Upstart Holdings (UPST -0.78%) made a splash in 2021, entering the markets in December 2020 to a mild start before climbing more than 750% by October 2021. The excitement has cooled, but the fintech's stock still gained about 280% for the year. Management's expectations for 2022 are curbing some enthusiasm as well. What should investors do this year?

Buy?

There are many reasons to love Upstart. It has real disruptive potential in its artificial intelligence-powered credit-evaluation platform, an alternative to the traditional FICO scoring model that groups people into boxes and denies credit to millions of potentially reliable borrowers. Upstart challenges that by running loan applicants' information through thousands of data points that assess their personal creditworthiness. It uses many more variables than the standard rating system, such as employment history and education, leading to more approvals while more accurately quantifying risk to the lender.

The company says that 80% of Americans have never defaulted on a loan, but less than half have access to the most favorable interest rates. Getting loans to those "missing million" provides more equity in the marketplace and more business for banks.

Two people shaking hands.

Image source: Getty Images.

Upstart's story brings this into reality. The company says 67% of loans are approved instantly, and that total approval rates are higher than with the traditional scoring system.   More bank partners are using Upsart's platform to get these benefits. And as more partners come in and more funds are loaned, more data goes into the model for greater accuracy, leading to a flywheel effect and more business all around. 

Third-quarter revenue increased 250% from a year earlier to $228 million, which is pretty fantastic, but was a huge slowdown from the more than 1,000% year-over-year increase in the second quarter. That contributed to the stock drop. But the opportunity is still wide open. Management sees an $81 billion potential market in its core business of personal loans, and a $672 billion addressable market in its newer business of auto loans. Finally, it has a $4.5 trillion opportunity in mortgages, a market that it plans to enter in 2022.

Sell?

With such a great future ahead, what would be the reasons to sell? Not too many. Even though it does face competition, Upstart is making gains in a huge potential market. The main risk is valuation, which has already receded.

These days Upstart stock trades for about 157 times  trailing-12-month earnings, a huge decrease from mid-2021, but still expensive. Management is predicting a 200% year-over-year sales increase in the fourth quarter, yet another deceleration in growth from previous quarters. That's still high-growth territory, and if you pull your money out to find a  stock with faster growth, you might come up empty.

One reason to sell would be if you are risk-averse and the ride's giving you an upset stomach. The stock-price chart is a roller-coaster ride, and investors need to be willing to handle the ups and downs of this growth stock.

Chart showing rise and fall in Upstart's price in 2021.

UPST data by YCharts

Hold?

If you are already an Upstart shareholder, hang on. If you bought early and are now seeing your gains evaporate, stay put; all stocks go through better and worse times, and high-growth stocks tend to be more volatile than others. That's their nature, and with risk (sometimes) comes reward. 

If you bought more recently, you might have losses if you sell. Just put it away for a while and wait for the stock to grow over time. The huge opportunity, disruptive business, and profitability make this stock a keeper