Upstart Holdings (UPST) intends to raise $252 million for itself and selling shareholders from the sale of its common stock in an IPO, according to an amended registration statement.
San Mateo, California-based Upstart was founded to utilize machine learning techniques to maximize the matching of lenders with consumers seeking personal loans.
Management is headed by co-founder and CEO Dave Girouard, who was previously president of Google Enterprise and a product manager at Apple.
Below is a brief overview video of an interview of Upstart CEO Dave Girouard:
Source: Bloomberg Markets and Finance
The firm makes money by charging referral fees, platform fees and loan servicing fees.
In Q3 2020, Upstart funded only 2% of loans through its platform. The company has partnered extensively with consumer loan banks and institutional investors in loans.
Upstart has received at least $162 million from investors including Third Point Ventures, Stone Ridge Trust, Khosla Ventures, Rakuten (RKUNY), and First Round Capital.
The firm obtains prospective borrowers via online marketing through earned and paid search optimization and marketing efforts.
Upstart provides its consumer loan underwriting and matching service via either its own website or through a white label product on the bank partner website.
Sales and Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.
The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, was stable at 0.7x in the most recent reporting period.
According to a 2020 market research report by First Research, global household debt exceeded $47 trillion in 2020, which was '$12 trillion higher than in the run-up to the 2008 global financial crisis.'
The U.S. consumer lending market generates annual revenue in excess of $36 billion between over 14,000 businesses, from small to large lenders and facilitators.
The U.S. saw personal debt grow to $4.2 trillion by January 2020. It is likely this figure has increased markedly as a result of the Covid-19 pandemic.
Also, the U.S. consumer lending market is concentrated. The report indicates that 85% of consumer lending revenue is generated by the 50 biggest firms.
Major competitive industry participants by category include:
- Non-bank lenders
- Credit cards
- Other Fintech firms
Upstart’s recent financial results can be summarized as follows:
- Growing topline revenue
- A positive swing to slight operating profit and operating margin
- A negative swing to significant cash used in operations
Below are relevant financial results derived from the firm’s registration statement:
Source: Company registration statement
As of September 30, 2020, Upstart had $53.2 million in cash and $194.6 million in total liabilities.
Free cash flow during the twelve months ended September 30, 2020, was negative ($45.5 million).
UPST intends to sell 9 million shares of common stock and selling shareholders hope to sell 3,015,690 shares at a proposed midpoint price of $21.00 per share for gross proceeds of approximately $252.3 million, not including the sale of customary underwriter options.
No existing shareholders have indicated an interest to purchase shares at the IPO price.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $1.57 billion.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 16.58%.
Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:
We intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in businesses, products, services, or technologies. However, we do not have agreements or commitments for any material acquisitions or investments at this time.
Management’s presentation of the company roadshow is not available.
Listed underwriters of the IPO are Goldman Sachs, BofA Securities, Citigroup, Jefferies, and Barclays.
Upstart seeks public investment both to fund its growth initiatives and to cash out some selling shareholders.
The firm’s financials show strong topline revenue growth, although at a decelerating rate of growth in the most recent reporting period.
Sales and Marketing expenses as a percentage of total revenue have been dropping and its Sales and Marketing efficiency ratio has been stable at 0.7x.
The market opportunity for consumer loan lead generation using advanced technologies appears to be robust, as the consumer loan market in the U.S. is extremely large and banks are looking for any edge they can get in reducing their customer acquisition costs.
Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 73.8% since their IPO. This is a top-tier performance for all major underwriters during the period.
As to valuation, management is asking IPO investors to pay an EV/Revenue multiple of 7.5x.
For what is essentially a financial software firm, a 7.5x multiple on a company growing revenue above 44% and generating positive earnings appears reasonable.
Given a reasonable IPO valuation, current and future growth prospects and the firm’s Covid-19 pandemic resilience, my opinion on the IPO is a BUY at up to $21.00 per share.
Expected IPO Pricing Date: December 15, 2020.
(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice. Past performance is no guarantee of future results.)
To receive automatic notification of new IPO activity, click the "+ Follow" button.
Click the link below to VOTE on your interest in this IPO and see results: