The artificial intelligence (AI) race has been a hot topic in the stock market in recent times. Although some of the biggest companies in tech have benefited, some smaller businesses haven't been so fortunate.

Upstart (UPST 5.51%) is one of these disappointing stories. Its shares dropped 42% through the first six months of 2024, and they trade a staggering 94% below their peak.

Is this fintech stock worthy of investment consideration, especially after its price has gotten hammered? Or should investors simply avoid it altogether?

Upstart's bumpy journey

Companies that emphasize AI are getting a lot of attention these days, but Upstart has actually been developing its AI and machine learning capabilities for more than a decade. In fact, this technology is what the business is built on.

Upstart works with banks and credit unions, of which more than 100 are partners, offering its AI platform to help them better analyze a borrower's default risk, and quickly and automatically approve loans. Upstart claims its system can open up lending opportunities to people who might not look like worthy borrowers based on the traditional FICO credit scoring model.

Growth was phenomenal when Upstart had its initial public offering (IPO) in December 2020. Revenue surged 42% in 2020 before soaring 264% in 2021. And this company was profitable in both of those years. It's no wonder the stock price skyrocketed 857% from the start of 2021 to its all-time high in October of that year. This business was a darling on Wall Street.

But then the U.S. started to experience rapidly accelerating inflation. It's the central bank's job to keep prices across the economy stable. So the Federal Reserve started to rapidly hike interest rates during 2022. All of a sudden, the favorable economic backdrop turned into one that was constricting Upstart.

The company's revenue fell 1% in 2022. And last year, revenue and transaction volume dropped 39% and 59%, respectively. The management team expects revenue to decline 8% in the current quarter. Even worse, Upstart has consistently been reporting sizable net losses.

The path forward

In the early days after its IPO, Upstart was probably viewed by the market as a thriving tech enterprise with outsize potential. The company's AI platform was appealing. And the executive team touted a huge total addressable market valued in the trillions of dollars of loan originations annually. That can easily excite any investor.

However, economic conditions have revealed just how cyclical this company is. Changes in interest rates are also totally out of Upstart's control, which means it will always be exposed to the whims of the broader economy. That's worrying.

There is the expectation that the Fed will cut rates at some point in the near future. And in this scenario, demand from borrowers for loans could pick up. But what if the U.S. sees elevated levels of inflation for the next few years? Perhaps interest rates will never get back to the levels they were during the 2010s. And that could create a difficult operating environment for Upstart.

An investor's perspective

Because Upstart shares trade at a price-to-sales ratio of 3.7, which is 60% below their historical average, I can understand why bullish supporters would want to consider buying the stock. On paper, the upside looks compelling.

From my perspective, though, this stock should be avoided at all costs. Owning it requires you to correctly assess in what direction the economy and interest rates are heading. That's an impossible task that no one can do accurately.

Until Upstart can report consistent revenue growth and recurring positive earnings, I am staying away. This business still has a lot to prove.