Finding another stock that has had as bad a 2022 as Upstart (UPST 0.44%) is challenging. The stock is down nearly 90% this year and 95% off its all-time high. With those numbers, you may have expected Upstart to have executed terribly throughout the year.

However, Upstart's fall from grace dealt with stock overvaluation and a rising interest rate environment. So, with many investors deeply in the red on Upstart, should you buy, sell, or hold the stock in 2023?

What happened to Upstart in 2022?

First, let's cover Upstart's decline. Upstart is an artificial intelligence (AI0)-powered alternative lender company. It uses multiple factors that FICO scores don't to assess a borrower's creditworthiness more accurately. In 2021, Upstart's growth was unparalleled -- it posted multiple quarters with 300% year-over-year (YOY) revenue growth.

This caused investors to get way too excited about Upstart's stock, causing it to skyrocket to a valuation of more than 45 times sales. Few companies (if any) can sustain a valuation level like that, and predictably, it came crashing down. Now, it sits at 1.5 times sales -- a valuation level I'd argue is far too cheap. However, I'll touch on that in a bit.

With raging inflation, the Federal Reserve has been raising interest rates to cool the economy. This causes loan rates to rise, which quells demand due to a higher cost for the same amount borrowed. This approach hit Upstart squarely in the chest, and there were doubts if Upstart's AI model could handle the rising interest rates since it has never experienced such an environment.

This cause of Upstart's decline also rolls right into why investors should sell the stock.

Sell side: The metrics are moving backward

With loan interest evaporating, Upstart's revenue is beginning to fall. In the third quarter, revenue fell 31% YOY, with loan volume falling 48%. Additionally, Upstart's profitability has disappeared. Last year, the company made $29.1 million in net income but lost $56.2 million this year.

That's nearly every major metric for Upstart trending in the wrong direction. Additionally, Wall Street analysts project Upstart's sales will fall another 11.7% next year.

With the financials not trending in the right direction, it seems easy to sell. But is this short-sighted?

Buy side: This environment won't last forever

As the Federal Reserve puts the brakes on the economy, it does this knowing that it will eventually cut interest rates to stimulate the economy. It may never reach the free money levels of 2020 and 2021 again, but consumers will need loans eventually. Upstart's short-term pains are likely the cause of consumers having sticker shock on interest rates. Eventually, those consumers will take out a personal loan or purchase a car, and Upstart's business will pick up.

Upstart's stock also has nearly nowhere to go but up. At 1.5 times sales, Upstart is valued at nearly a tenth of its major competitor FICO at 11.6 times sales. So if Upstart can return to growth mode, even at a pace of just 15% per year, and reach profitability again, it's not hard to envision the company rising to a multiple in that range, which would indicate over 670% upside.

The short-sightedness of the bears could cause them to miss an excellent long-term opportunity. But is this view too bullish?

Hold: Let's see what happens

Many Upstart investors are deeply in the red, and their losses may never recover. However, what matters is where the stock will go from today. Logically, Upstart's financial decline will likely continue if the Federal Reserve raises or maintains higher rates. However, it also makes sense that when the Fed reduces rates, Upstart will significantly benefit.

This will require patience to watch this play out, but holding could insulate investors from further losses should Upstart's business crumble. If you don't buy more shares, you'll also have to be content with giving up some potential gains due to a stock rebound if and when sentiment changes.

As for me, I'm in between the hold and buy arguments. I've paused my purchases of Upstart's stock for now but will likely add some more to maintain a small position in my portfolio. If Upstart's business returns and sends the stock soaring, my small investment will provide serious returns in my portfolio. If it fails, then my exposure to the loss will be minimal. That's my stance on Upstart for 2023, but it could easily change depending on the Fed's decisions and how the business executes.