Investors turned bearish as the economy weakened in the first half of the year, putting the stock market on a downward trajectory. At the end of June, the broad base S&P500 had fallen 21% from its peak, and heavy tech Nasdaq Compound was down 31%. But that hasn’t stopped some wealthy hedge fund managers from buying growth stocks.

Jim Simons of Renaissance Technologies added to his stake in Assets received (UPST 1.36%) in the second quarter, and Philippe Laffont of Coatue Management opened a position. Meanwhile, Ken Griffin of Citadel Advisors and Israel Englander of Millennium Management bought more shares of Elastic (ESTC 3.74%).

Upstart and Elastic are currently at 94% and 55% of their highs, respectively. Is it time to buy those battered growth stocks?

1. Upstart Holdings: reinventing the lending industry

Upstart’s mission is to improve access to affordable credit. Its business is based on the idea that traditional lending models – which rely heavily on Just IsaacFICO scores of – fail to accurately quantify risk because they do not incorporate enough data. This ultimately results in higher loss rates for lenders, which results in higher interest rates (and lower approval rates) for borrowers.

Upstart uses big data and artificial intelligence to make the system more efficient. Its platform captures 1,500 data points per claimant — 50 times more than sophisticated FICO models — and relies on artificial intelligence (AI) to measure those data points against past redemption events. This allows Upstart to quantify risk more accurately, which translates to fewer defaults for lenders, allowing those lenders to approve more borrowers and offer lower interest rates.

Upstart posted triple-digit revenue growth and strong GAAP earnings last year as stimulus checks and accommodative monetary policy created an ideal environment for lenders. But this year, the narrative has changed. Banks are less willing to fund loans because high inflation makes defaults more likely, and borrowers are less likely to apply for loans because rising interest rates make capital more expensive. As a result, Upstart grew revenue just 18% year-over-year in the second quarter, and the company reported a GAAP loss of $30 million, down from a profit of $36 million. dollars the previous year.

Despite these disappointing results, investors still have reason to be optimistic. Upstart is currently in uncharted waters as its AI models have yet to be tested in a bearish credit cycle. This undoubtedly plays against the company. But internal data suggests Upstart’s AI quantified risk far more effectively than FICO-based models for loans originated between Q1 2018 and Q4 2021. If this pattern holds in the current macro climate , lenders are likely to be more eager to fund Upstart loans in the future.

On that note, the company currently facilitates three types of loans – personal loans, auto loans, and small business loans – which collectively represent a $1.5 trillion addressable market. But management plans to expand into other verticals in the future, including the $4.2 trillion mortgage origination space, which means the company’s market opportunity will only than grow. For context, Upstart generated $11.8 billion in loans in 2021, meaning it captured less than 1% of its addressable market.

With that in mind, the stock is currently trading at a reasonable price of 2.1 times the sell. Given the disruptive potential of this fintech company, I think it’s worth buying a small position in this growth stock today.

2. Elastic: Gaining power in observability and cybersecurity

Elastic is a data analytics company. Its platform (called the Elastic Stack) includes a suite of tools for ingesting, searching, and visualizing data, and this technology underpins its three software products: Enterprise Search, Observability, and Security.

Enterprise Search is a workplace search engine that helps companies find relevant information stored in their IT ecosystem and enables developers to embed search functionality into websites and mobile apps. Similarly, observability and security allow companies to collect and analyze data for the purpose of monitoring and securing their applications, networks and infrastructure.

Elastic operates in several competitive sectors, but it has distinguished itself as the most popular search engine in the workplace, and this competitive advantage has enabled a strong strategy for growth, establishment and expansion. Research company Gartner recently named Elastic a “visionary” in application performance monitoring and observability, and Forrester Research recently recognized Elastic as an “excellent performer” in the area of ​​endpoint security.

Over the past year, Elastic has grown its customer base by 21% to 19,300, and the average customer has spent almost 30% more, indicating that the company is indeed succeeding with its strategy of establishment and expansion. This fueled strong revenue growth in the first quarter of fiscal 2023 (ended July 31, 2022), as revenue grew 30% year-over-year to $250 million . But in the end, Elastic posted a growing GAAP loss of $70 million, though management expects to generate “slightly positive adjusted free cash flow” for the full year.

Looking ahead, Elastic is focused on attracting customers and growing its business through product innovation. It recently expanded its security offering with cloud-based protection capabilities and enhanced its artificial intelligence engine to deliver results more relevant to Enterprise Search use cases, driving adoption of higher level subscription products.

In short, Elastic is gaining momentum across multiple marketplaces that collectively create a $78 billion addressable market, and with stocks trading at a reasonable 8.5 times sales – a bargain compared to the average on three years of 15.9 times sales – patient investors should consider buying a few stocks of this growth stock.