After the shares fell a whopping 91% in 2022, Upstart (UPST 2.76%) has been on a major upswing this year. Investors are optimistic about the business again.

If I'd bought this fintech stock at the start of 2023, I'd be sitting on an impressive gain of 240% (as of Dec. 22). This performance crushes the 43% rise of the Nasdaq Composite Index.

You might be thinking that it's a smart idea to hop on the Upstart bandwagon in the hopes of strong future returns. But before you rush to do that, it's worth digging deeper and understanding more about the business and how it has fared this year.

The fundamentals haven't improved much

When Upstart had its initial public offering (IPO) in December 2020, the company was firing on all cylinders. Its lending platform, based on artificial intelligence (AI), was finding raging success, increasing customer count and revenue for its lending partners and with lower risk of default. In 2021, revenue rose 264% year over year. And this early stage growth company even posted net income of $135 million.

However, ever since then it's been a wildly different story. Rapidly rising interest rates last year started to pressure demand for loans from borrowers. And this dynamic carried over into 2023.

Through the first three quarters of this year, Upstart saw its revenue drop 46%, a clear sign of the cyclical nature of this enterprise. Even worse, the company posted a net loss of $198 million during this time.

Transaction volumes also fell 34% in Q3. Since the business generates fees anytime one of its more-than-100 lending partners uses its platform to originate and approve a loan, reduced activity is a huge headwind. Again, this points to how financially unsound Upstart can be, especially when economic factors aren't working in its favor.

The poor fundamental performance in 2023 makes you scratch your head and wonder why the stock has done so remarkably well. I think credit goes to a more optimistic and enthusiastic market, one in which many other high-growth tech stocks have experienced big price run-ups. Upstart is simply riding the wave.

Investor enthusiasm is through the roof

If we dig beneath the surface, it's obvious that this improved market sentiment is, in fact, the key driver for Upstart shareholders' huge returns in 2023. And then some.

Since the start of this year, the stock's price-to-sales (P/S) ratio has soared 512%, going from about 1.3 to more than 7.2 right now. So despite still having weak fundamentals that were clearly on full display this year, Upstart's valuation multiple expanded significantly. The stock is now more expensive today.

Bullish investors will quickly point out that Upstart's current valuation based on its P/S ratio is still a discount to the historical average of 10. And they might say that the stock still looks like a smart investment idea given the company's long-term potential.

This is a legitimate argument. Upstart has found real utility for AI. And it's trying to attack a truly gargantuan $4 trillion market opportunity for four different lending segments (personal, auto, home, small business loans). This might entice those who have been on the sidelines to consider buying the stock.

I'm not convinced, though. I view this as an extremely risky investment that's more expensive now than it was just 12 months ago. And even though the shares have climbed this year, the underlying business is still unprofitable and cyclical.