There have already been a few posts around the preliminary results, but no one has discussed the CEO's and CFO's comments, which I think are the most interesting part. If you're here, you probably already know they posted a ~25% revenue miss for Q2 and -12% margins.
“Inflation and recession fears have driven interest rates up and put banks and capital markets on cautious footing,” said Dave Girouard, co-founder and CEO of Upstart. “Our revenue was negatively impacted by two factors approximately equally. First, our marketplace is funding constrained, largely driven by concerns about the macroeconomy among lenders and capital market participants. Second, in Q2, we took action to convert loans on our balance sheet into cash, which, given the quickly increasing rate environment, negatively impacted our revenue.”
I find this really unusual. First off, the CEO says their big problem is funding loans they originate. Next, he says they were liquidating their own inventory of loans… presumably into that same funding constrained pool of lenders. He's basically saying “there weren't enough lenders for all the loans we wanted to originate, and, instead of plugging that hole with our excess liquidity, we threw fuel on the fire and trimmed our portfolio of held loans.”
Are they speculating on that interest rates will go higher than the fixed income market is currently predicting? Do they not believe in their own models and are looking to dump these held loans? Exclusive of their loan purchases, Upstart has generated reasonable amounts of cash from their operations. They have an open repurchase program, but it's only about half of their cash position as of Q1. They should have plenty of room to keep growing their notes receivable.
Sanjay Datta, CFO of Upstart, said “Despite the tumultuous economy, Upstart-powered loans have performed exceptionally well. For loans facilitated through our platform and held by our more than 60 bank and credit union partners, average returns have consistently met or exceeded expectations since the program’s inception in 2018.”
“For loans purchased by non-bank institutions, all vintages from 2018 thorough 2020 delivered significant excess returns, while our 2021 vintage is within 100 basis points of our loss expectations. Lastly, we believe our models are well calibrated to economic conditions and are currently targeting returns in excess of 10 percent.”
Again, that sounds great. 10% returns on originated loans in the current macro environment would be excellent. They have $650M in debt at .25% interest, and $500M in net current assets. If there isn't enough liquidity from their network of lenders, why aren't they buying these loans themselves? Why are they selling off assets they project will generate 10%+ RoR in favor of cash, at the detriment of their ongoing loan originations?
It looks like they're reiterating their belief in their models while panic selling their loan inventory. I just don't get it.
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