Although the market, particularly the Nasdaq Composite index, is having a solid start to the year, there are many stocks that are still substantially off of their all-time highs. Rapidly rising interest rates and the threat of a recession in the near future have been unnerving investors. So, there might be some discounts that the market is offering up right now for those who are comfortable taking on more risk. 

Take Upstart (UPST 0.71%). The lending platform that integrates artificial intelligence (AI) has seen its stock fall 96% from its peak (as of this writing). As a result, it's currently trading at a historically cheap valuation. Does this make Upstart stock a buy right now? 

Upstart is an innovative company 

It's hard to argue with the potential of Upstart's tech-powered lending system, which analyzes more than 1,500 different variables before making credit approval decisions. The promise for its 92 lending partners is that by using Upstart's platform, they can approve more loans without increasing default risk. And this can obviously lead to higher revenue for the banks and credit unions using Upstart's system. 

Total revenue rose almost 1,400% between 2017 and 2022, indicative of the enormous growth and success of Upstart's offering. And management has its sights set on a huge opportunity. Combined, the mortgage, auto, personal, and small business loan origination markets are worth about $5 trillion annually in the U.S. Upstart focuses on personal and auto loans right now, but you get the idea of how big its expansionary runway can be. Last year, the company's platform processed $11.2 billion of volume. 

Upstart isn't without risks 

Upstart's innovative business model is certainly impressive, but there are still some risks that investors should be aware of. Upstart might not be exactly like a traditional bank, but this company still needs a lot of factors to go its way to succeed, and these are things largely beyond its control. 

Take the overall economy. Upstart benefited for much of its history thanks to loose monetary policy and strong demand from borrowers. These conditions reversed and became a headwind last year, when the Federal Reserve started aggressively hiking interest rates to slow inflation. In 2022, Upstart's revenue declined 1% year over year. And in the fourth quarter last year, the company's transaction volume of 154,000 loans was down from 495,000 in Q4 2021. Demand from borrowers is slumping, and Upstart has no control over this. 

"Obviously 2022 was a challenging year for Upstart, and we're not happy with the results we're sharing today," Upstart co-founder and Chief Executive Officer Dave Girouard said in February. "In many ways, last year was the perfect storm for our business model." It's also worth mentioning that Upstart posted a net loss of $109 million last year, a huge swing from profit of $135 million the year before. 

There are some other cracks in Upstart's operations that are starting to show, including trouble selling some of its loans as it did in the past. As of Dec. 31, 2022, the company carried $1 billion of these loans on its own balance sheet, a figure that skyrocketed in 2022 as credit markets dried up and interest from institutional investors to buy Upstart's loans plunged. This exposes the business to greater credit risk. 

Making matters a bit more uncomfortable for shareholders is the fact that in 2022, a whopping 51% of Upstart-powered loans were originated by one lending partner, Cross River Bank. Another bank was responsible for 36% of Upstart's transaction volume. This concentration creates huge potential points of failure should these partners decide they no longer want to work with Upstart or if they start to demand more favorable fee arrangements. 

Investors have a choice  

Looking at all the facts and considering both the good and the bad with this business, I don't think the stock is a buy right now. Upstart's cyclicality is on full display. And without consistent positive profits, shareholders have to worry about the company's ability to handle unfavorable macro conditions. The negative factors outweigh the positive traits, in my opinion, and so I'm not inclined to buy the shares. 

However, some investors might be drawn to the company's innovative business model and disruptive potential in a huge and lucrative industry. And the historically cheap price-to-sales ratio of 1.75 can also be compelling for some. It's up to you to decide your risk tolerance before making an investing decision about Upstart.