After capturing investors' hearts and wallets, Upstart Holdings shares (UPST 0.96%) now are down a breathtaking 88% in 2022, overturning its astronomical gains in 2021. It's on track to be one of the worst-performing stocks of the year.

But the market can be fickle. Many of its biggest-ever gainers had some pretty awful years along the way. Believe it or not, Amazon stock lost 80% of its value in 2000 even as the S&P 500 only lost 10%. It continued to lose value in 2001 before it began to gain again.

Based on historical trends, there's reason to be confident about the market's potential return to gains in 2023. But what about Upstart? 

Why did Upstart look so good?

When Upstart went public two years ago, investors were intrigued by its business model, which looked like a credible disruption to a traditional industry.

It claims that its artificial-intelligence-powered credit evaluation platform can better predict who's going to default on a loan. It makes its assessments using thousands of data points and many more factors than the traditional credit score, which essentially counts about five factors. With its more-accurate evaluations, the company says, credit partners can approve more loans without increasing the risk of defaults, a huge game changer. More loans mean more interest accrued for banks, but banks always have to balance that with the risk of not having their loans repaid. 

Upstart's banking partners increased from 31 last year to 83 at the end of the third quarter as more banks and credit unions find the model compelling. Upstart was posting monster growth as more partners were using its platform to originate loans, since it gets a fee from each origination.

It also launched Upstart Auto Retail after it acquired an auto lending platform, and that business is adding many partners as well. Auto dealerships increased from 291 last year to 702 this year in the third quarter.

Thrown off its throne

The business started to fall apart late last year. Investors began to lose confidence as inflation took off and the Federal Reserve raised interest rates, slowing loan growth. Upstart's sales not only slowed, but are now declining. Third-quarter sales fell 31% from a year earlier, and the company posted a $56 million net loss. It's forecasting further revenue declines and losses in the fourth quarter.

Not only is demand for loan originations down, but Upstart's platform is also pricing the loan requests that are coming in at higher interest rates, making potential customers more reluctant to borrow. Chief Executive Officer Dave Girouard said, "Contraction in lending volume in a time of rising rates and elevated consumer risk is a feature of our platform, not a bug." The point is that in this economy, there are likely to be more defaults, so Upstart's model is working, even if sales are falling.

How it will do in 2023 will likely depend on interest rate changes during the next year. 

Equal parts potential and risk

Upstart stock is incredibly cheap now. Even including its losses, shares are trading at only 17 times trailing-12-month earnings. But that's not necessarily a reason to buy.

Its model appears to outperform traditional models in its capabilities to evaluate true credit risk. When the economy is doing well, Upstart benefits. Considering that the economy does well most of the time, it's well positioned to provide real value for credit partners in general. And since it has a machine-learning model, by the time the next floundering economy comes around, it should be an even stronger product. But like the banking industry in general, it's likely to be a cyclical performer. 

Since it's not quite there yet, its inability to drive sales now -- even if it's offering a better product than its traditional peers -- makes it risky. That could change quickly in 2023 if the economy begins to improve.

So back to the original question: buy, sell, or hold? I wouldn't recommend buying it right now, but I would keep it on your watch list. If you do already own it, you might want to hold on to your shares. It would be a shame to sell when a recovery could be in the cards in 2023.