Shareholders in Upstart Holdings (UPST -2.94%) are having a fabulous year, with the stock up a jaw-dropping 170% in 2023. The general optimism surrounding the market, and tech stocks in particular, has helped propel this artificial intelligence (AI) lending platform. 

By zooming out, we'll see that it hasn't always been so rosy. If you were bold enough to invest $1,000 in Upstart during its initial public offering in December 2020, you would be sitting on a gain of 20%, despite its huge run-up this year. So, that $1,000 would be worth $1,200 today. During this same period of time, the Nasdaq Composite Index has climbed 9%. 

But Upstart's stock remains about 90% off its all-time high. Let's take a closer look at what's been going on with this fintech. 

Disrupting the business of lending 

By leaning on the 99 lending partners that use its technology, Upstart applies AI to better analyze the creditworthiness of potential borrowers. Management claims that its system can approve more customers at lower default rates. And by simply collecting fees for every loan that it originates, Upstart markets itself as a platform company as opposed to a traditional bank. 

Growth early on was superb. Revenue jumped 42% in 2020 and 264% in 2021. That shouldn't be too surprising given how low interest rates were. And -- unusual for a tech startup -- Upstart was profitable, posting net income of $135 million in 2021. This certainly helps explain why the stock skyrocketed through the first three-quarters of that year. 

At the end of the day, if Upstart can continue increasing the accessibility of credit to more people, especially those who might otherwise be shut out by traditional channels for getting loans, then it's very hard to deny that this company is a positive force in the world. And if it can find ways to get back to its growth rates before 2022, then the financial results should be favorable. 

Cracks are starting to show 

Upstart's stock is still way below its peak price, so shares look cheaply valued. They currently trade at a price-to-sales (P/S) ratio of 4.5, compared to the historical average of 10.8. However, the P/S is much higher now than it was at the start of 2023. 

The initial reaction from investors is probably to hurry and take advantage of the low valuation to add a disruptive business to the portfolio. After all, Upstart was using AI long before it became a hot  topic. And management is trying to chip away at what appears to be a huge market opportunity in the lending industry. That could be the necessary recipe for outstanding investment gains. 

It's best to understand the risks, though, to make an informed decision. And Upstart's cracks are starting to show. 

Although it is a tech-enabled platform, last year made it extremely obvious just how cyclical Upstart's business really is. The Federal Reserve's aggressive interest rate hikes to curb high inflation discourages consumers from borrowing.

And we saw this play out, and Upstart's loan volume and revenue declined 14% and 1%, respectively, in 2022. For the entirety of 2022, the business' net loss was $109 million. This was a big reversal from the profit registered in 2021. 

This poor performance continued into the current year. Revenue fell 67% in the first quarter. And Upstart posted a huge net loss of $129 million.  

And while it usually sells the loans it originates to third-party institutional investors, this market has dried up. As of March 31, Upstart had $1 billion in loans on its own balance sheet, 67% higher than the total just a year ago. This adds substantial credit risk to the equation. 

The current valuation could reflect this pessimism, so for some investors, Upstart might look like a worthy portfolio addition right now.