After its initial public offering in December 2020, shares of lending platform Upstart (UPST 0.82%) soared more than 1,200% during the next 10 months to hit a peak of $390 in October 2021. But since then, it has been on a monumental decline. The stock is down a whopping 96% in the past 14 months, and the business now finds itself in small-cap territory with a market value of just $1.3 billion. 

Is this beaten-down fintech stock a buy right now? Let's take a look. 

Upstart's business model 

There's no doubt that Upstart's business model has the potential to disrupt the lending industry. The company offers its 83 different partners (banks and credit unions) an artificial-intelligence (AI) platform that analyzes thousands of data points about potential borrowers before making a lending decision. Compared to the traditional Fair Isaac FICO model, which many consider outdated, the platform has been shown to improve approval rates, while at the same time lowering defaults -- a lucrative combination for lenders. 

Upstart doesn't take on all borrower credit risk. The banks and credit unions it works with provide most of the capital. And the majority of Upstart-powered loans (65% in the first nine months of 2022) were sold to third-party institutional investors. This moves credit risk away from the company and onto someone else, but this model still relies on loose capital markets. 

Of the $30 billion in loans the company has processed in its history, it only carries about $700 million on its balance sheet today. This makes Upstart a capital-light business, which is attractive from an investment perspective. It's no wonder the stock skyrocketed for most of its first year as a public company: A very scalable model, coupled with a robust macroeconomic backdrop, provided a solid foundation for rapid growth. 

In 2021, a very favorable year for the company, Upstart processed more than 1.3 million loans and generated revenue of $849 million, up 338% and 264%, respectively, from the prior year. And management touted just how vast its opportunities were. Its bread and butter, unsecured personal loans, are estimated to be a $146 billion market. And the platform was just starting to scratch the surface with auto lending, a $786 billion market.  

Upstart's latest results 

Even though Upstart doesn't keep most loans (and credit risk) on its own books, the business is extremely sensitive to the macroeconomic environment. And with the way things have gone this year, as the Federal Reserve raises interest rates to curb rampant inflation, the company's financials have taken a hit. 

In the third quarter, revenue declined 31% year over year to $157 million. And the bottom line swung from a profit of $29.1 million in the third quarter of 2021 to a net loss of $56.2 million in the more recent ended. The business helped originate 189,000 loans in the three-month period, which was down from 321,000 in the second quarter of this year and about half the 363,000 in the year-ago third quarter. 

Upstart saw 70% more defaults in the third quarter than management said it would expect in a "long-run normal macro environment." And the capital flowing from those institutional investors to scoop up Upstart's loans has tightened as interest rates have gone up. 

For the current quarter, management expects revenue to fall 56% to $135 million at the midpoint of its estimates and report a net loss of $87 million. 

"We're eyes wide open to the challenges of the current macro economy and determined to make the decisions that will optimize for the long-term success of Upstart," Chief Executive Officer Dave Girouard said on the third-quarter 2022 earnings call.  

Proceed with caution 

It's difficult for me to recommend that readers buy the stock today, especially because the U.S. could be headed for a recession sometime in 2023. Like regular banks, Upstart is a cyclical enterprise, absolutely thriving in prosperous economic times, but struggling in downturns. The benefit the company has compared to banks is that it doesn't take on all that much credit risk directly, and this is a positive. 

Despite the stock being down 90% in 2022 and trading at a current price-to-earnings multiple of 15, I think the best course of action is to keep Upstart on your watch list for now. Should the economy show signs of improvement over the course of 2023, the business might then look like a compelling buy.