Why Upstart’s AI Day Dip is a Golden Opportunity for Contrarian Investors

The recent 7.66% plunge in Upstart Holdings (NASDAQ: UPST) on May 16—triggered by near-term margin pressures and a temporary dip in investor sentiment after its AI Day event—has created a rare contrarian buying opportunity. While the market fixated on short-term headwinds, long-term investors should focus on the company’s transformative AI-driven growth, its dominance in high-margin lending verticals, and its positioning to capitalize on underpenetrated markets like auto and HELOC loans. This is a stock primed to rebound, and the dip on May 16 offers a strategic entry point for those willing to look past the noise.

The Near-Term Sell-Off: Overreacting to Temporary Pressures

Upstart’s stock dropped sharply on May 16 despite delivering record Q1 2025 results, including a 67% year-over-year revenue surge to $213 million and $42.6 million in adjusted EBITDA—a stark turnaround from its $20.3 million loss in Q1 2024. The sell-off stemmed from two concerns:
1. Margin contraction: Contribution margins dipped to 55% (from 59% in 2024) due to rapid expansion into high-quality borrower segments and new verticals like auto and HELOC.
2. Q2 EBITDA guidance: Adjusted EBITDA is projected to fall to $37 million, down from Q1’s $42.6 million, as the company scales into higher-margin but capital-intensive markets.

But these are temporary growing pains. As Upstart’s AI-driven automation (now at 92% of loans fully automated) and cross-selling synergies (e.g., auto refinance costs dropping 57% sequentially) take hold, margins will stabilize. The market’s panic overlooks the long-term trajectory of a company reinventing lending with AI.

Q1 Results: A Blueprint for Dominance in AI Lending

Upstart’s Q1 results underscore its strategic brilliance:
- Auto lending: Originations grew 42% sequentially and 500% year-over-year, fueled by cross-selling and AI-optimized pricing.
- HELOC expansion: Home loan originations hit $41 million—a six-fold increase from Q1 2024—as Upstart leverages its AI to underwrite complex home equity products.
- Super prime borrowers: Loans to borrowers with FICO scores >720 jumped to 32% of originations, signaling Upstart’s shift to higher-margin, lower-risk segments.

These metrics highlight a company diversifying beyond its core personal loan business into markets with superior unit economics. The HELOC and auto verticals alone could add $1 billion+ in annual revenue by 2026, based on current growth rates.

The AI Advantage: Model 19’s Game-Changing PTM

At the heart of Upstart’s moat is its proprietary AI, most notably Model 19, which introduced the Payment Transition Model (PTM). Unlike prior models that focused on terminal loan outcomes (e.g., prepayment or default), PTM analyzes intermediate delinquency states, enabling Upstart to predict borrower behavior with unprecedented precision.

The results?
- A 55% reduction in excess defaults during periods of macroeconomic volatility, per backtests.
- A 12-month acceleration in model recalibration during the post-pandemic stimulus withdrawal.
- HELOC loans showed zero defaults by late 2024, a testament to PTM’s risk-management prowess.

This technical edge allows Upstart to approve more borrowers at better rates than traditional lenders, while maintaining—or even improving—credit performance. With 92% of loans now fully automated, the platform’s efficiency is unmatched, and Model 19’s innovations are just the beginning.

Contrarian Thesis: Why Now is the Time to Buy

1. Undervalued for its AI leadership: At 6.5x forward revenue (vs. fintech peers at 8–12x), Upstart is priced for failure, not the $1.01 billion revenue and 19% EBITDA margin it forecasts for 2025.
2. High-margin verticals: Auto and HELOC loans carry higher interest rates and lower default risk than personal loans, improving profitability as they scale.
3. Market underappreciation: The stock’s 17% post-earnings drop (despite beating estimates) and May 16 sell-off reflect short-term myopia. Investors are ignoring the $2.1 billion+ annual origination run rate and the $599 million in cash fueling growth.

Risks, but Manageable Ones

• Macro risks: Rising interest rates or unemployment could pressure borrowers.
• Regulatory hurdles: Fintechs face scrutiny over underwriting models.

Yet Upstart’s 92% automation and CFPB-compliant underwriting mitigate these risks, while its AI adapts to economic shifts in real time.

Conclusion: A Rare Contrarian Play in AI Fintech

Upstart’s May 16 dip is a once-in-a-rare-opportunity to buy a leader in AI-driven lending at a 52-week low. With its AI advancements, high-margin verticals, and a balance sheet capable of scaling, UPST is primed to rebound. This is a stock for investors who see beyond quarterly noise and recognize that long-term dominance in AI lending is already being written.

The question isn’t whether Upstart will recover—it will. The question is: Will you be on board when it does?