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1. Meta Platforms (FB) -- Leadership Guides Us Through Their Messaging Roadmap at the Inaugural Meta Conversations 2022

Meta announced WhatsApp’s opening of its Cloud API to all businesses globally. According to Zuck, this will allow enterprises to access the business messaging services anywhere, build and customize on top of WhatsApp to create a granular user experience (UX) and also to speed time to customer response.

“Today we are opening up the cloud based version of the WhatsApp business platform. Meta will be the hosting service and will take on all secure hosting including maintenance, network, compute, storage and everything else for free. This means businesses can increase messaging and get real-time access to new features. We think this will be a game-changer for those who build on WhatsApp.” — WhatsApp VP of Product Ami Vora

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There are already 1 billion users connecting with a business account across the company’s various messaging services per week and this caters to developers and enterprises by making those experiences better and more personal -- more examples of this later. The new release comes with a dedicated business app on WhatsApp for smaller businesses with “lightweight” messaging inboxes across Meta’s Family of Apps. Meta Business Suite is available for bigger customers while its new “Kustomer” acquisition (which is a messaging first customer resource management tool) will be the backbone of the company’s scalable product for the largest of its customers. As a side note, Forrester thinks Kustomer enhances agent efficiency and efficacy by up to 30% and reduces service costs by up to 88%.

“Kustomer is a messaging first platform built on top of the messaging apps people use most. Phone, email, chat, SMS and of course, messaging. If brings customer conversation seamlessly from every channel into one unified view to treat people like people. Kustomer offers advanced AI tools to offer personal support without any agent intervention and automation to proactively handle problems.” — Co-Founder and now VP of Kustomer Brad Birnbaum

The company also announced a new startup accelerator with Plug and Play (early stage VC).

Some stats:

70% of Meta’s users feel more connected to a business they can message.
65% of Meta’s users prefer messaging over email or call.
Per Gartner, by 2025, 80% of customer service organizations will abandon mobile apps for messaging on a 3rd party platform.
Per Forrester, 50% of U.S. online adults use chat to buy things with that being 62% for people ages 25-34.

Case Studies:

Uber debuted WhatsApp to Ride in a city in India to a reception “it didn’t expect” according to CEO Dara Khosrowshahi. 33% of the riders coming through WhatsApp are brand new to Uber while its new rider rate for the rest of the business is “usually very small.” Khosrowshahi explained that this type of incrementality is quite rare for such a well-known brand and also quite welcome. These riders were also much younger than the rest of the company’s user base which is another large plus. Uber plans to expand this program throughout India and then in Brazil and more major markets eventually.

“WhatsApp is the number one communication platform for us especially in developing markets. It’s the way folks want to communicate and has become a core part of our everyday workflow.” — Dara Khosrowshahi

KLM Royal Dutch Airlines saw call volume spike 500% when pandemic restrictions were put in place. It used a prioritization model within Messenger and WhatsApp to resolve routine inquiries and to free up scarce agent time. It reduced wait times from hours to instant for those inquiries.

Aldi wanted to speed its response to questions about inventory. Through Messenger, it reduced response time from 180 seconds to 3 seconds and was able to re-purpose 8.5% of its customer service staff to other parts of the firm like business development.

The National Australian Bank used Meta’s click to message ads and saw an 83% reduced cost per inquiry and a 6X in lead-generation.

“If we stopped using WhatsApp for Business today, we’d have to open up 25 more stores to mitigate the volume loss.” — South American General Motors Director Bruno Campos

“The faster you can free up your call centers -- which are essentially cost centers -- the sooner you can turn them into profit centers by enabling them to up-sell and cross-sell. And yes, messaging is one of the best ways to generate and qualify leads.” — Meta VP of Business Messaging Matthew Idema

2. Upstart Holdings (UPST) -- An Investor Conference, KBRA Data, a New Partner and Wedbush

a) CFO Sanjay Datta Interviews with Barclays

On using the balance sheet to fund more loans:

“Most of the time, our platform is borrower constrained. There are periods of macro shocks where funding rapidly changes and becomes the constraint. At these times, we have a decision between stepping in with our balance sheet to support volume until the new equilibrium clearing price is found or we can just not originate a bunch of loans. Neither is ideal. In Q1, we stepped in with our balance sheet for about $150 million. In retrospect, we were caught off guard with the visceral reaction by the market to this. In the future, the decision will be to accept the volume volatility and not use the balance sheet as a stabilizing mechanism… that’s the lesson learned.” — CFO Sanjay Datta

Thank you Sanjay. I’d greatly prefer a small volume hit over this decision in the future.

“We would have probably done things differently had he known all of the questions this would raise about our business model, which in our view hasn’t changed at all.” — CFO Sanjay Datta

Also keep in mind that the 2-year yield rising is the greatest cause of this pricing instability. Its rapid rise last quarter (fastest in centuries) caused it but that rise has not even remotely been repeated during this current period.

On how Upstart becomes more resilient:

Sanjay spoke on the need for a continued shift in its funding mix to partners retaining more loans (as I've been saying). This funding source is far more durable and resilient vs. capital markets as cost of capital is lower and loans can be held to maturity rather than needing to be flipped for profit/liquidity.

He also discussed how the Upstart model’s reaction to the rapid rise in the 2-year yield needed to be more immediate. It wasn’t prepared to do this and instead temporarily deployed significant balance sheet resources to react to macro. It’s now investing to make sure the proper automation is built in to the platform so this doesn’t happen again. This bothered me as I would have hoped the automation would have already been built in.

On auto-refinance and indirect auto (point of sale with dealerships):

Upstart has begun the initial roll-out of its indirect auto loan product integration with its software platform built specifically for dealerships. It’s only integrated in about 3 of its 500 dealers today and expects to rapidly ramp that number over the next several quarters as loss curves season and mature. This is the bigger opportunity for Upstart vs. refi but there was an interesting trade-off that Datta discussed: As more loans are mis-priced with legacy underwriting, there’s more refi demand but if Upstart succeeds in indirect auto, then loans will be priced better and there will be less refi activity.

On the new Subaru & VW partnerships:

“These are sort of retail transformation-style deals. Ultimately, you’re selling to the dealership. But at the OEM level, they strike deals which take the form of an endorsement along with some customization and some financial incentives to push adoption. It’s more of a program to grease the wheels. We hope to have more of these OEM deals to announce.” — CFO Sanjay Datta

On what’s baked in to forward guidance:

“We’re taking a somewhat conservative approach due to the wide variance of scenarios right now. Things could unravel further, tightening could push us into a recession… on the other hand, there could be a quicker unwinding of some of this stuff and a quicker return to confidence.” — CFO Sanjay Datta

On mortgages:

“About a million in non-qualifying (don’t have the credit to qualify) loans were issued in 2001. Then the bubble popped in 2008 as subprime volume soared and subprime became a bad word. Now there’s next to 0 non-qualifying loans issued. If you don’t meet qualified loan criteria, you are just out of luck. I think there’s an area of underserved borrowers where we can bring better models to bear and do what we’ve done in personal and auto. And then the process of getting a mortgage is like going to the dentist. It’s not fun and there’s a lot to be automated and improved there. It’s the same playbook in a much bigger market.” — CFO Sanjay Datta

On the international opportunity:

This is in the roadmap, but Upstart will first round out its full credit product suite in the USA before expanding internationally. Datta hinted at global expansion being done through M&A or maybe partnerships to access unique data sets so it doesn’t start from scratch.

On how to know Upstart is better at underwriting:

Datta cited all of the credit and federal agency data on Upstart’s underwriting prowess that I've covered but wouldn’t go into the exact things that make it better -- and leadership never will. Every team with a uniquely valuable algorithm has every incentive to keep the secrets as quiet as possible. We have to lean on 3rd party data to assess the legitimacy of its claims (which has been largely, but not entirely positive thus far).

“The specialists who have been looking at our credit since 2016 would tell you that something is different about the way our credit performs.” — CFO Sanjay Datta

b) New Credit Union Partner

Upstart announced Carolina-based Sharonview as its newest referral program partner -- its largest revenue segment. The two began exploring a relationship a few months ago and are ready to take the next step. Sharonview has over 100,000 members and $1.7 billion in assets under management. It has also been named by Forbes as the best credit union in South Carolina.

Upstart likely has several more of these announcements coming soon as it added 15 partners last quarter but only announced a couple of them. It’s now adding a new partner every week.

c) KBRA Surveillance Report

KBRA released its latest comprehensive report on Upstart’s credit performance. Here are the highlights:

Housekeeping:

All deals priced from 2018-2021 had their credit ratings affirmed or upgraded.
Delinquencies -- as expected -- are trending higher than during the stimulus era.
Cumulative net loss (CNL) trends -- a more important metric -- are also ticking higher as expected but at a slower rate of change.
Upstart amended its conduit contracts with CRB and Finwise. This allows borrowers who experience a temporary income shock to apply for loan modification for payment relief on up to 18% of the loan term if 2 payments have been made.
1. This was previously 4 payments. Modification requests had been quickly rising but have since leveled off.
Upstart conducted another update its loan algorithm in March 2021 to account for the changing macroeconomic backdrop. Its models will never stop being updated.

Credit Summary for Upstart’s Securitization Trust:

Credit Reserves are above original targets for every single deal (most recent from 2021). Over-collateralization has also remained steady or risen on all of these deals (a good thing).
All deals priced through Upstart’s securitization trusts have CNL projections at or below original estimates (a good thing).

Credit Summary for Upstart’s Pass Through Trust:

Credit Reserves are above original targets for every single deal (most recent from 2021). Over-collateralization has also remained steady or risen on all of these deals (a good thing).
Upstart’s 2020 deals within its pass-through trust continue to outperform CNL estimates.
All 2021 deals have seen CNL estimates RISE by 2-3%. As the company told us on the last call, certain 2021 vintages have underperformed and this is what they were referring to.
1. When averaging out all current vs. original CNL estimates -- Upstart continues to comfortably outperform BUT this is a sign that the outperformance is growing more vulnerable as macro rapidly deteriorates. Expected, but still not good.
2. No trigger rates have been breached.

Upstart continues to be able to place loan pools with capital market investors. In its latest pre-sale report, it cleared about $650 million in total pool balance. This so far has been quite similar to the deal size and frequency we saw in 2021. Furthermore, in this pre-sale report, none of the 2022 transactions have seen their base case CNL estimates rise and delinquency rate rise trends have begun to fortunately level off -- as management told us it had. These base case assumptions were already raised (a bad thing) vs. 2021 but have not been raised again since the deals started seasoning.

All of these issues diminish if Upstart can continue to get its partners to retain a larger portion of the sourced loans. These partners have far better access to capital, less need to quickly sell pools through capital markets, and less 3rd parties to pay in the value chain while still yielding appropriate cash flows. I will be laser-focused on capital market reliance continuing to fall along with management keeping its word of not using the balance sheet for bridge funding again -- just take the volume hit.

d) Wedbush

Wedbush lowered their Upstart price target multiple times during the week. This is not all that important to me but I received a couple questions about it that I wanted to address:

Its bearish views are predominately related to the terrible macro-backdrop. They’re absolutely right about that. 2022 could be a tough year for the company which is why I plan to continue trimming into extreme strength while accumulating into extreme weakness.
The other piece of the concern was uncertainty surrounding how the model would hold up amid a credit cycle and rising delinquencies. In terms of credit cycle commentary, they’re right again. Upstart hasn’t been through a traditional cycle, only credit shocks which it has performed quite well in. If it overcomes the challenges it will be greatly rewarded and if it doesn’t, it won't. I’m optimistic, but we’ll see.
These price targets are commenting on the next 12 months, not the next 5 years. If Upstart can get through the next 12 months intact like I think it will, it should be far smoother sailing as the credit cycle eventually brightens.
Wedbush does not have a personal vendetta against Upstart. They're simply expressing their opinion. Analysts are graded on their opinions. This is not personal.

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3. PayPal Holdings (PYPL) -- Investor conferences & a Debt Raise

a) CEO Dan Schulman Interviews with MoffettNathanson

On the last 12 months and guidance:

“We clearly got ahead of ourselves. We looked at early trends during the pandemic and our assumption sets about how they would play out proved to be wrong. I take full accountability… We’ve changed the way we think about guidance. We now believe that in our guidance, we need to operate under the likelihood of things getting worse going forward, not better. When we looked at the low end of our guide, we thought things might continue to worsen and we ought to make sure that we feel very comfortable that we can deliver of over-deliver.” — CEO Dan Schulman

“There have been many obituaries written about PayPal over the years. I remember when wireless carriers came together and people felt that because they control phones, they’ll control digital payments. Over the last 6-12 months, I can’t tell you how many times people compared us to companies like Fast or Bolt. Through all of this, we’ve grown share.” — CEO Dan Schulman

PayPal continues to expect OpEx growth to fall back to the single digit percent range which would mean significant margin expansion ahead as long as growth doesn’t unexpectedly halt.

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A lot of this turbulence is still eBay operating agreement expiration-related (along with the strengthening dollar and lapping credit reserve releases). PayPal will be fully through that headwind in Q3 when industry e-commerce growth should also re-accelerate. I continue to think the 2nd half of the year will be strong for this company. We’ll see.

On market share:

PayPal has 8X the merchant placement vs. its next closest digital wallet competitor
PayPal has 10X the consumer preference rate vs. its next closest competitor.

On user growth:

Schulman responded “yes with an exclamation point, of course we can” when asked if PayPal can continue to sustainably grow users. The top of the funnel has remained strong for PayPal throughout all of this turbulence. The bottom of the funnel (churn) is the main driver of user growth which is why it’s so heavily focused on engagement and the digital wallet. 50% of its user base now has this installed and have shown to double revenue per account and lower churn by 25%.

On Venmo:

“When I speak at college campuses in these massive auditoriums I always ask how many of you use Venmo. It’s like 100% of the class that raises their hands. It’s a phenomenon for that demographic in that age group.” — CEO Dan Schulman

The Venmo MAU issue brought on by new 1099 tax policy has already disappeared.

Pay with Venmo on Amazon will still launch as Amazon’s first digital wallet payment solution sometime this year.

On Braintree’s unbranded processing:

“We were tired of hearing about other players growing faster and that’s just not true. Braintree is more than holding its own with unbranded processing. You look at the client base where we have the overwhelming majority of their full stack processing, Uber, Airbnb, Live Nation, DoorDash Spotify. We’ll continue to move down market as well so when somebody integrates their full stack processing into Braintree, it’s a fully native integration into our most advanced tech stack. It means you’re not popping in and out and in and out of the app. It’s fully linear checkout across Venmo, PayPal, other APMs, Apple, Google. If you’re a merchant, you get all of that." — CEO Dan Schulman

The billions of vaulted cards within Braintree’s ecosystem will also be imperative for powering PayPal’s single-click, upgraded, checkout.