Upstart (UPST -5.62%) has been on a major upswing as of late. Since early August, shares of this artificial intelligence (AI)-powered lending platform have skyrocketed 92% (as of Dec. 11), driven by seriously improving market sentiment.

While that gain makes this fintech stock a better performer than the Nasdaq Composite Index, Upstart still trades an alarming 80% below its all-time high from late 2021. If you're considering buying the dip, take the time to know these three things about Upstart first.

1. Trying not to be a lender

Upstart has developed an AI model that analyzes 1,600 different variables about potential borrowers. This helps to set an interest rate to charge, while also assessing their ability to repay a loan. Using technology to improve the lending experience is the name of the game of Upstart. An impressive 91% of its loan originations were fully automated in the third quarter (ended Sept. 30).

Upstart makes its money by providing its software to third-party lenders, of which it has more than 100 partners today, earning fees in the process. The goal here is for the business to not be a pure-play lender, as this would resemble a traditional bank and not the technology and software enterprise that Upstart strives to be.

However, at the end of Q3, Upstart had $656 million of loans on its own balance sheet. This figure decreased from just three months before, but it shows that the company needs to have interest from institutional investors to sell these loans to in order to keep the funding going.

2. Upstart's cyclicality

Upstart shares soared 857% from the start of 2021 to their peak in October of that year. Credit goes to historically low interest rates that helped spur huge demand for loans. The company reported 264% revenue and 338% loan growth in 2021.

However, the last couple of years have shown just how cyclical the company is. Higher rates have been a major headwind, resulting in declining sales and ongoing net losses for Upstart. Revenue did rise 20% in the latest quarter off an easy comparison in the year-ago period, so the worst days might be in the past.

Upstart's bullish supporters will point to the prospect of lower interest rates as we look to 2025 and beyond as a reason to buy and hold shares. Lower borrowing costs can certainly lead to stronger demand for loans from consumers. That thinking makes sense.

However, what if the Federal Reserve considers pausing rate cuts, or maybe even raises interest rates in 2025? The U.S. economy is in solid shape, and inflation has trended higher in the past couple of months.

I have zero clue what direction interest rates are heading in, which supports my belief that macro factors are unpredictable. At the end of the day, Upstart investors face a risky proposition not knowing how the underlying business will perform, given its heavy reliance on having a robust economic backdrop.

3. Where are the profits?

Upstart's leadership team is fully focused on growth, investing in sales and marketing and product development to acquire more lending partners and launch new products. Consequently, generating positive earnings has been an afterthought.

In 2022, 2023, and through the first nine months of 2024, Upstart reported a cumulative net loss of $475 million. There's really no end in sight to the business bleeding red ink, as the company is slated to post a $35 million net loss in the current quarter.

Owning unprofitable companies adds financial risk for investors. First of all, it demonstrates that the business model has not proven to be sustainable on its own. Additionally, it puts the company at a disadvantage, as there's always the chance that it will need to raise capital, maybe at inopportune times, to fund operations.

Maybe if Upstart can grow its revenue base significantly over the next five to 10 years, it can start to generate strong profitability as it scales up. This is certainly what shareholders are hoping for.