Since the start of last year, the stock market has been a huge winner for investors. Just two months into 2024, the major indexes are hitting fresh all-time highs seemingly every day.

Growth tech stocks, especially some of the more speculative ones, have benefited greatly from a more robust market environment as investor enthusiasm is soaring. Just look at Upstart (UPST 2.76%). The artificial intelligence (AI)-based lending business has seen its shares skyrocket 85% in the past 14 months.

It might be a no-brainer decision to want to scoop up this fintech stock and ride the momentum. However, it's best to pause first and understand that Upstart has a hidden risk you can't ignore.

Extreme sensitivity to macro forces

In 2021, Upstart could do no wrong, as its revenue rocketed 264% that year to total $849 million. Net income came in at $135 million. The favorable macro backdrop, specifically low interest rates, helped drive demand from borrowers for loans. Upstart's appeal? It developed a system to help its lending partners evaluate the creditworthiness of borrowers, claiming its platform looked at many more data points than traditional credit-scoring models.

But then the Federal Reserve started aggressively hiking rates in 2022 to fight inflation that proved to be anything but transitory. Upstart saw its sales drop by 1% that year.

These weak trends continued into last year. Despite having more than 100 lending partners using its technology, Upstart's revenue cratered 38% in 2023, with loans approved declining 59%. And it posted a net loss of $240 million.

There's no question that Upstart is struggling mightily right now. And unless interest rates begin to drop meaningfully, it's difficult for investors to be optimistic about the company's prospects.

The positive spin on this, though, is that the economy spends much more time in expansion mode than it does contracting. This could propel Upstart over the long term.

But the business has yet to prove it can increase loan volume and revenue while also generating positive earnings throughout a full economic cycle. And this is the only reason one needs to avoid the stock. In other words, there's a significant risk that Upstart will run into financial woes at some point in the future, which could derail the company.

Disruptive potential

Upstart and its founders deserve credit for what they've built. Since its founding in 2012, the business has facilitated $36 billion worth of loans. And in the latest quarter, 89% of these loans were fully automated, an achievement that improves the borrower's experience.

That lending sum might seem like a big number, but in the U.S. alone, origination volumes from personal loans, auto loans, home loans, and small business loans total more than $3 trillion annually. I'm not sure how much of this Upstart will realistically be able to get onto its platform one day, but at least the executive team is targeting a massive market.

And that Upstart has long been working on a real-world use case for AI is commendable. There's definitely a lot of hype surrounding what many people think is a revolutionary technology. Upstart has successfully mixed AI and financial services to provide a tool that might actually benefit the world, increasing access to credit for people who might not otherwise be able to obtain funding.

But until there are concrete improvements, particularly as they relate to Upstart's financial performance, this stock should be avoided like the plague. Based on the facts, it remains a very high-risk investment.