1. Upstart (UPST) — 10K Wrap-Up + Encouraging Analyst Revisions

a) 10K Wrap-Up

Upstart reported earnings and a link to my review of the results can be found here. The company waits to publish some key information until it releases its SEC filing, which happened yesterday. Here were the highlights:

Upstart’s 2021 take rate expanded from 5.81% to 6.17% year over year (YoY). The take rate expansion is direct evidence that Upstart’s growing value proposition is justifying a larger and larger piece of the profit pie; its admirable performance throughout rapidly changing macroeconomic environments is a big reason for this.

Take Rate Definition: (referral fees + platform fees) / total volume

We’ve seen other players in different pieces of consumer credit lower their take rates to fend off competition in recent months. Upstart has not had to follow suit.

Note: In the future, more of Upstart’s overall revenue will be coming from its blossoming auto business which means lower up-front referral and platform fees and higher revenue from interest. This will lead to Upstart’s average fee take rate falling. That’s not a good or bad thing, but is simply an interesting difference in how each product generates revenue.
- Hopefully, Upstart soon splits the auto and unsecured businesses into different disclosure segments so that we can evaluate the take rates for each individual product.
- Between interest and fee revenue, Upstart expects its auto business to carry a similar margin profile to its unsecured product in the coming years. It will, however, take time to get there.

From a partner concentration risk perspective, Cross River Bank (CRB) (Upstart’s main capital market originating conduit) originated 55% of Upstart’s 2021 loans vs. 67% in 2020. Similarly, CRB accounted for 56% of total Upstart revenue in 2021 vs. 63% in 2020. Finwise Bank (FB) — its other major originating conduit partner — is picking up this reduction in CRB volume. It accounted for 36% of Upstart’s 2021 volume vs. 24% YoY and also represented 27% of Upstart’s 2021 revenue vs. 18% YoY.

While concentration risk is never preferred, it does not bother me in this case. Why? CRB and FB are not performing a particularly unique service. They’re merely originating loans for a small cut which takes very little work and requires very little balance sheet risk. If CRB or FB were to ever end this economically easy and efficient agreement, they should be easily replaced.

The more pressing concentration risk (in my view) comes from one of its traffic partners — Credit Karma. This entity funnels a lot of demand to Upstart.com and is now owned by deep-pocketed Intuit. In the past, Upstart had disclosed the percentage of traffic coming from Credit Karma, but it did not do so in the annual filing. CFO Sanjay Datta has told us that this concentration was boosted amid the pandemic via many loan players halting operations. Upstart and Credit Karma did not, which left Upstart with less traffic partners to lean on. This disclosure removal could be a sign of the risk diminishing as “direct to Upstart” channel growth has outpaced partner channel growth over the last several quarters. At this point, we just do not know.

From a 2021 funding source perspective, Upstart’s loans were funded by institutional investors 80% of the time with its lending partners retaining 16% of loans and Upstart assuming the remaining 4% for itself. This compares to 22% funded by partners, 76% funded by capital markets and 2% funded by Upstart in 2020. Investors should prefer to see partners retaining a larger portion of loans over time — so this is not ideal. Section 6 of my Upstart Deep Dive explains the somewhat complex reasoning behind this partner retaining preference in detail and can be found here.

Encouragingly, in the company’s most recent quarter, its proportion of total volume re-purchased to sell through capital markets actually fell to 69% vs. 76% over the first 9 months of the year. This marks an encouraging and sharp pivot. I will be looking for partners to retain a larger and larger portion of Upstart-sourced loans going forward. I’d also like to see the 4% of loans retained on Upstart’s balance sheet prove to be a peak for the company — I want that at 0% ideally.

b) Analyst Revisions Post Earnings

Following Upstart’s strong quarter, forward average analyst revisions per Koyfin continue to rise:

Analysts’ 2022 revenue estimates rose 14.8% to $1.39 billion, 2023 revenue estimates rose 17.3% to $1.83 billion and 2024 revenue estimates rose 11% to $2.61 billion.
Analysts’ 2022 EBITDA outlook for Upstart actually fell by 4% as the company leans into auto and other growth projects. Conversely, 2023 EBITDA estimates rose 3.6% to $344 million while 2024 EBITDA estimates rose 58% to $605 million.
Analysts’ 2022 earnings outlook rose 3.1% to $2.30. 2023 and 2024 earnings estimates also rose 12% to $3.10 and 57.6% to $4.65 — respectively.

Just one year ago, analysts expected Upstart to generate $0.57 in 2023 earnings. The company generated $0.89 in its Q4 2021 ALONE with 2023 estimates now at $3.10 (443% higher than twelve months ago). The degree of these beats and upward revisions is not normal for most public companies but has become common for this unique compounder.

2. CrowdStrike (CRWD) — 2022 Global Threat Report

CrowdStrike released its 2022 Global Threat Report — here were the highlights:

62% of hacks use no malware which supports CrowdStrike’s broadened mission of stopping breaches and not just malware.
CrowdStrike’s OverWatch (the managed detection team) observed a 45% rise in intrusion campaigns in 2021 vs. 2020.
2021 saw an 82% rise in ransomware-related data leaks with large spikes seen across every single industry.
21 new state-sponsored and independent adversaries were named.
E-crime continues to dominate intrusion activity at 49% of all intrusions overall vs. 52% YoY. Targeted intrusions (not searching for vulnerabilities broadly but attacking a specific entity) rose to 18% of activity vs. 13% YoY.

The takeaway is both encouraging and unsurprising for CrowdStrike — cybercrime continues to proliferate. It will continue to be a tide that lifts all boats in the sector and CrowdStrike is among the best-positioned to benefit in the cloud workload and endpoint pieces of the booming industry.

3. The Trade Desk (TTD) — The Super Bowl & More

Nielsen announced that 11.2 million viewers streamed the Super Bowl vs. 5.7 million YoY. It’s not clear if these metrics are 100% apples to apples, but it’s impressive growth regardless. iSpot — another company NBC uses for measuring viewership — reported even higher numbers and also revealed that 70% of viewers were cord-cutters.

In the series of dominos to fall throughout the evolution away from linear and towards connected TV (CTV), live sports shifting to our streaming services was perhaps the final blow to legacy viewing methods. Nearly 90% of the most watched shows in the United States are live sporting events — and so these events moving to services like Peacock, ESPN+ and Paramount+ should accelerate cord cutting further.

Considering CTV is The Trade Desk’s largest and fastest growing segment, this should be yet another tailwind fostering more growth. Furthermore, Google’s and Apple’s privacy changes have no impact on The Trade Desk in this CTV environment — the bigger the segment gets the more insulated The Trade Desk becomes from its competition. Yes, the company’s vast base of partner and training data makes it a fierce competitor regardless, but this still surely helps. I like tailwinds.

The company also reported earnings this week. Click here for my summary of the report.

In other TTD news, the company released its annual filing on Wednesday which revealed that it ended 2021 with 980 total clients vs. 875 YoY. Additionally, in 2021 it had three clients (which are agencies serving hundreds of advertisers) that represented 41% of its total receivables vs. four clients representing 51% of its total receivables in 2020.

Click here for my Deep Dive into The Trade Desk’s Business.

4. Teladoc Health (TDOC) — Chronic Care Launch & a Primary360 Update

a) Chronic Care Launch

Teladoc debuted a new product called “Chronic Care Complete” tailored to chronic care management for patients with more than one condition (representing 1 out of 3 adults on Planet Earth). The product leverages Livongo’s monitoring capabilities with enrolled members receiving connected gluccometers, blood pressure cuffs and a dedicated Chronic Care Professional coach to set and meet goals. The new product will also lean on Teladoc’s broad healthcare professional relationships to create the company’s most comprehensive chronic care product yet. This network will ensure the firm provides actionable solutions to go along with all the data members will be equipped with. It’s one thing to empower consumers with information and it’s another to connect that information to the very best next step.

“Take, for example, a member newly diagnosed with diabetes. They are not only relying on monitoring and coaching as they learn to live with their new diagnosis but will receive physician support for determining appropriate medications and adjustments, as well as mental health support for dealing with a potentially life-changing diagnosis.” — Teladoc Chief Product Officer Donna Boyer

These chronic conditions equate to an astonishing 90% of all healthcare spending, marking an opportunity for Teladoc to deliver desperately needed efficiency and value while enjoying a powerful growth lever to pull. Per GoodRx’s (GDRX) S1, an estimated 3 in 10 emergency room visits can be avoided with better access to primary and preventative care. This product could work wonders in enhancing access to care before the issues turn in to costly, deadly ailments.

In Teladoc’s journey to differentiate itself amid a swarm of commoditized competition — whole person care is the path that it’s taking. This requires creating a wide breadth of actionable primary, chronic and mental care solutions in a virtual setting. (Livongo made this possible and is why the company spent so much to acquire it)

As a reminder, Piper Sandler recently came out with a note revealing slightly underwhelming chronic care enrollment in Q4 2021 for Teladoc. Hopefully, this product launch will help going forward.

b) Primary360 Update

Teladoc shared some interesting information with Business Insider on its next-generation virtual primary care product — Primary360. This product aims to deepen the utility and breadth of service that can be enjoyed in a more efficient and affordable virtual primary care setting. This is nothing short of vital for combatting our world’s pressing doctor shortage.

Within Primary360, each patient is assigned a primary care doctor, nurse and medical assistant to guarantee timely, personal consultation. These professionals can also refer patients to other pieces of Teladoc’s offering like chronic and metal health. This deeper presence unlocks broader value creation and more lucrative employer contracts plus more cross-selling abilities for the company.

Here were the highlights from the report:

Member satisfaction sits at an elite 98%.
Primary360 enrollment has doubled internal Teladoc expectations to date.
25% of Primary360 members with diabetes and hypertension were new diagnoses. Earlier detection is a core driver of both consumer health and care unit economics.
- This is a key enabler of Teladoc’s value proposition — unlocking earlier detection through broader access.
Half of Primary360 members use 2+ services.
Teladoc has signed 50 health plans and employers to Primary360 which includes 11 Fortune 500 companies like Dollar General.
New patients are seeing their assigned physician in less than 7 days vs. 56 days in several key markets according to Merritt Hawkins.
- Patients receive an average of 50 minutes of hands-on consultation in these new visits.
The Teladoc employee who was interviewed by Business Insider reiterated the company’s plans to shift to value-based care pricing.
- This variable costing system will allow Teladoc to turn its deeper value creation into commanding a larger chunk of the overall profit pie.
CVS has seen “hundreds of thousands of members” sign up for Primary360 this year.
- “Another insurer” (probably Centene) is seeing enrollment “exceed expectations” with 3/4 of its new sign-ups being brand new to Teladoc despite being eligible for previous products.
Primary360 is planning to add the following “last-mile” features to merge virtual and physical care settings:
- At home vaccinations via clinics
- Preventative screenings
- Home script delivery
- Broader measurement of vitals