In this post, I want to talk about two new stocks that I added to my portfolio in the last few weeks. The first one is Upstart Network (UPST).

What it does?  Upstart uses Artificial Intelligence (AI) to help lending institutions determine credit worthiness of their borrowers. If you have borrowed money for a house, car loan or anything else, you are familiar with FICO scores. For the past 65 years, banks have used FICO scores as a measure of credit risk and have made lending decisions based on those scores. There are several problems with FICO scores as you might be aware (based on credit history, how much credit you have used and many other factors that are outside your control). On top of that, there are people with low FICO scores or even no FICO scores that may have better credit worthiness than someone with a higher FICO score. That’s where Upstart comes in. They are trying to disrupt this age old industry by using their own AI-based model to determine credit worthiness.

Their mission statement is short, sweet and communicates everything about their business: Enable effortless credit based on true risk. 

The management claims that their model has higher approval rates, lower APRs. 71% of the applications were instantly approved with no document uploads. They claim to be more inclusive- meaning improved credit scores for all demographics tested.  They started with personal loan originations and now planning to move into auto-loan originations which is a bigger market. I am excited to see their revenue growth over the past eight quarters which look like this

Upstart Revenues

Year Q1 Q2 Q3 Q4 Total
2019 20 33 49 63 165
2020 64 (220%) 17 (-49%) 65 (32%) 87 (38%) 233 (41%)
2021 121 (89%) 194 (1041%) ~750n(221%)

A word about Revenue Growth As you can see their revenue was growing at a nice clip before Covid hit (revenues declined by 49% in Q2 2020). But after that, their revenues just took off. Grew by 89% in Q1 2021 and by over a 1,000% (not a typo) in Q2 2021. To be fair, we should compare Q2 2021 with Q2 of 2019 because Q2 2020 was hit due to Covid but even that is not too shabby.  Before they released Q2 2021 results management was expecting $600m in yearly revenues but they grew so fast that they are now expecting to hit $750m in yearly revenues in 2021. My guess is that by the time the year is over, they might be close to a $1B in yearly revenues. I started a position in UPST in early August and added to it after they reported Q2 results.

The second position that I started in September is called Digital Ocean (DOCN).

What it does?

DOCN provides cloud computing and storage solutions to small and medium enterprises (SMEs). Think AWS, Google Cloud and Microsoft Azure for SMEs. You can read more about the technical aspect here.

What has me excited about DOCN is that they are aiming to grow 35%+ over the foreseeable future while growing their profits and cash flows as well. Most of the early stage companies spend heavily on Sales and Marketing and are unprofitable in their early years. DOCN already has EBITDA margins of about 30% and they aim to keep those margins steady.

This is a smaller company. Expected yearly revenues are about $$419-$423m and the market capitalization is about $8B (so a Price to Sales ratio of about 20 – 8,000/400). This is a very new company to the public markets (IPOed earlier this year).

This is how their revenue growth has trended 

Year Q1 Q2 Q3 Q4 Total
2018 Not Public Not Public Not Public Not Public 203
2019 Not Public Not Public Not Public Not Public 255 (25%)
2020 Not Public Not Public Not Public Not Public 318 (25%)
2021 94 (29%) 104 (35%) ~106-109 ~116 ~419-423 (~32%)

A Word about Revenue Growth

As you will notice, they were growing their revenues at a nice clip before Covid (around 25%) and now they are at about 35% growth. On the most recent earnings call, management noted that they expect to grow at 30% going forward for the foreseeable future. My expectation is that it will be more like 35%. I will be learning more about this company as they report more quarters and I can learn more from the management. If they experience a slowdown in their revenue growth for at least two quarters, I will be heading for an exit.

I also want to talk more about this SME space. I have invested in a few companies that operate in this SME space and I know from experience that this can be a very lucrative space because the larger companies like Amazon, Google and Microsoft cater to very large organizations and the smaller companies feel that they are not getting enough attention. Companies like Paycom, Hubspot and that cater entirely to SMEs and treat them well have been rewarded by investors over the years. I see some of the similar traits in Digital Ocean. I will be watching to see if the management can execute on their promises.

So, these are the two companies that I bought recently. As always, don’t buy or sell a company because you read about it here. Do your own due diligence and examine whether a company represents an investing opportunity for you.