In this episode of the Left Brain Thinking podcast, host Chuck Jaffe interviews Madhu Chaudhry, an investment analyst at Left Brain Investment Research, to evaluate Upstart Holdings (ticker UPST). The conversation explains Upstart’s core offering: an AI‑driven, alternative‑data credit underwriting platform that evaluates thousands of variables beyond traditional FICO scores, enabling lenders to better differentiate good and bad risks. The hosts discuss the limitations of FICO, the benefits of Upstart’s model (lower loss rates, higher approval volumes, potentially lower consumer rates), and position the company as both a fintech and an artificial‑intelligence play. They outline the massive market opportunity in U.S. personal loans (~$80 B), auto loans (~$600 B), and broader consumer credit (~$4.2 T), noting Upstart’s current loan origination run‑rate of $11‑12 B and its rapid revenue growth (1,000 % YoY in the most recent quarter, with guidance for >200 % YoY). Despite high growth, the firm reports solid unit economics, with ~30 % EBITDA margin in Q2 and guidance for ~15 % margin in Q3. The discussion highlights management strengths (CEO with Google/Apple experience, product/data science head from D.E. Shaw) and significant insider ownership (~25 %). Risks are identified: high valuation post‑IPO, concentration of traffic from Credit Karma (Intuit) and loan originations through Cross River Bank (>60 % of revenue), though the number of partner banks has grown from 10 to 25, indicating diversification. The episode concludes that while short‑term valuation concerns exist, long‑term investors may find the growth trajectory, AI moat, and aligned management compelling. The podcast ends with standard disclosures and promotional information for Left Brain Investment Research.
Chapters
Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. Today we're discussing a new-age fintech company with Madhu Chaudhary, investment analyst for Left Brain based in India. He's making his first appearance on Left Brain Thinking, and you can learn more about him and the firm at leftbrainir.com, where you can also sign up and get information on their new weekly Jarvis newsletter, which looks at the insights gained from the firm's proprietary analytics. Again, check it out at leftbrainir.com. Madhu Chaudhry, welcome to Left Brain Thinking.
Hello, Chuck. Great to be with you. Looking forward to this.
Now you are making your debut here, and that makes you a new and different voice. Another way to describe that, well, when it comes to this show, you're an upstart, which is appropriate because today we're talking about Upstart Holdings. It's ticker symbol UPST. This is a fintech company. There's lots of those, but what makes this one stand out to you?
So Chuck, Upstart, like you said, is a fintech company that basically connects lenders with borrowers. However, its secret sauce is really its ability to help its lending partners determine a borrower's loan repayment capability based on not just FICO scores alone, but a broad set of alt data comprising of nearly thousands of variables that provide a more holistic view of borrowers' ability to repay a loan. For every loan made on Upstart's platform, Upstart collects a fee from its partner banks, and that's how it earns its revenue.
What is different about its process from the other fintech companies that have tried to make this work? Because there's plenty of competition. I can think of a couple of companies right off the top of my head. There's got to be something that makes this system different or better if you're thinking it's going to succeed where some of the established companies already have some, some pretty big turf.
Actually, before I talk about competition, let me discuss FICO scores in brief. As I'm sure most of our listeners would know already, FICO scores have been the all-important metric that lenders use to decide whether they want to lend someone funds or not. There are several limitations with FICO scores as they don't really take into consideration factors including how quickly an individual settled an obligation after it went into collections. Additionally, if you don't have a credit card, which a lot of millennials do not, then they don't really have a FICO score in the first place. Another way to think about the situation is that if there was a FICO-like score for stocks, I would certainly not rely just on that. I would look at a number of factors that would allow me to truly assess the attractiveness of a stock and put facts in context. So a company may be generating strong cash flows right now and may be available at an attractive PE, but that could also be just because it's in a very mature or almost dying industry where cash flows are about to evaporate. So I'm not really sure how one single score would capture that nuance. With this principle, Upstart is essentially trying to upstage the traditional way of lending in the US by looking at the lending decision more holistically. And by the way, Chuck, the new way of looking at borrowers' creditworthiness is already delivering results. After partner banks apply the company's algorithm, loss rates reduce, number of loans approved goes up. Also, the interest rates for consumers can be lower relative to if they had secured a loan on a traditional FICO score-based platform. These are the things that got us excited about Upstart. Now there are other players in this space. So Upstart is not alone. However, it has done the most impressive job of building a non-FICO, all data-led lending decision matrix and making lending more inclusive.
You haven't used what I think are the two most important words to describe what they do, where anyone who is score-based is basically saying, hey, we'll plug in your score. As I understand Upstart, it's about AI, artificial intelligence, that, that there would be some who would consider this less a fintech play and more an artificial intelligence play. Let's find a way to use AI to sort the good risks from the bad ones.
That's exactly correct. So they look at thousands of variables that help them or help the lenders differentiate between the good risk and the bad risk, which can't be easily explained by a single score.
Let's talk about the good risks and the bad risks with the company. In LeftBrain's case, we know that you guys are always looking for dynamic growth. So let's talk about the growth prospects and the upside of Upstart, and then we'll move to the downsides.
So let's look at the market opportunity. The company started with unsecured personal loans and has only recently entered auto finance. There are clearly several branches of the lending industry that the company can enter into longer term, even as it has barely scratched the surface in its existing verticals. In terms of the overall market opportunity, annual run rate of personal loan obligations in the US is around $80 billion. Auto loan originations are over $600 billion, and overall consumer credit is nearly $4.2 trillion. And that is just the US. Obviously, there's, you know, large opportunity in Europe and Asia as well. Now, on an annual run rate basis, loans originated on the company's Upstart's platform is around $11 to $12 billion. So the opportunity is clearly very large. And not surprisingly, the company's recent earnings results have been spectacular. They reported 1,000% growth in revenue in the last quarter. But that growth number is a bit misleading as Q2 last year saw major disruption from COVID Still, the company's Q3 revenue guidance, which is more apples to apples, calls for over 200% revenue growth year on year. And we believe that if the Q2 momentum continues into Q3, then those numbers could potentially turn out to be conservative. So that's on the revenue front. In terms of margins, you know, typically highly disruptive, high-growth tech companies are running losses as they are heavily investing in growing penetration of their products and services. In this case, the company actually reported nearly 30% EBITDA margin in Q2, and its guidance calls for nearly 15% margin in Q3, which again could prove to be conservative if revenue momentum stays strong. So the company is offering a combination of explosive revenue growth and solid unit economics very early in its growth curve. And, and, and, you know, that's something that worth appreciating.
What about the downside? I mean, there are some folks who would be a little bit worried in buying a stock that only went IPO at the end of last year that went IPO at about $30 and is now trading for well over $200, they would say, wow, there's already been a lot of growth. You're talking about maintaining the growth. Is the valuation a risk or is there something else that you would say, you know, hey, here's my warning along with my good outlook?
In the near term, especially after such an explosive IPO, there are obviously risks. However, at LeftBrain, we tend to look at the longer term, and especially when it comes to growth stocks like these, you have to take a longer-term approach. And if the company can continue growing revenues by 30, 40, 50, 60% longer term, then over time the company can grow into its valuation. So valuation is a concern for investors looking for sort of near-term investments, But for long-term oriented investors, we think the company still offers good opportunity. I will also add here that although the company has IPO'd recently, its management is actually a strong plus in the company's favor. You know, the company's CEO and product data science head, both co-founders, have a solid tech background. The CEO comes from Google and Apple. Paul, the product and data science head, used to work at DE Shaw, the large successful hedge fund that has its roots in quantitative trading. Together, we believe they're a formidable duo and, you know, they have the right skills to build a large tech-oriented business with AI and machine learning at its heart. And also Insiders own nearly 25% of this business, which we at LeftBrain like, as that means their goals are aligned with ours. A couple of risks that I also wanted to mention here. One is that there is some concentration risk here, both on the origination of traffic on the website as well as the banks it partners with. So the company generates a large portion of its consumer traffic from Credit Karma, which is now owned by Intuit. And on the other hand, a large portion of the loans made on its platform are actually made by one bank, which is Cross River Bank, which accounted for over 60% of the company's revenue. This risk is worth highlighting here, but it's also important to keep in mind that the company has made substantial progress on getting more banks on its platform. And as those relationships mature, the customer concentration should reduce progressively. So the company had 10 partner banks and credit unions last year, same time. And as of the last update recently, they now have 25 partner banks and credit unions. So the concentration concerns us a bit, but we like the fact that it's going down and we're moving in the right direction on that.
It sounds like a really interesting opportunity. FinTech, AI, put it all together. Upstart Holdings, UPST. Madhu, thanks so much for joining me to talk about it.
Thank you very much, Chuck.
Left Brain Thinking is a joint production of Left Brain Investment Research and MoneyLife with Chuck Jaffe. These conversations are not personalized investment recommendations, but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe, and you can find my weekday show on your favorite podcast app or check it out online at moneylifeshow.com. Thanks to my guest, Madhu Choudhry, investment analyst at Left Brain Investment Research based in India. Learn more about the firm's ideas at leftbrainir.com, where you can sign up for the new weekly Jarvis newsletter, which looks at the insights gained from the firm's proprietary analytics. Find it where you look for the Left Brain blog and keep your left brain involved on Twitter @LeftBrainIR. Left Brain Thinking is available every other Wednesday. Subscribe via your favorite podcast app. And until we don our left brain thinking caps again, happy investing, everybody.
