Upstart (UPST 7.30%) no doubt has an innovative credit rating model that integrates artificial intelligence (AI) to better assess how risky prospective borrowers are. And this disruptive potential delighted shareholders with a monster gain throughout most of 2021. Upstart's market cap exceeded $30 billion in October of that year. 

However, over the past year, it's become strikingly obvious just how dependent this business is on robust macroeconomic factors for its success. And this should make investors think critically about whether owning the stock, which is down 96% from its peak, is such a good idea. 

So, is it time for investors to sell Upstart? Or is the fintech stock worth the risks? 

Watching what the Fed does 

Upstart makes money by charging its 92 partner banks and credit unions and 778 auto dealership locations a fee anytime its artificial inteligence-based credit tool approves a borrower. By using more than 1,600 variables that can better analyze a borrower's ability to pay, Upstart claims its system can not only reduce defaults but also increase loan volume at the same time. Even more, the AI tool should get better over time as it processes more data. 

Unsurprisingly, when interest rates are low and the economy is on strong footing, there's a healthy demand for loans. If consumers believe that the near future is going to be better, then they will take on debt because they believe they will be able to generate enough income to pay back their borrowings. And this is a wonderful situation for Upstart. During 2021, Upstart's revenue was up 264%, and the number of loans it approved skyrocketed.  

But when interest rates rise rapidly, as they did in 2022, it can hurt the business. In 2022, Upstart posted revenue of $842.4 million, down 1% year over year. That isn't too alarming on its own, but consider that revenue in the fourth quarter dropped 52%. The business registered a net loss of $108.7 million for the entirety of 2022, after generating positive net income of $135.4 million in 2021. Upstart approved 154,000 loans in Q4 2022. In the fourth quarter of 2021, that figure was 495,000. That's a huge drop that can at least partly be attributed to the macro environment. 

"Indeed, as we exit 2022 and enter a new year, consumer delinquencies remain elevated, and the funding markets remain limited in their appetite for risk," CFO Sanjay Datta said on the Q4 2022 earnings call. Things could get worse before they get better, as Upstart is expected to post a net loss of $145 million just in the current quarter. 

While investors first fell in love with Upstart's platform-like business, one that essentially connects its bank partners to consumers and generally doesn't keep loans on its own balance sheet, even this is changing. As of Dec. 31, the business held more than $1 billion worth of loans, compared with just $252 million a year ago. This exposes Upstart, instead of its lending partners, to more direct credit and default risk.  

What should investors do? 

It's understandable that investors were enamored with the AI-focused capabilities of Upstart to disrupt the business of lending. After all, Upstart's initial public offering happened at a time when speculative tech stocks were all the rage. But last year proved that this company needs a favorable economic backdrop to thrive. Luckily, the U.S. economy is more often in growth mode than it is contracting. And this could lead some investors to remain Upstart shareholders. 

However, the near-term situation is full of uncertainty, and it's unpredictable. Making matters worse is Upstart's lack of consistent positive profits. You also have to question management's decision to repurchase shares throughout 2022, a year that saw the business struggle. Consequently, I'm not yet convinced about Upstart as a stock to own in my portfolio. As for those investors who are lucky enough to be sitting on a 28% gain in 2023, now might be an opportune time to consider selling shares.