Artificial intelligence (AI)-driven lending platform Upstart Holdings (UPST -0.94%) has nosedived 81% year to date, a massive drop compared to the Nasdaq Composite, which has declined 20.2% in the same timeframe. As a whole, growth stocks have had a turbulent year in light of record-breaking inflation, the Federal Reserve's hawkish monetary policy, and the war between Russia and Ukraine.

As a result of the fresh pullback, many high-potential stocks are now trading at more attractive valuation levels. Stock market corrections are a part of investing, and investors should take advantage of them by purchasing shares of high-quality businesses.

Upstart reported its second-quarter earnings digest on Aug. 8, and the company demonstrated it continues to make headway as a business despite a challenging economic landscape. Is now the right time to buy the financial technology (fintech) stock? Let's review its current situation to find out.

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Upstart is in a transitional phase

Upstart is on a mission to transform the $6 trillion loan origination market. Instead of using traditional underwriting criteria like Fair Isaac's FICO score, various credit reports, and/or annual income to approve consumers for loans, Upstart has created an in-depth, AI-driven model that uses over 1,600 variables to determine a customer's creditworthiness. The company partners with banks and credit unions to provide more affordable loans to a wider variety of customers, with 73% of its loans being instantly approved and nearly 100% of the operation being automated.

A key concern of late has been whether or not the company's lending models would hold up in a murky economy. Complementary to its second-quarter earnings report released in early August, the company posted an update on its credit performance and funding model. Recent data suggests that its model offers roughly five times more risk separation than FICO for loans on its platform, which enables more precise risk-based pricing. And while the company has experienced an increase in defaults, the data is consistent with the broader industry as default rates shift back to pre-stimulus levels. In short, the company's model continues to be accurate in the face of a gloomy macroeconomic backdrop, which serves as a tremendous signal for investors.

In Q2, Upstart's total revenue increased 17.7% year over year to $228.2 million, and it endured a net loss of $29.9 million, a sharp decline from its positive $37.3 million net income a year ago. In terms of other key operating metrics, its bank and credit union partners rose 184% to 71, versus 25 last year, and its total borrowers served climbed 119%, up to 2.4 million. The slowdown in revenue is the major cause of concern for Upstart at the moment. During its earnings call, management cited a "funding constrained environment" as the primary driver behind the curtailment, but remained confident that its long-term growth picture is unharmed.

In response to the current economic environment, many of Upstart's lenders and institutional credit investors have paused or reduced loan originations in recent months. In order to improve the funding side of its business, the company is evaluating different options to bring on lending partners who will invest regularly through economic cycles. This process will take time to unravel, so the company has decided to temporarily leverage its balance sheet as a "transitional bridge" to funding. Investors shouldn't fret too much, in my opinion -- the company currently boasts $914.4 million in cash and restricted cash on its balance sheet, so it's well positioned to weather an economic storm and survive the transition.   

Should you buy Upstart stock now?

Upstart has the potential to be a major disruptor in the massive lending industry. After its stock price collapse of more than 80% since the beginning of 2022, I believe the fintech company offers investors a favorable margin of safety today. Right now, the stock trades at a price-to-sales multiple of 2.4, which is below its March 2020 pandemic lows. The fintech company is undergoing a transitional phase, and growth may be patchy for the foreseeable future. But at a market capitalization of just $2.3 billion, Upstart could generate fortunes for patient investors who buy at today's lows and hold for the next several years.