer before a bank tested it first for six months. Now, one of the things that Dave Jarrett said on the last earnings call was that they onboarded a bank now in 50 days. In those 50 days, the bank was already convinced that this works. It used to take months and months and months. So the banks will, of course, control if it's true what Upstart claims. And if you read the statements, of course, these are promotional statements in PR and what have you. But even there, you can sense that it's more than just PR talk.

And there is real enthusiasm in the statements of people from banks and credit unions. So that's one side. You can lower your default rates by 75%. The other possibility is that you say, well, let's take the same default risk as we have now. What you can do is you can lower the creditworthiness of your potential customers by a lot at that moment. So, a big group which was not a target because they were too risky now suddenly can become customers. so and those are the two pools that you can work with as a bank and most banks you know choose somewhere between the two and they can adapt that at any moment so um you know it's not just

um lower you know they they don't take one pool and then stay there no they they can really turn Turn the buttons there and look what they see in their results and see what they can come up with that works best for them. One of the things that we have seen now is that several banks, four already now, have completely done away with the FICO score as one of the parameters, so they don't look at a FICO score anymore. They want to look at the potential of a customer and not at his or her past. That's actually how you have to think about the quality of the loans.

There will be a mix. There will be a mix of lower defaults for banks or the same default on average, of course, but a lot more target customers, let's call it. That's the two sides that you can play with as a bank. Another question that I think Brad, our friend Brad, most of the listeners probably know him. He's on the show once every two weeks. He mentioned to us to ask this question, which is the customer concentration with Credit Karma. So for the first nine months of this year, 44% of Upstart's loan originations comes from Credit Karma. I'm curious how you think about that. Do you see that as a big risk? It's definitely one of the risks. I mean, there are a few. Now, just to make sure so everyone understands, people go to Credit Karma to check their credit score, credit wordiness, what have you. And they are brought to Upstart's platform. It has gone down. I don't

remember exactly what it was, but it was more than 50%. So it has come down. Now, I think if you put it in context that it is still a bit of a risk, but Credit Karma has been bought by Intuit. and some people are afraid that Intuit would you know set up something competing with Upstart is that possible yes of course that's always possible nothing is impossible in business right but it's I think unlikely one of the reasons that I think it's unlikely is that you know Intuit has paid, I think, $8.5 billion to get Credit Karma. If they would do away with Upstart, it's half of the revenue. And it would have to do away with the other customers of Credit Karma as well

because they would be competing as well. So they would actually annihilate Credit Karma completely. their $8.5 billion acquisition. That's one of the reasons that I think it's unlikely that Intuit will start something like that. If it would do it, it would probably remain as diversified as possible, but I don't see them going into this anytime soon

because of the acquisition. And I think that Intuit could come up with loans, but I'm not sure if they would come up with – I think they would probably focus on business loans and not so much on personal loans, et cetera. But the future is always a surprise to everyone, and it's one of the things that I look at if the quarterly report is filed at the SEC. And I will check it out. And that's one of the things that I will control F to see how Credit Karma has done or how the traffic from Credit Karma has become less in this case. But it's not something that I lie awake at night thinking about Credit Karma. it's yeah i mean ideally you don't want to see that much of an influence coming from another

company but at the same time i don't it's not a direct competitor i don't see into it going into direct competition anytime soon or so there are no signs of that and would be very strange because it would kill their 8.5 billion acquisitions. So, yeah, it's something to watch, but not overly concerned. Yeah, Control-F, that's the most important tool for those quarterly reports. They can save you so much time.

If you don't use the Control-F, you're missing out. All right, we've got plenty more questions, but we're going to hit a quick ad break before we get to them. this episode is brought to you by La Quinta by Wyndham here you are miles from home and ready to start your vacation good thing you're staying at La Quinta by Wyndham they have free high-speed wi-fi to stream all your favorite movies and in the morning get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center either way you're ready to

conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. This episode is brought to you by KPMG. As a business leader, how can you innovate, build trust, and move forward in a digital era? KPMG can help by bringing together the right talent and technologies, generating insights that spark opportunities. To explore they're thinking, visit reed.kpmg.us slash opportunities. Okay, welcome back in. I wanted to know what your thoughts on management are. You talked about it briefly, but there's Paul Gu, Dave Gerrard. I think there's three founders, if I'm not mistaken. So what do you think about them? How important are they to your investment? Yeah, well, the third one is Anna Councilman.

She comes from Google as well. They are actually very important. It's one of the things that, if it wouldn't have been there, it's not who gets really excited about creditworthiness. I mean, not me and not that many people, I think. When I saw that Dave Gerrard came from Google and a councilman as well, especially Gerrard, he was the one who started, or I'm not sure if he restarted, but he was there from the very beginning with, how is it called now, Google Apps, G Suite, or whatever you want

to call it. So the business side of Google, so with Drive and all the docs and what have you, subscription service. And he has built that from the ground up to the billion-dollar business that it was already several years ago before he said, you know, I want to do something for myself. And I want to, you know, I want to start my own business. And I want to solve a problem. And And, you know, he thought really long about the most annoying problem that he could think of. And, you know, credit was definitely an annoying problem for him. And initially he, you know, he is a bit, I would put it, you know, he's not someone who stands out in a crowd. You know, you have very charismatic leaders.

you know they fill the room from the moment that they you know they are there dave gerard is you know humble i mean i'm not sure if that is the correct word because if you listen to what he says i mean he says now um i'm sorry when they had their ipo worked with 10 banks so and then they you know i think they have 31 now so in a year they have tripled that uh but you know he He says things like, I cannot imagine not working with hundreds of banks in a few years. Or, you know, I want to take this globally. So if you listen to what he says, you know, he's very ambitious. At the same time, he looks a bit like, you know, that professor that you once had.

And then you thought, well, he was, you know, a gentle guy and, you know, soft spoken. And so he has that side as well. And then the combination with Paul Gu is, you know, is great because and a councilman. I'll talk about her. You know, she's, you know, she's one of the first that is still underestimated, I think. I'm sorry. But Paul Gou, he's brilliant. I mean, he's a Peter Thiel 2020 fellow. So, you know, he got into that program.

He has a degree in economics and programming, I think it is, from Yale. And, you know, he worked at D.E. Shaw. So the Shaw is the same quant company that Jeff Bezos worked for before he started Amazon. And that's a collection of brilliant minds as well. Paul Gou is that guy that you think, this is Prodigal Son and he is the smartest guy in the room, you can be sure. Now, if you talk about Dave Gerrard and Paul Gu, I think without Anna Councilman, they wouldn't have had the same success because starting a company is more than just solving technical problems. It's also working with people. And she has been doing the HR department, and I think that's very important.

And she has been one of the driving forces behind, you know, Upstart going fully digital or, I mean, telework then. um and and then um i think at this moment 75 of the the people working for upstart you know have never worked at the head office because you know the headquarters um because they um you know they only started after the pandemic started and that's you know very important to understand because in that way upstart can really get the best talent from everywhere because if you are You know, the 6,753rd Silicon Valley company that wants that same AI talent, well, good luck if you're smaller, right? So I think that's very important to understand as well. I have a few subscribers who are AI specialists, and they say, and I cannot judge on that myself, but I believe them.

I say that they say that, you know, Upstart really has top talent because you have AI and you have AI rights because a lot of people call an algorithm AI because it sounds better now nowadays. And, you know, there's a big difference between an algorithm that can learn on its own because that's artificial intelligence. right? And one that just performs a regular job and automates a few things. They say that Upstart really has top talent. One of my subscribers says, Because of the 100 people that work in AI, one is really a great AI developer. Is that true or not? He says that the rest are just people. Not everybody.

You have skills, of course, but a lot of people working in AI don't have the specific training to create something completely new. You can discuss about that. I'm not 100% sure that is correct, but it's something I think of. And with, you know, Paul Gu, and I have named Dave Gerrard now. I have named Paul Gu. I have named Anna Councilman. But those are also the three co-founders.

And, you know, that may sound, you know, very normal, but it's quite exceptional that three co-founders are still together after, I think, 12 years now or so. And I think that is because of the fact that they are completely different. You know, Dave Gerrard had a lot of experience and he found out the first time he met Paul Gou, he found out that the parents of Paul Gou

were actually younger than he is. um and then um you know so paul goose is still very young i think he's i don't know 30 now is see is he already i'm not sure um and then you have a and a councilman who who who really has that um you know talent for let's call it human connections and and and that is often so underrated So the three co-founders are definitely part of my investment thesis. All right. And a lot of people talk about credit risk when it comes to Upstart, and they have a few of the loans on the balance sheet, like you mentioned. But how comfortable do you think, as they scale, will they be for taking any of this stuff in-house? Have they talked about taking stuff in-house, or do you think they're all going to make it more third-party loans?

I cannot see them doing it anytime soon. So I don't think they will take more credit risk on their balance sheet because they really position themselves as a tech company and not a semi-bank, let's call it. So I think you never know down the road, maybe seven, eight, ten years out. Maybe they hit a speed bump and they look into it deeper, but I cannot see it coming anytime soon because they still have so much potential market share to gain that, for me, it would be a red flag right now. So I wouldn't, again, unless it's, you know, it's a bit more because of a certain reason, what have you, there are always nuances, but if they would say, you know, we're becoming, you know, a big lender ourselves, I would not be, I think it would be re-rated very fast in its multiple as well. because right now they are the attack company at that moment they're becoming another you know another lender and i think you know their valuation probably would go down i don't know by 75 or so so right and let's get more into the some of the segments of their business they just

had the prodigy acquisition in the spring that seems to be going great so far can you explain what that company is and what opportunity it presents when combined with upstart yeah so um they originated loans as well but then car loans so they are uh you know they are focused on car loans and they they start actually with uh the place where people buy cars so car dealerships So they are actually what Upstart is for banks. They are for car dealerships. And they, you know, they try to, you know, if you buy a car, you don't want to pay too much attention to credit, right? Or to credit.

I mean, you just want an easy solution when you buy a car. And so most loans are originated in the car dealerships. Now, again, you have the same mechanism that works in car loans than you have in personal loans. So people defaulting means that other people have to pay extra credit risk to get some profitability for the banks or credit unions or what have you. Now, what this means is a project could even, and is already doing that, refinance car loans at a cheaper price and undercuts everyone's own price on EPRs and is already doing that. Now, I think it's very early at this moment. They have originated, I think, $2 billion in car loans.

It's very early in that sense that they're just starting out. I think some people already expect results in the next quarter or so. I think it will take time. At this moment, personal loans will remain the main business of Upstart, but I really like it that it's diversifying its stream of revenue because I always have loved companies. C Limited, for example, if you look at C, you have a more mature company in Garena, gaming division. Then you have Shopee, which is already big but still growing immensely fast. Then you have more or less like a startup in C-Money. Those are the three divisions.

I really like that part that companies almost have startups in their own companies. You have seen that with Google as well. You have seen that in Amazon. You have seen that in Apple. Those are really important signs for me that this company thinks over the long term. This is not something for next year. This is something for the next decade. Then they will probably go into the mortgage market as well. Then you have another growth pillar for years to come. That's a bit how I look at it. This is their internal startup that they have acquired because they already have some car loans, et cetera.

But it's still small. And I think that Prology acquisition will pay off immensely over time if they play it well. You mentioned mortgages. Have they made any moves yet into that business? And then how important do you think that business can be long term? Well, they have officially announced it on the last earnings call that they will go into mortgage.

So they will work on it in 2022. What work on it means is not that clear. I don't expect them. Maybe they could launch something, but, you know, again, very early stage, more to test the waters, to see how their AI performs in that market, et cetera, et cetera. It's something which will, you know, take time to work out, but it's a huge market. I mean, if you look at mortgage in total in the US, it's 11 trillion.

I mean, that's, I don't know, but I cannot even think of how big that is. You know, it's so huge. And you know what they say, if we can take 1% of that market. I'm joking. I'm joking, but I'm sorry it doesn't say that, but it's a huge opportunity. I think that there as well, if they can break that code of bringing down the defaults a lot, or Dave Jarrett talked on the conference call about the missing million. And he said, if you look at 2001, so way before the financial crisis, which came because of a housing bubble, as we know, but 2001, there was no bubble yet.

And if you look at 2015, you see that there are 1 million fewer people who have a mortgage. And that is because of, you know, the fact that it has become much harder to get a mortgage, which even not just because of the coming back to earth after the housing bubble, but there's still a big gap if you compare to before the bubble started forming. So he says this is a great potential market. And if they can do the same thing there for those people, And I think, I mean, you can be very cynical about Upstart saying it's credit and they're just interested in money. But I believe, Jared, also because Upstart is part of charities to give more people access to credit because it can change their lives, right?

I mean, buying a house is so important for so many people. And you can be cynical about that. But, I mean, you really change the life of people who cannot afford a house right now because they're not granted a loan. And if Upstart wants to, the people who deserve the loan, despite certain things that have happened in the past, it's not about the past, it's about the future. And they want to energize that potential in the market of addressing those people and giving them a mortgage loan as well. And I think it's interesting to see that if you look at the terms or the periods, it's getting longer and longer, right? And first, you have personal loans now, which are short-term. Then you have car loans, which are already, let's call it medium-term.

And then you have mortgage, which are long-term, 25 years, 30 years or so. And that will also, over time, stabilize the predictability of the revenue of Upstart. I think if Upstart can do the same thing, connect people who want access to the market or to mortgage and cannot get one, the institutions who want to lend out money but who are afraid of defaults, if they can be that efficient connected between those two markets or two parties with both their own desire and make that a great match for both parties, I think they can do extremely well over time. Again, it's very, very early, and I think people underestimate sometimes how early Upstart

still is. It's almost a startup. Haha, I had to say it. I think it's extremely early, and that's also something typical. The concentration on credit karma, you see that in early companies. I think you will see with those new markets, you will see that Upstart will change dramatically as a company itself as well, I think. So it will become mature. Right, right.

And let's do kind of a backwards question into a valuation discussion. Upstart, in some ways, is trying to dethrone FICO, which, if anyone doesn't know, that's credit scores. But they already have approximately twice its market cap. How do you think Upstart can fulfill these high expectations over the next decade? And do you think that comparison has merits? No. Why not? Because it's all about revenue, of course.

And if you look at the revenue of FICO, it's not because it's so much older. I think if you look at 2022, so next year, I think the revenue of Upstart is estimated to be 10%, 15% lower than that of FICO. I mean, that's not such a huge gap. And of course, you know, last quarterly results for FICO, the revenue was down 10%. You know, if it was up in the course before it was single digits, I mean, of course, Upstart is expected to grow faster. And it's normal that a company that grows faster, you know, gets a higher multiple as well. And also, you cannot really compare the two. I mean, it's a bit like saying, you know, Google at the time, right?

Google wanted to replace Yahoo. So does it make sense that it already has a bigger market cap than Yahoo? Well, yes, because there are so much more potential. I mean, if Upstart can really break the new markets that it goes into and be successful there as well, I think it could still 10x and maybe more. I think there's a lot of confusion about the actual model, but I think that Upstart is some sort of tollbooth MasterCard, Pfizer type of company, or it has that potential. It is not that company yet. Let's make it clear. But it could become that type of company that if you have loans and you want to go into that market and you do not have it, you'll have a disadvantage. In that way, it's the same thing. The take rate will be very low.

I mean, for Visa, MasterCard, it's, what is it, 2% or so. And I think it will be the same thing for Upstart. But if they can continue to add new partners, to add new markets, I mean, the potential is huge. Of course, there's always execution risk. um you know the company has has to do uh everything perfectly uh or perfectly general picture has to be perfectly there can always be mistakes every company makes mistakes that's that's normal but um you know that the the execution should be very uh or will be very important and i think if you look at uh what dave jared has already done there

If you look at his past, you know, Google and Google Apps and G Suite and what have you, I think that is an extra sign that this guy knows how to execute. And that is also something that, you know, gives me confidence. Of course, it's no guarantee. there are lots of examples of very smart people who have proven themselves in the past who still screw up but nothing is certain in investing of course you look for a probability and and you look for factors that can improve that probability in your advantage right right and i mean if you're betting on a guy that built google drive i mean that's you know one of the best products out there. Uh, but sorry, Ryan, do we have one more last question? Yeah. Last

question, I guess, how could this investment go wrong? What are sort of the biggest risks, uh, associated with it? Yeah. Well, um, I think the biggest risks that are named now are, you know, the, the traffic from a credit camera and, um, you know, the fact that, um, a lot of the loans are sold to just, you know, two banks and mostly cross river bank, which is, uh, you know, a bank, which I think is really visionary. I have been saying for years, and this is not my original idea. I got it from Unscaled by Hemant Taneja, which was a quintessential book for my investing.

In that book, Hemant Taneja says that he sees the future of finances as a completely different, completely different from what you know. And he compares it to telecommunications. So, you know, you have the big players, you know, the hardware, the lines, and then you have the internet, right? And if you look at the internet, you know, boom in 2000, a company like, you know, Intel,

for example, or AT&T had huge valuations but could never really return to those kind of valuations. Because if you look at the history of the internet, you see that probably the best time to start investing in the internet was 2010. That had a bit to do with the crash as well but even if if you started 2012 2014 2000 2016 and you saw what was happening um the the real value was in the uh you know the the the products built on top of that infrastructure if you make that comparison with um banks um banks will become the infrastructure and not the ones who take the huge profits anymore. They will have reliable revenue.

Why? Because if you see one thing that has continued is that there's more and more regulation for banks. So they will become more and more regulated and the real value will be built on top of their infrastructure, namely fintech. And Upstart is one, Square is one, You know the names.

There are plenty out there, and some will be huge, and others will go away probably in a few years, but there will be huge winners there. And I think the biggest risk is not the fact that for Upstart, at this moment, they have revenue concentration or traffic concentration. the biggest risk is that another startup would come and completely have a better model, work better with the banks. I don't know. You never know. Maybe that company is already out there. If we talk about AI, sometimes a small difference can make a huge difference in the end.

I think that that is the biggest risk to Upstart that it would be disrupted. It's as simple as that. Well, that's all the questions we have. I guess for any listeners that haven't heard you before, where can they find you? Well, they can find me on Seeking Alpha. I publish free articles there. If you go to From Growth to Value on Seeking Alpha, you can read my free articles. If you are more interested, you can go to my marketplace, Potential Multibaggers, which has, of course, more content and portfolios and chat and what have you. You can always find me on Twitter if you're listening in the car right now. Maybe that message Which is a bit too, then you just have to remind, add from value, and you go to my pinned

tweet, then you'll see everything as well. Right. And we'll make sure to link that in the show notes. And we can attest to it, the write-ups on potential market beggars are very thorough and they're great analysis. Thank you. All right. Yeah.

Thanks for joining today, Chris. It was a pleasure. Thank you very much for having me. All right. That's going to do it for this episode. Thank you all for listening. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation.

Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.