Fintech lender Upstart (UPST -7.55%) has delivered a year-to-date gain of about 250%, but it isn't just because of earnings. In this episode of Industry Focus: Financials, Fool.com contributor Matt Frankel, CFP, and host Jason Moser discuss why the stock has performed so well. Plus, we now have an official date for the upcoming Coinbase direct listing. And finally, there has been a massive slowdown in the SPAC world in recent weeks. So why are we seeing such a sudden lack of interest?
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This video was recorded on April 5, 2021.
Jason Moser: It's Monday, April 5th. I'm your host, Jason Moser, and on today's Financial show, we're going to take a look at the latest news regarding Upstart. The Coinbase IPO date is set. We'll chat a little bit more about SPACs, including a listener question regarding a recent SPAC opportunity in the FinTech space. Joining me this week, Certified Financial Planner, and he looks like he's ready for Masters Week, folks, it's Mr. Matt Frankel. Matt, how is it going?
Matt Frankel: Everyone assumes that I'm a golf guy. [laughs] I've played probably three times in my life.
Moser: Why did they assume you're a golf guy, do you think?
Frankel: Because I live in South Carolina, I guess.
Moser: That's probably a fair leap. Having grown up in South Carolina, I could tell you, there's a lot of golf to be played down there and that was a great place to grow up. That's for sure. I grew up in Charleston, got to play a lot of golf in our Charleston, Mount Pleasant. I understand the leap at least, but hey, [laughs] once we find ourselves in the same place again, maybe we'll go play some golf or maybe some [...] I don't know, something.
Frankel: I will gladly play around golf once [laughs] we can meet up again.
Moser: Yeah, that'll be a lot of fun. I look forward to it. Matt, we wanted to kick this week off talking a little bit about a company that you and I dug into not all that long ago. Travel back in time with me, Matt just a few months, back to January 11th of this year, where we actually talked about the company Upstart on this show. We were talking about the fact that Upstart had just gone public. The stock had performed very well up to that point. If you look at year-to-date, now, Upstart shares are up almost 250%. Just over to pull a quote from you, from that show back in January, because I think it was the right thing. I think it was the right observation when we were talking about the risks with a business like this. You said, "What I have to believe is the biggest risk, it's not just valuation, it's got to maintain its growth, and there is a huge element of competition risks in this space." I think in this world of these so many companies out there trading in 40 times sales, it seems like that's the norm nowadays. Businesses that have yet to really bring any meaningful profits to the income statement, it does seem like with Upstart, it wasn't just valuation. They have to really justify that valuation with the growth rates. It seems to this point at least, like it's maintaining that burden of proof. I'm not sure. What do you feel is the impetus behind this performance here so far with Upstart?
Frankel: For starters, the earnings report that they recently issued looked great. That wasn't the number one reason that the stock is, like you said, more than tripled year-to-date. But the numbers are worth mentioning. Revenue handily beat expectations. Their revenue was about $87 million, that was about $13 million more than analysts were calling for. Their margins expanded year-over-year, that revenue number was up 40%. They're calling for 115% revenue growth in 2021. They grew 40% with the pandemic's effects. That's a pretty impressive year. But the real story was that they're acquiring a company called Prodigy Software. I don't know if you're familiar with them.
Moser: I'm not.
Frankel: They provide automotive shopping experience. You said it correctly that last time we talked about them, I mentioned how competitive the personal lending space is. The auto-lending space is not nearly as competitive, especially the online side of it. Every company is doing personal loans these days, it seems. I could probably ramble off a list of like 20 different FinTech companies making personal loans. I can't really ramble off a list of that many companies that make auto loans other than the traditional banks. If I couldn't name a traditional bank, I don't really know where I would start that list. [laughs] Prodigy is a company that provides a shopping experience for consumers in dealerships, but like a high-tech version of it. The idea is that this acquisition will really catapult Upstart into the auto-lending space, which is a huge untapped market. The auto-lending markets are just beginning to be disrupted. Like you said, the personal loan market, about $300 billion in size, has a lot of competition in the FinTech space. The auto-lending market, $1.4 trillion. Not a lot of competition in the FinTech space. There aren't many companies trying to do auto-lending better than the establishment. That's really what the market is so excited about here. This really gets their proprietary AI-based lending technology into thousands of dealerships across the country. It really can jump-start Upstart's auto-lending business.
Moser: Why do you think that is that the auto market is so different? It seems to me and I guess the last time I took out an auto loan was, well, it was I bought on Explorer probably five, close to like 5.5 years ago or something, and the dealership gave me 0% financing and that was it. Period. It was like I'm not going to find a rate better than that unless they're willing to actually give me money. Why do you feel like the auto market is so open for that competition? Is it the nature of what they're selling? Is it the idea that this thing that you're buying, once you drive it up a lot, it loses so much value? Adjusted that transfer ownership? Is it an asset thing? Do they not make it as attractive an opportunity because of the competition and set it there for the dealerships in the car companies themselves?
Frankel: Well, there's a lot of it. Like you said, you got 0% financing when you bought your car. The legacy lenders, which I would include traditional banks like Wells Fargo whom I auto loans through, and the actual car companies that have financing arms, they do a really great job of financing for the prime borrowers. I don't know Jason's credit score, but I assume it's pretty good.
Moser: It's pretty good. [laughs]
Frankel: The legacy vendors do a great job with guys like Jason. They don't do a great job with subprime borrowers, which is Upstart's bread and butter for its personal lending business. The average interest rate for a borrower would say a 600 credit score. Is that like the 18%-19% ballpark on an auto loan? It's because the traditional lenders really don't know how to analyze risk in that side of the market. Upstart has proven that it's really good at analyzing subprime risk in the personal lending markets. They cut down on bank losses. They approve more applicants than otherwise would without increasing losses. If they can translate that to the auto industry, which a lot like even the FinTech lenders don't know how to tackle the subprime market. That's really where Upstart's trying to add value, and if they can do that with the auto industry, that's a big chunk of that $1.4 trillion auto market that is really not being well-served.
Moser: Yeah. I think you're right and I think that you're going back to the conversation that we had in January. You noted that one of their biggest competitive advantages, if not the biggest, was really the proprietary technology. This AI allows them to assess risk and ultimately make better loans. It's very similar to what we talked about with companies like Square, I think, PayPal to an extent now. A lot of these companies are doing a better job of utilizing data in order to make better financial decisions, underwriting decisions when it comes to lending. I think we're seeing the same thing with really well-run insurers too. I guess it goes back to that idea that data is the new oil, as they've said. It really is becoming perhaps the most important commodity around the globe at this point because you can do so much with it.
Frankel: Yeah. As Upstart gets bigger and bigger, their competitive advantage there just gets better and better. The more data they have, the better they'll be able to assess risk. If a customer has defaulted on auto loans six years ago and things have changed in their situation, they got a new job, they got out of debt, things like that, it's really tough to quantify that by just looking at the FICO score, which is what most auto lenders do. Upstart uses a ton of data points to really kind of get a big picture view and it really accurately predicts who's going to default on their loans, and so far, it's working. It's a very promising system. Like you said, data is king and Upstart, they're building a data library and they have a really big headstart over anyone else who wants to join this space.
Moser: We have talked a lot about Coinbase on this show over the past several months. Coinbase is looking to go public here and we've now got a bit of a clearer picture as to when that's going to happen. Matt, tell us the latest news here in regard to Coinbase's impending IPO.
Frankel: Coinbase got SEC approval to start their direct listing on April 14th. A better week and a half from when we're recording this. The FCC has approved, like I said, they are doing a direct listing, meaning they're selling shares directly to the public, not going through underwriters and stuff like that. We do know that their ticker symbol will be COIN, C-O-I-N. Pretty easy to remember.
They are going to sell 115 million shares in their IPO. The latest price per share on the private market was about $343. That means they're going to raise about $5 billion in their IPO. I'm sorry, they're selling about $5 billion worth of existing shares. They're not actually raising the money. Based on that share price, which isn't an official price on where it's actually going to start trading, but that's what they're getting used to setting the day one reference price. The private market valuation is about $68 billion. Coinbase had a phenomenal year in 2020. They're profitable. They made a little over $300 dollars.
Moser: Wait, hold on. There's an IPO that's getting ready to hit and they actually make money? This is new territory. [laughs] What's going on here, Matt?
Frankel: They made money, great growth, $1.2 billion in revenue last year.
Frankel: But I would put a big asterisk on that because, what happened with Bitcoin last year? Bitcoin is trading right now for about 10 times where it was a year ago. When you get and exchange the transaction of a certain asset and that asset grows tenfold in a year, of course the company is going to make money. [laughs] Coinbase wasn't profitable before Bitcoin started going crazy. It's like this wave of mortgage lenders we've seen go public. Remember, we've talked several times on the show about how refinancing volume has doubled or tripled from a year ago at certain points during the pandemic. The numbers look great right now because conditions are ideal for mortgage lenders, so they're all going public. The same thing could be said here.
We already saw eToro, a fellow cryptocurrency exchange, is going public through a SPAC merger. Coinbase is going public through direct listing. They would not have gotten a $68 billion valuation a year ago. The question is, are these higher bitcoin prices, and more importantly, the higher interest in bitcoin, is that here to stay, or is it going to pull back over the next year or two as the market stabilizes? Because right now, the market in cryptocurrencies is all over the place. If you believe higher volumes are here to stay, and if you're a believer that Bitcoin could be half $1 million, $1 million someday, which a lot of people are, Coinbase at $68 billion could be achieved.
If you think Bitcoin is going to be a mainstream form of payment, people are going to need a place to buy it, Coinbase could be cheaper than its current valuation. It really depends on what direction the cryptocurrency market takes as to whether that $68 billion figure is cheaper or expensive.
Moser: Do you feel like with businesses that direct list, obviously, the direct listing, they're not bringing in that capital, they're not raising that money in issuing new shares. Is that a position of strength to you? Is that a reason for investors to feel like maybe that is a bit of a stronger competitive position or a company that's in a stronger position one way or the other, versus companies that may not necessarily choose that route?
Frankel: Usually, one of the biggest differences between a direct listing and IPO from a company's point of view is that they're not raising any capital. Usually, they are used by companies that have a ton of working capital and don't really need to go through the traditional IPO process to raise money. Slack is a good example of a company that went public through a direct listing that had a ton of money on the books. One thing I will say, and I'm really interested in, is that Coinbase said they will release preliminary first-quarter results tomorrow, April the 6th, at 4:30 PM Eastern Time on their Investor Relations website. That's rare, that tells me that they're happy with what they're going to show. [laughs] Companies that are about to go public don't usually disclose more information than they have to. I'm curious to see what they are. I'll be looking at that and if it's anything worth noting, we'll definitely talk about that next Monday.
Moser: Absolutely. That'll be something to keep an eye on. I'll be looking forward to checking that out myself.
Frankel: But in the first quarter, it seems like Bitcoin hit a new high every day, [laughs] most days at least, so I want to see how that translated to Coinbase's bottom line.
Moser: That's something that's worth keeping an eye on for sure. It's been a volatile period to say the least, and it's always worth knowing the different levers that control how money flows through these businesses. Clearly, with the company like Coinbase, Bitcoin is going to be a key part of the thesis. No doubt. Matt, it feels to me like the SPAC craze has slowed down a little bit. Is that just me?
Frankel: [laughs] It came to a crashing halt.
Moser: There have been no headlines. For a month or two, it was just SPAC. It was nothing but SPAC 24/7. That really seems to evolve, but died down. What's going on?
Frankel: Let me read you a couple of data points here. Just doing a quick look on my TD Ameritrade account before we jumped on here. There are no new SPAC IPOs scheduled for this week. There was one that went public last week. The week of March 15th, there were 24. The week of March 8th, there were 23, and the week of March 1st, there were 36. That went down to one last week and zero this week so far. That's why I say it didn't just slow down, it came to a screeching halt. Not just the number, the price action really shows that the market has been flooded with these.
If I add those together, let me do a quick count. I'm a math guy. [laughs] Roughly 75 SPACs went public in March, and out of those, most of them are trading at or below their net asset value, which was $10 a share. That's what SPAC goes public for. The highest I saw was $10.10. Not only are they really not getting as much investor attention and going public as frequently, they are not trading at these premiums we saw. If you remember, some of them were trading at huge premiums before they even had a deal. Those have really cooled off. We did our SPACs here recently, so just to name a few from there. The two are Chamath's SPACs that have not found deals yet. IPOD and IPOF are both down 40% from their recent highs. They didn't have deals then, they don't have deals now, it just really cooled off. They're not trading for as big of a premium anymore. They were trading for $17 or $18. Now they're trading for about $11. Remember, they have $10 a share in assets sitting in a trust account.
Moser: Yeah. I was going to say at some point, if they don't find that deal to bring to the market, you get that $10 back ultimately. That's the baseline.
Frankel: Right. The premium has just evaporated here. Bill Ackman's Pershing Square, that's the one that people are really optimistic about. That's down 27% from its highs. Even the ones that the deals were announced have cooled off. We've talked about Lucid. Churchill Capital IV is the one taking Lucid public. That's down 64% from before it announced the deal. The 23andMe, a Virgin Group acquisition, VG Acquisition, are down 44% since the deal was announced. SoFi, the one that we talked about and we really like, down 40% from its highs. We've seen the number of SPACs going public go down, we've seen the premium that new SPACs are trading for completely evaporate, and we've seen even the ones that the market have really given headlines to over the past month or so, they're really cooled off as well. There's still over 300 SPACs in the market looking for targets. There's billions and billions of dollars of capital waiting for companies to take public. It really looks like the market has just been flooded and it just caught up to it really fast.
Moser: Yeah. I wondered too, when you think about these SPACs and the nature of so many of these businesses, they come public so much earlier than they normally would, in many cases, pre-revenue or very modest amounts of revenue, $20 million, $30 million, you're talking very modest amounts. SPACs really does seem like it's less about fundamentals and more about the psychology behind it, the excitement, the potential, the growth. Just as you were saying with Upstart, for example, really that growth, they need to make sure they can show that growth that really backs that valuation. To me, I wonder with SPACs, as we start to reopen more fully, as people start going back to work as they did before, we're becoming a little bit less virtually tied and a little bit more real-world based and out doing other things now, I wonder if maybe that psychology starts to wear off a little bit, that interest starts to wear off a little bit, just because, first off, you said so many have already come to market. There's only so many good ideas out there to begin with, but then also maybe people aren't looking and listening to the stuff. They aren't looking to the stuff and listening to it like 24/7 as maybe a lot of people have been over the past year.
Frankel: Yeah. At some point, the appetite for speculation starts to run out.
Moser: Yeah. That's a good way to put it.
Frankel: Think of some of the more speculative stocks, even the ones that have really good businesses, I would say like a Tesla at its valuation, companies with good businesses that really trade on momentum. They've really reversed course over the last few weeks, and you're just seeing that really happening at even a more magnified level in the SPAC market because they're even more speculative. The market doesn't have unlimited money to speculate with, it's what we're seeing here, and it's really playing out in the SPAC market.
Moser: Yeah. That's a good point. It seems that unlimited money or the money that was being thrown around, it seems like that might be drying up here too. I don't know that we'll necessarily see the floodgates quite as open here as things start to improve in regard to the overall economy. Speaking of SPACs, I just said that in figure, maybe that would make a good podcasts title, we should get together after we get done with speaking of SPACs. There can be a show, we could do a show like that. We'll talk about that later. But speaking of SPACs, we had a question from a listener, a little while back, @Jeffreyleaf on Twitter. This was back a few months ago. But Jeffrey asked, "Any ideas on Paysafe? I'd love to hear a deep dive or thoughts." This is a company Paysafe that just came to the public markets via SPAC. This is the best way to define it, the best way to describe it, is it's a FinTech company, [laughs] and honestly, Matt, [laughs] to me, if we're getting saturated with SPACs, I'm starting to feel the same way about FinTech. I'm starting to wonder what's differentiating a lot of these businesses because a lot of them say they do the same thing. Paysafe says they are a leading specialized payments platform with a two-sided consumer and merchant network, that sounds like Square, whose core purpose is to enable businesses and consumers around the world to connect and transact seamlessly through payment processing.
Frankel: That last slide sounds very familiar. I think that's the exact line Payoneer used when they were on the show not long ago.
Moser: Yeah. That's not to take anything away from them. I'm not saying they don't do that, I'm not saying they don't do it well, but when you have a lot of these companies that are doing the same thing, you have to try to make sense of them and figure out which ones are going to be the better opportunities. But you've had the chance to dig in a little bit to Paysafe. Let's take a big picture look at this business, understanding that it is a FinTech, a payment processing company. What are some of the takeaways from Paysafe? What do you feel listeners should know about this business?
Frankel: First of all, before I said something a little negative about Payoneer a minute ago, [laughs] that they used that line.
Moser: But I think you were just comparing the two. [laughs]
Frankel: The continuation of that is you have to read between the lines to figure out what they do that they're really good at. In Payoneer's case, it was cross-border payments, if you remember from that interview. They do the international payments a lot better than everyone else. But Paysafe, one of the things that they do really well is gaming payments, online gaming, they are the global leader in online gaming payments.
Moser: That's a little bit more clear. I mean, that's a massive market.
Frankel: Right. That's a huge growth market right now because their trend is clearly toward legalized gaming. DraftKings, for example, is one of their customers. William Hill, I don't know if you're familiar with them, that's the sportsbook company that Caesars just bought. They're a Paysafe company. Paysafe did $92 billion of payment volume in 2020, so it's not a tiny operation. They are the number two global leader in digital wallets, by the way. There's a few things that they do really well, which is really key to identify when you're looking at a FinTech. Like when you mentioned Square, I could name three or four things that Square does better than the other FinTechs. In person payments, no one comes close to Square, in my opinion. Spotify, Fortnite are two other bigger customers of Paysafe. What I like about them, I like a lot of the SPACs, they have very realistic projections. [laughs] They are a long established company, unlike a lot of these other SPACs. They started in '96. They've been doing online payments for a long time, 25 years now. If you remember a product called Neteller --
Moser: I do remember that.
Frankel: That was a Paysafe product. They've been around for a long time. They were taken public by a SPAC led by Bill Foley, who has a fantastic track record of not only investing, but adding value to financial services companies. FIS, Fidelity information services, that was one of his investments. He invested in 2003, where the stocks went up something like 35X since then. The margin expansion, he's really helped out with his expertise and just got them 1,800 basis points of margin expansion since that time. Just really adds value to all these FinTechs. There is a long list on his website of companies that he's really done a great job of adding value to. I like this merger, the ticker symbol is PSFE, by the way, now it's actually trading under its own ticker symbol since the merger was completed. The merger was completed just a few days ago. It started trading under its new symbol on March 31st. Really impressive company. I like that they are a leader in a couple of really key growth markets. I don't know, what do you make of Paysafe?
Moser: It certainly is a bit more clear understanding that focus on the gaming market, and I agree with you. I mean, its tremendous opportunity there, particularly as you see sports betting becoming legalized in more and more places. I think that ball is going to continue rolling in that direction. I don't think that's something that is going to change. For a business that, No. 1, has been around for that long, you feel like not only do they have expertise and really the market that they are pursuing, but they've had a lot of experience in building products and services as this payment space has evolved. They're not building something new based on the capabilities the technology affords us today. They've been following this all along the way. To me, I certainly see that as a plus. Then in regards to Bill Foley, the only knowledge I have of him is through what I've read through the investor deck and investigating this SPAC, and it certainly seems like he has quite the track record in helping companies exploit their true value. To me, I'm at least cautiously optimistic. [laughs]
Frankel: With any FinTech, I tend to think of experience as a much bigger competitive advantage than long-standing industries have. If someone has 25 years of FinTech experience, who else has that?
Moser: Yeah. [laughs]
Frankel: Even if you think of some of the big FinTechs, the most experienced person at Square has 11 years of experience. I mean, the company hasn't been around that long. When you look at some of these companies with FinTechs especially, experience really is very valuable. No one's been doing payment processing longer than Paysafe online, or if there are, it's very, very close. [laughs] I got to think of that as a big competitive advantage that they really, like you said, participated in the whole evolution of the space.
Moser: It does feel like there's an opportunity there and that will be a fun one to keep an eye on, another company for our radar here, for our show, is clearly given its financial focus. We will continue to keep Paysafe on the radar and follow that as earnings season comes around. But Matt, I think that is going to do it for us this week. I really appreciate you taking the time to jump on the show today and dig into Paysafe and talk a little bit more about what you've been seeing with Upstart there. It's a lot of fun. Thanks for joining.
Frankel: Of course, always fun to join you.
Moser: All right, well, folks, remember you can always reach out to us on Twitter @MFIndustryFocus or drop us an email at firstname.lastname@example.org. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Thanks as always to Tim Sparks for putting the show together for us. For Matt Frankel, I'm Jason Moser. Thanks for listening and we'll see you next week!