Upstart Holdings (UPST -2.18%) burst onto the market at the end of 2020 with an initial public offering priced at $20 per share that peaked at $401 a share less than a year later. Since then, though, it's been all downhill, and the stock trades for under $80 a stub today.

That's still a quadrupling of value from the IPO, but if you got in anywhere near the top, you're nursing losses of 80%. That's a serious hit to anyone's portfolio and has left many asking where Upstart will be in the future: Will it regain its former glory or continue to revisit lows closer to its offering price?

Let's dive in and see where this cloud-based, AI-driven lending platform will be in three years. 

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Learning to lend smarter

There's good reason to believe Upstart has a huge growth runway ahead of it. Upstart uses AI and machine learning to assess credit risk for its banking partners, and the results have trumped traditional models. Using some 1,600 variables to assess risk, Upstart has been able to make more loan approvals at lower interest rates for borrowers. Notably, the Upstart process posts the same loss rates as traditional FICO score-based lending for some 42 banking partners.

According to the Consumer Financial Protection Bureau, Upstart's AI-driven models approved 27% more loans than top-end traditional models, while nabbing loans for borrowers with APRs 16% below average. All of this allowed for 2.7 times more approvals at no increase in loss rates.

Those kinds of numbers are why Upstart continues to find greater acceptance among banks and why its revenue quadrupled last year to $849 million. That number is expected to hit $1.4 billion this year. Wall Street expects it to grow by nearly two and a half times to $3.4 billion by 2026.

After running losses for years, Upstart turned profitable in 2020 and hasn't looked back. Analysts are looking for earnings of $2.35 per share in 2022, growing to $5.98 per share four years down the line.

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The risks in the investment thesis

Yet there are risks for this fintech stock. In its fourth-quarter earnings report, Upstart noted that 70% of borrowers were instantly approved, meaning that those people didn't have to upload any documents, talk with anyone for further clarification, or wait to learn if they'd get the money they wanted. 

While that's been a fairly consistent figure since Upstart went public, we're now entering a period of rising interest rates, with a hawkish Federal Reserve committed to reining in the impact of rampant inflation. With these macroeconomic headwinds, lending money becomes a riskier proposition, meaning banks will be more circumspect about to whom they lend money. With 95% of Upstart's revenue coming from fees from banks, the platform could suffer a serious decline if banks start cutting back on loans.

Moreover, Upstart counts on one bank, Cross River Bank, for 56% of its revenue. A second lender represents another 27%. Together, they account for 91% of the loans facilitated on the platform, giving Upstart substantial concentration risk if either of them cut back on lending or run into trouble.

While Upstart is already entering the auto loan market, mortgages are the really big game if the lender truly wants to be a leading player in the space.

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Where will it be?

Although banks may indeed become more reticent in loaning money due to broader macroeconomic factors, it's also true that banks don't make any money by sitting on deposits. Banks need to loan money to consumers if they want to generate profit, and Upstart's AI-driven system reduces the risk for banks.

Yet even at Upstart's knocked-back stock price, it still remains at a premium, going for 56 times trailing earnings, nine times sales, and 44 times free cash flow. Considering we're entering an era when the cost of money is likely going to rise, there seems to be more downside potential in Upstart's share price.

But, investors need to have a long-term horizon, and in three years -- let alone in five years or a decade down the road -- I expect Upstart Holdings' current stock woes will be forgotten and its valuation to be significantly greater than it is today.