Mid-Week Earnings Update: 11/10/21
Let's talk about Amplitude, Palantir and Upstart.
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In this post, we’ll cover:
If you didn’t catch last week’s earnings recap on 11 different stocks, click this link.
If you’re new around here - give this post a read. It’s a complete deep dive into the company, how I discovered them, all of the supplemental research I published on them, as well as includes a 2-year price target.
The company reported their third quarter financial results yesterday, published here - let’s talk through every aspect together.
Revenue: $45.5 million, an increase of +72%
This is awesome. During all of the analysis Chris Sommers and I conducted on Amplitude, we assumed a +60% revenue growth rate for this quarter and next. In other words - they’re ahead of schedule. It’s also nice to see Wall Street assuming a +57% growth rate for the 2H21 and Amplitude coming in above their expectations.
Amplitude also gave us some guidance as to what their overall FY21 revenue will look like, and it comes in at exactly +61% growth. Nailed it!
They also reported a whopping $152 million in remaining performance obligations. If you’re not aware of what this means, it’s essentially the value of the remaining part of the contracts they have with customers as of the end of Q3.
Number of Paying Customers: 1,417, an increase of +54%
Rock solid - love this. Remember, these customers include the below companies.
Dollar-based net retention rate: 121%, compared to 119% last year
This is also rock solid! If you’re not familiar with this metric, this is sort of the “upsell” metric for the company. On average, after one year of being a customer - the company is able to sell you +21% more of their product.
It’s a great thing to see this number expand, especially as we know Amplitude’s growth levers in the future surround expanding across their existing customer base.
The company also had two other notable mentions:
Jim Whitehurst, formerly president of IBM and CEO of Red Hat has joined their Board of Directors
Announced a partnership with Snowflake (SNOW) to combine the Data Cloud and Digital Optimization in efforts to deliver real-time, unified customer insights
All in all, the company is crushing it and I’m more confident than ever in their ability to execute going forward. It’s sort of funny that they announced this partnership with Snowflake considering we’ve been comparing their valuation multiple to Snowflake’s for quite sometime now.
Maybe, now that they’re working so intimately with them, the market will begin to price Amplitude more like they price Snowflake - a good thing!
If you’ve been rocking with me since the good ole Patreon days, you’ll likely have read this IPO breakdown of Palantir I published, detailing their business and why I was excited about the company.
This quarter we saw mixed results, but it seems like the market only paid attention to the bad side of the story. Let’s break down everything together - feel free to follow along here.
Revenue: $392.1 million, an increase of +36%
This surpassed the company’s own original guidance of $385 million, bringing their revenue YTD to now over $1.1 billion (+44%). The company grew US-based revenue by a total of +45% - driven higher by a +103% increase in US-based commercial revenue.
Adjusted gross margin on their revenue expanded +1% to 82% year-over-year.
The company also guided to a +40% FY21 increase in revenue, compared to the only +30% increase we’ve been told in the past. This now implied a FY21 revenue figure of $1.54 billion.
Customers: the company added 34 net new customers in the third quarter, an increase of +46%.
That’s a +135% increase in commercial customers YTD. While adding these customers, the company closed 54 deals during the quarter - 33 of which were valued at $5M+, and 18 of which were valued at least $10M+.
This spiked Palantir’s remaining performance obligations by +172% to now be worth $874 million (refer above to Amplitude if you forgot what this means).
Free Cash Flow (FCF): the company generated $119 million of adj. free cash flow, an impressive margin of 30% - compared to 13% last quarter.
Certainly a positive thing when you see a company guide to $150 million of free cash flow for 2021 in Q1, raise it to $300 million in Q2, and now raise it again to $400 million in Q3. Given the company’s FY21 revenue expectations of $1.54 billion now, this $400 million adj. FCF guidance implies a margin of about 26%.
So now let’s begin to explore why the company’s stock experienced a sell off - and why our long-term conviction in the company hasn’t changed.
Revenue growth slowed from +49% in Q2 to +36% in Q3.
Remember, the company is operating within this massive $120 billion total addressable market (TAM) - meaning there’s a lot of revenue to go around. Considering their existing Big Data business is projected to grow more than +22% annually, it would be nice to see Palantir pump these numbers up.
As Matthew McConaughey says.. “gotta pump those numbers up, those are rookie numbers in this bracket.”
The company’s Foundry business segment didn’t grow as aggressively as the market was hoping for - considering Foundry is the company’s biggest growth lever internationally for the coming decade.
Their US commercial revenue surged +103%, accelerating beyond an already stellar +90% growth last quarter - but the rate of international adoption for Foundry is still weak comparatively. Their management team had this to say on the call regarding international revenue…
Our international business continues to gain momentum as well with international commercial revenue growth accelerating for the third straight quarter as economies continue to reopen and recover.
It’s disappointing to see the company’s complete lack of highlighting any international growth whatsoever inside the earning presentation.
So why do we remain excited?
Free cash flow of course - that’s the name of the game and the reason any company’s stock increases over long periods of time. Free cash flow per share.
2022 looks like a year of about $2.0 billion in revenue - if we take into account the company’s reiteration of their +30% CAGR through 2025, we’ll see ~$5.0 billion in annualized revenue by 2025.
Slap a 30% FCF margin on that revenue, something I’m confident they’ll be able to achieve considering 2021 was 26% and this quarter was 30% alone - and you’re looking at $1.5 billion in annualized FCF by 2025.
That’s nearly a 4X in annualized free cash flow for Palantir in 4 years - assuming they don’t expand their margin there (something they absolutely can do) at all between now and 2025.
That’s the bull case - free cash flow expansion on annual revenue growth between +30-40% through 2025.
Oh, Upstart - our biggest winner yet after pitching the stock to you all in this post way back when on Patreon. Upstart was trading around $60 / share back then - recently peaking above $400 / share just a few weeks ago.
Long story short - despite their stock trading down some -18% after earnings, not a single thing has changed for this company and my investment case is as strong as ever. Haha, not as strong as Amplitude, but strong.
It’s been made clear to us over the last several quarters that Upstart’s growth in the future will be driven higher by 4 main growth levers:
Being the “Shopify” for car dealerships - Upstart Auto Retail (Prodigy)
Becoming a consumer-focused brand through their website - think Credit Karma or Nerd Wallet
AI credit decisioning API for regional banks
Growing their personal loan business segment
So with that being said, let’s break down their quarterly earnings results - feel free to follow along here.
Let’s start off with the opening statement..
“Since Upstart's IPO a year ago, we've more than tripled our revenue, tripled our profits, tripled the number of banks and credit unions on our platform, and tripled the number of auto dealerships we serve.”
Pulling a few words from their earnings call, just so we’re all on the same page here about the company’s insane growth..
“In the 6 years leading up to our IPO, 620,000 loans were originated on the Upstart platform. A year later, our bank and credit union partners have originated more than 1.5 million Upstart-powered loans, totaling more than $16 billion in originations. While there were 80,893 loans originated on our platform in Q3 2020, which was the quarter prior to our IPO, we facilitated 362,780 Upstart-powered loans in Q3 2021. That's a growth rate of 348%.”
In their 6 years of existence prior to IPO, Upstart processed 9 million repayment events and was trained on 15 billion cells of training data. Today, 1 year later, that number is 17 million repayment events and 28 billion cells of data.
People.. it took them 6 years to hit the first mark, and only 1 year to double it. Parabolic growth.
“A year ago, a handful of auto loans had been refinanced in a single state. Today, more than 4,000 Upstart-powered auto loans have been originated in 47 different states.”
Revenue: $228 million, an increase of +250%
Absolutely incredible. This revenue growth seems to now become standard for this company .. I’m only joking - haha. But seriously, insane. This figure was driven higher by the success of their personal and auto loan business segments.
“Personal loans continued to drive the growth and profitable economics of Upstart. Post pandemic, the demand for these simple installment products has reaccelerated. I like to refer to personal loans as the duct tape of credit, a fast and simple solution that consumers love for their usefulness, affordability and accessibility. And banks are beginning to realize that offering instant all-digital personal loans makes sense, unless they want their customers to find them elsewhere.”
“As a reminder, the auto lending market is at least 6x the size of personal loan market. In our view, it's at least as inefficient. On the auto refinance front, we continue to make fast progress to eliminate the time and effort required to refinance a car loan. We're also making rapid progress on our auto purchase product. In the third quarter, we rebranded the company and the product formerly known as Prodigy to Upstart Auto Retail, but our progress in auto retail went far beyond rebranding. In fact, we've now tripled the number of dealers on our platform compared to a year ago. And in Q3, we added an average of more than one rooftop a day.”
It’s also worth re-focusing on the fact that Upstart originated 363,000 loans this quarter, an increase of +348% annually. Considering 92% of their revenue comes from fees regarding loans - this is very good!
Adjusted EBITDA: $59.1 million, an increase of +281%
This was probably where people got tripped up the most - kind of extrapolating out into contribution margin as well here, it came in at 46% which was above the 45% guided to but less than the 54% last quarter.
Sort of frustrating to see the market sell off a stock that does exactly what they said they’d do, especially after explaining the lower sequential contribution margin is derived from their aggressive expansion into auto loans.
“..representing a 46% contribution margin, down from a margin of 54% in the year prior and slightly above our guided level of 45%. As discussed on past earnings calls, this margin was expected to moderate concurrently with the scaling up of our acquisition programs, as well as from the margin impact of our growing auto loan volumes.”
Finishing off with guidance for the next quarter…
“With this backdrop in mind, for Q4 of 2021, we are expecting revenues of $255 million to $265 million, representing a year-over-year growth rate of 200% at the midpoint and bringing our full year 2021 revenue guidance up to $803 million versus the previously guided number of $750 million; contribution margin of approximately 47%; net income of $16 million to $20 million; adjusted net income of $48 million to $50 million; adjusted EBITDA of $51 million to $53 million.”
So what’s the plan here?
Continue to dollar cost average.
Not a single part of Upstart’s business results have alluded to anything to worry about - despite the market selling off. I’d argue the sell off Upstart experienced was more aggressive than expected because of the inflation announcement and macro economic fears rather than business results. Brutal timing for an otherwise fantastic earnings report.
As their CEO said in their conference call..
“Artificial intelligence is perhaps the most transformational technology the world has yet to see, and Upstart is at the forefront of applying AI to the multitrillion-dollar financial services industry, so the scale of the opportunity is not lost on us.”
Upstart is not going away. Their parabolic growth has shown us that.
Stay the course. We just had a bombshell dropped on us today (highest inflation rate in 31 years) and we’re going to see some volatility in the coming weeks. Remember what you’re doing here - buying business, not numbers on a screen.
Amplitude is partnering with $100B+ companies, Palantir is on track to spit out $1.5B in FCF next year, and Upstart is triple the size it was upon IPO.
All is good.
Oh, and it’s nice to see I was correct about Opendoor Technologies (OPEN) - their stock is up +19% after-hours upon releasing their earnings results.
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.