Not all companies benefited from the Nasdaq Composite Index15% total return since the beginning of 2023. Even those with seemingly promising product offerings have struggled greatly.

Just look upstart (NASDAQ:UPST)Shares of the technology-focused lending platform have risen nearly 60% in recent days. Better than expected results in the second quarterare still trading 90% below their all-time high.

In addition to the price drop, there are other reasons why I would avoid the stock. Fintech shares with a 10 foot long pole.

Combining AI and finance

To be clear, what Upstart has accomplished so far deserves applause. The company wants to give more people access to credit, especially those excluded from traditional banks. Since its founding in 2012, Upstart has originated $39 billion in loans.

Artificial intelligence (AI) is the foundation of this business model. Upstart looks at 1,600 unique variables about a person before making a credit decision. The FICO model, which has been around for decades, only considers five key variables. By understanding more deeply than the FICO model, Upstart claims it can approve more loans and limit losses.

Upstart is the perfect example of a company combining AI with financial services to better serve consumers.

Warning signs at Upstart

There are many reasons for investors to avoid the stock. The company’s disappointing financial situation is a major warning signal.

Upstart experienced incredible growth in 2020 and 2021, even posting positive net income. The bull market in 2021 helped the stock reach new heights. As of mid-October, shares were up a staggering 857% at one point this year.

But in 2022, Upstart started to show cracks. The company showed investors that it needed low interest rates to succeed. When the Federal Reserve began aggressively raising interest rates to curb inflation, Upstart faced troubling headwinds.

Growth has turned negative. Revenue and loan volume of $514 million and $4.6 billion, respectively, in 2023 were both significantly lower than two years earlier. In the first six months of this year, revenue stabilized somewhat compared to the same period in 2023. However, Upstart continues to report significant net losses.

Upstart’s management team touts the huge market the company is targeting, so I can understand why growth-oriented investors looking for a venture capital investment would be drawn to this AI fintech company. But Upstart’s long-term prospects are just too uncertain.

The story continues

The company is incredibly cyclical, which is not something you would expect from a technology-based company. Other fintech companies have nevertheless been able to grow quickly while also generating bottom-line profits. Given the past few years, investors need to be critical and ask themselves if Upstart can not only consistently grow its revenue and loan volume, but also generate positive earnings and free cash flow year after year.

Are better days ahead?

Investors who keep an eye on the state of the financial media could counter all my negative arguments against Upstart by saying that US monetary policy will change, and Interest rates are expected to fall. That may or may not be the case. But one can be optimistic that demand and funding for upstart loans will pick up in a looser environment.

However, if successfully picking a stock requires you to correctly predict macroeconomic changes in advance, this may be the clearest warning sign that you should stay away from this business.

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Neil Patel and his clients do not own any stocks mentioned. The Motley Fool owns a position in and recommends Upstart. The Motley Fool has a disclosure policy.

1 Stock I Wouldn’t Touch with a Barefoot was originally published by The Motley Fool