Despite its grand fall from stardom, or perhaps because of it, Upstart Holdings (UPST 4.56%) is still capturing investors' attention. The potential looks so appealing, but the performance isn't matching up.

Is it a company problem? Or is it just the macro environment? And what does that mean for investors interested in buying the stock? Let's see where Upstart could be in a year from now and decide if it makes sense to buy it.

Reeling from economic turmoil

Upstart initially caught investors' attention as it posted triple-digit percentage sales growth for several consecutive quarters after it went public in 2020, and even one quarter of quadruple-digit growth. 

Its platform appears to approve more loans for lenders without increasing the risk of defaults, which is an incredible feature. I say "appears," though, because its rates of approval, which were much higher before interest rates rose, have come down in this economy. In general, lenders are more cautious right now, and altogether Upstart's business has suffered in the past year.

In the first quarter, revenue fell 67% from last year to $103 million, transaction volume was down 78%, and the loss per share was $1.58 compared with per-share profit of $0.34 last year.

Making strides to combat outside forces

Chief Executive Officer Dave Girouard called the first quarter a "transitional" one, and assured investors that the company is taking action to improve despite the hostile operating climate.

One of the important updates was about a deal securing $2 billion in funding for its loans. Upstart had some trouble selling its loans last year, so this was greeted with enthusiasm. The company also cut employee head count and is reducing infrastructure in a move that is expected to save $10 million annually, which should go a long way toward improving profitability.

Investors were pleased with management's first-quarter updates and sent the stock higher.

A long growth runway, but short-term pressure

Credit evaluation hasn't changed much in decades, and it's ripe for disruption in the age of artificial intelligence (AI). The traditional Fair Isaac FICO score only uses five factors when determining risk, closing out the possibility of a loan for plenty of people whom Upstart says have never defaulted on a loan.

Lenders are catching on, and Upstart's lending partners have increased from 10 when it went public to nearly 100 today. That will eventually lead to higher loan activity and sales when more people borrow.

Upstart is entering the mortgage market in the coming months, which should be a huge revenue generator. It's the segment with the largest market opportunity: $2.7 trillion. Management says that average time to funding for a regular mortgage is 36 days, and it plans to have approval in 10 minutes on its app and funding in five days. 

Upstart's premise is a compelling one, and although right now the situation looks bleak, it might end up working in the company's favor. Now that it has trained data points, even when the chips are down, its platform can do an even better job assessing risk and pricing loans.

In a year from now, don't expect Upstart to have done a complete turnaround. There's no way to know where the economy will be or how lenders and borrowers will respond. But Upstart should be in a much better place than today. It's likely to report increasing sales and improving profitability, considering how hard it's fallen right now. 

The stock is down about 35% during the past year, but it's up 80% in 2023. Investors are starting to see the bigger picture, and it's whetting their appetite for more. Of course, what you don't want is the previous situation, where the price was pushed up so high that the valuation became astronomical and impossible to sustain. For now, only investors with a high tolerance for risk might want to take a small position.