Last year's highfliers have fallen deeply out of favor due to higher interest rates and uncertainty over the economy. But what's shunned today can turn into a winner tomorrow.

The key is to focus on strong companies that make something in demand. Business might soften in a recession, but companies serving a long-term growing market will rebound when the uncertainty clears.

Two growth stocks that have fallen below $20 per share are the cloud-based lending provider Upstart Holdings (UPST -0.78%) and fast-growing cybersecurity expert SentinelOne (S -1.26%). Here's why investors can confidently buy these stocks right now.

Upstart Holdings

Personal loans and auto financing are two of the fastest-growing segments of consumer lending, and rising interest rates seem to have boosted demand for debt consolidation. The number of personal loan accounts has increased by 16% in 2022, according to Experian. In the long term, the total addressable market for personal loans and auto financing is estimated at over $900 billion. This is a huge opportunity for Upstart Holdings and it offers a high-tech solution to the problem of legacy credit systems.

Many banks use FICO scores and a handful of other variables in considering a loan application. However, Upstart's cloud-based platform uses artificial intelligence that factors in over 1,500 variables. The company's models can more accurately identify risk and approve applicants that a traditional credit system might decline. This translates to higher approval rates and lower interest rates for consumers, in addition to lower rates of fraud and loan losses for banks.

Upstart has experienced tremendous growth. From 2019 through 2021, revenue climbed fivefold to $801 million, which was earned from charging fees to banks.

However, 2022 hasn't been a good year for the company, as uncertainty in the broader economy has pressured lending volumes. While revenue is up 28% year to date, the third quarter showed a deceleration in growth, with revenue down 31% year over year. The company also reported a loss of $58.1 million compared to a year-ago profit of $28.6 million for the third quarter.

But as CEO David Girouard noted on the earnings call, lower lending volumes during a weak economy are exactly what Upstart's platform is designed to produce. It's clear that management builds its models to help banks be extra conservative when there's a greater risk of loan losses; this should help Upstart grow its reputation as a trustworthy platform for bank and credit union partners over the long term.

Upstart ended the last quarter with $830 million in total cash available to fund investments in its lending models. This will allow the company to strengthen its competitive advantage and return to growth once the economy is on solid footing.

Investors can buy the stock at a huge discount right now. Upstart's market cap is just over $1 billion, which is low for a business that generated over $150 million in free cash flow when business was booming in 2021.

SentinelOne

Another trend that will surely produce some major winners in the stock market is the growing number of cyberattacks. McKinsey & Company estimates that the damage caused by cyberattacks will climb to over $10 trillion annually by 2025. That is an enormous cost to corporations, and it explains why leading cybersecurity provider SentinelOne is reporting such tremendous growth right now.

Between SentinelOne's fiscal years 2020 and 2022 (each ended in January), revenue grew from $46 million to $205 million. After another year of growth, management now expects fiscal 2023 revenue to reach $420 million.

What's more, the company has seen its adjusted gross profit margin expand from 67% a year ago to 71% in the third quarter. An improving margin is a good sign that the company is able to price its subscription-based platform to firm up profitability among a crowded field of choices in the cybersecurity market.

SentinelOne competes primarily with Crowdstrike, Palo Alto Networks, and Zscaler, which all claim to offer the best capabilities in cybersecurity. But the proof is the pudding, as they say, with SentinelOne growing faster than its competitors over the last year. SentinelOne's main advantage derives from its AI-based detection system, which is able to fix security threats in real time and is proving to be a key selling point for new customers.

S Revenue (Quarterly) Chart

Data by YCharts.

The bear market has sent the stock sharply lower, and the sell-off has been magnified for unprofitable growth stocks. Despite improving gross margin, SentinelOne's net loss widened in the last quarter to $99 million compared to a loss of $69 million in the year-ago quarter. This is mostly due to higher spending on marketing and on research and development, and it has clearly paid off with monster top-line growth.

With significant gains in market share -- the company has added over 3,000 businesses to its platform over the last year -- buying the stock at these lows could be very rewarding for the patient investor.