Investors turned bearish as the economy weakened in the first half of the year, setting the stock market on a downward trajectory. By the end of June, the broad-based S&P 500 had fallen 21% from its high, and the tech-heavy Nasdaq Composite was down 31%. But that didn't stop certain wealthy hedge fund managers from buying growth stocks.

Jim Simons of Renaissance Technologies added to his stake in Upstart Holdings (UPST 5.89%) in the second quarter, and Philippe Laffont of Coatue Management started a position. Meanwhile, Ken Griffin of Citadel Advisors and Israel Englander of Millennium Management bought more shares of Elastic (ESTC 1.42%).

Upstart and Elastic currently sit 94% and 55% off their highs, respectively. Is it time to buy these beaten-down growth stocks?

1. Upstart Holdings: Reimagining the lending industry

Upstart is on a mission to improve access to affordable credit. Its business is built around the idea that traditional lending models -- which rely heavily on Fair Isaac's FICO scores -- fail to accurately quantify risk because they don't incorporate enough data. That ultimately results in greater loss rates for lenders, which drive 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 applicant -- 50-fold more than sophisticated FICO models -- and it leans on artificial intelligence (AI) to measure those data points against past repayment events. That allows Upstart to quantify risk more precisely, which translates into fewer defaults for lenders, empowering those lenders to approve more borrowers and offer lower interest rates.

Last year, Upstart delivered triple-digit revenue growth and solid GAAP profits as stimulus checks and loose monetary policy created an ideal environment for lenders. But this year the narrative 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 costly. As a result, Upstart grew revenue by just 18% year over year in the second quarter, and the company posted a GAAP loss of $30 million, down from a profit of $36 million in the prior year.

In spite of those disappointing results, investors still have reason to be optimistic. Upstart is currently in uncharted waters because its AI models have yet to be tested in a down credit cycle. That is undoubtedly working against the company. But internal data suggests that Upstart's AI has quantified risk far more effectively than FICO-based models for loans originated between Q1 2018 and Q4 2021. If that pattern holds in the current macroeconomic climate, lenders will likely 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, meaning the company's market opportunity will only get bigger. For context, Upstart powered $11.8 billion in loans in 2021, meaning it captured less than 1% of its addressable market.

With that in mind, shares currently trade at a reasonable 2.1 times sales. Given this fintech company's disruptive potential, I think it's worth buying a small position in this growth stock today.

2. Elastic: Gaining steam in observability and cybersecurity

Elastic is a data analytics company. Its platform (known as the Elastic Stack) comprises a suite of tools that make it possible to ingest, search, and visualize data, and that technology underpins its three software products: Enterprise Search, Observability, and Security.

Enterprise Search is a workplace search engine that helps businesses find relevant information stored across their IT ecosystem, and it allows developers to embed search functionality into websites and mobile applications. Similarly, Observability and Security enable businesses to collect and analyze data for the purpose of monitoring and securing their applications, networks, and infrastructure.

Elastic operates in several competitive industries, but it distinguished itself as the most popular workplace search engine, and that competitive edge enabled a strong land-and-expand growth strategy. Research company Gartner recently named Elastic a "visionary" in application performance monitoring and observability, and Forrester Research recently recognized Elastic as a "strong performer" in endpoint security.

Over the past year, Elastic increased its customer base by 21% to 19,300, and the average customer spent nearly 30% more, indicating that the company is indeed succeeding with its land-and-expand strategy. That powered strong top-line growth in the first quarter of fiscal 2023 (ended July 31, 2022), as revenue climbed 30% year over year to $250 million. But on the bottom line, Elastic posted a widening GAAP loss of $70 million, though management expects to generate "slightly positive adjusted free cash flow" for the full year.

Looking ahead, Elastic is working to attract customers and scale its business through product innovation. It recently expanded its Security offering with cloud protection capabilities, and it enhanced its artificial intelligence engine to provide more relevant results for Enterprise Search use cases, which boosted the adoption of higher-tiered subscription products.

In short, Elastic is gaining momentum in several markets that collectively create a $78 billion addressable market, and with shares trading at a reasonable 8.5 times sales -- a bargain compared to the three-year average of 15.9 times sales -- patient investors should consider buying a few shares of this growth stock.