Upstart Holdings (UPST 3.21%) stock got off to a blazing start at the end of 2020 but has since fallen flat. It's now down more than 80% in 2022, making it one of the worst stocks to have owned this year.

Up or down, it draws a lot of commentary. Why is everyone talking about Upstart stock? And should it be on your shopping list?

True market disruption

Many companies set out to disrupt traditional industries with new technology. That's not an easy feat even when the technology itself seems superior; it requires entering markets where dinosaur companies have lived for ages and control the territory. So when a company can pull off a real change, it can truly disrupt an industry, giving it an advantage.

Upstart offers what it says is a better model for credit assessment. It claims that when client lending partners, which are banks and credit unions, use its platform, interest rates are 43% lower than those of banks that only use traditional credit scoring models.

These numbers suggest a model that highly outperforms the traditional credit scoring system. It could be revolutionary for how loans are approved, putting more money to work for more people, specifically those at the lower end of the credit totem pole who previously had a harder time getting loans. Upstart says that 80% of people have never defaulted on a loan, yet less than half have access to prime credit. . Its system, which takes many more factors into consideration than older models, also approves more minority borrowers. Upstart says that it approves 43% more Black borrowers at 24% lower interest rates and 46% more Hispanic borrowers at 25% lower rates than traditional borrowers.

This led investors to enthusiastically embrace the stock when it went public just a year and a half ago. But people are talking about it today for a different reason.

Can it perform under challenging circumstances?

In a very practical case of "the higher they go the harder they fall," Upstart stock has tanked as investor confidence has not been matched this year by financial performance.Specifically, Upstart's torrid growth has shrunk to more of a trickle, with an 18% year-over-year revenue gain in the second quarter. It also posted a net loss of $32 million, its first loss since going public.

Management said that last year, when it demonstrated growth that may have been too good to be true, it was operating in an environment flooded with pandemic stimulus money. That's now dried up, and this year's numbers are competing with those on a year-over-year basis. Further complicating that, as the Federal Reserve has raised interest rates to battle inflation, there's a higher risk of defaults, making lenders more cautious about approving loans. This atmosphere puts Upstart's model to the test -- can it outperform traditional models in this less favorable environment? 

The company says it can. It explains that its system is more accurately determining credit risk among borrowers, with a 16-point difference between the highest and lowest risk grades, versus a 3-point difference between the highest and lowest FICO grades. The point difference indicates that Upstart's system is more accurately able to place borrowers into credit risk categories, with distinct high and low risk categories. It also says that its system continually improves, which is the expectation from an artificial-intelligence-powered machine-learning system.

Management also contends that the higher rates of defaults it's experiencing are not exclusive to its platform, but are affecting the whole industry. That makes sense. But then is Upstart really offering a better product? Or is its product only better than alternatives under certain conditions? These are important questions for investors to consider.

What does this mean for investors?

There are still a lot of question marks here, which is why Upstart stock is a hot topic. If it does indeed end up outperforming the industry, its stock could be explosive (again). But if it doesn't demonstrate the ability to substantially determine credit risk more accurately over time and improve default rates as a result, it could remain the dud it's been so far in 2022.

Chief Executive Officer Dave Girouard assured investors that Upstart is a viable business with ambitious long-term plans. As a business with low fixed costs, a high gross margin, and plenty of cash on hand, it can withstand current challenges and maintain its advantage.

It's a dicey stock to own right now, but risk-tolerant investors may want to have a small position in this high-potential company.