In this article, we’re going to talk about the 10 Best Small-Cap AI Stocks to Buy According to Short Sellers.
The Prevalence of AI
Artificial intelligence is quite widespread in today’s economy. We have relied on search engines, virtual assistants, e-commerce websites, and navigation apps for a long time. But with the advancements in large language models (LLMs), AI has made its way into everyone’s life in a way never seen before.
Large language models are a type of AI that uses deep learning techniques and massive datasets to understand, generate, and predict human language. They’re trained for all of this through statistical relationships from vast amounts of text. The reason why they became so popular in such a short time is because they can be fine-tuned for specific tasks or understand language better through specific prompts. LLMs like Gemini and ChatGPT-4 are Multimodal AI platforms that allow processing and generating multiple types of data simultaneously, such as text, audio, and visual inputs.
However, with such strides come crucial concerns, including data privacy, cybersecurity, algorithmic bias, and other ethical considerations. These challenges show the importance of responsible AI development, prioritizing privacy, and security. While the general public agrees that responsible AI development and deployment requires regulation and big tech companies seem to oppose it. We covered this in our 10 Best Artificial Intelligence Stocks Under $50 According to Hedge Funds, here’s an excerpt from that:
“A significant development in the AI industry is California’s recent proposal of the AI regulation bill, SB 1047, introduced by State Senator Scott Wiener, which aims to establish strict safety protocols for advanced AI systems (those costing over $100 million to develop). The bill requires AI systems costing over $100 million to develop to have a ‘kill switch’ to deactivate models that malfunction, hire third-party auditors to evaluate safety practices, and empower the California Attorney General to sue developers for non-compliance.
Major tech companies have opposed it, citing concerns that it could stifle innovation and drive talent away from California. Some lawmakers, including prominent Democrats like Nancy Pelosi, agree on the potential negative impacts on AI development and open-source models. Despite these objections, the bill has passed the state Senate and is awaiting a vote in the Assembly. If passed, the bill will be sent to Governor Gavin Newsom for approval or veto by the end of September.”
Despite opposition, Google CEO, Sundar Pichai, in a conversation about the future of AI, highlighted the importance of addressing ethical concerns in AI as GenAI becomes more prevalent. Pichai says that AI systems need to be able to distinguish between objective information and synthetic content, which is crucial for maintaining trust in search results.
Pichai also talked about other developments in this discussion. His company is now rolling out AI-powered search results, called ‘AI Overviews’, providing users with direct answers at the top of search results. While this will streamline the search process by presenting summarized information without having to go through multiple links, such a feature raises concerns among content creators about traffic and visibility.
The company’s AI is being designed to integrate seamlessly across other products, such as Gmail and YouTube, to allow for functionalities like summarizing emails and responding to complex queries. While Pichai acknowledged that the company may not always be the first to market, it has the infrastructure and expertise to dominate in the long run.
We also see other tech giants making strides in AI development. Mark Zuckerberg mentioned the shift towards open-source AI, in contrast to closed-source competitors. He credits open source as foundational for building Facebook, allowing him to access code cost-efficiently as a student.
Zuckerberg wants his company’s AI to become the most used AI assistant globally by the end of 2024 and has made significant progress as of August. With other companies looking to make similar impacts, AI stocks have become favored investments by experts and analysts worldwide.
Given the potential for significant returns, it’s important to identify promising AI stocks. One way is to consider the opinions of short sellers. This article lists the 10 best small-cap AI stocks to buy according to short sellers. Given the increasing demand for AI technologies and the competitive landscape, these stocks offer the potential for significant growth.
Our Methodology
To compile our list, we sifted through ETFs and internet rankings to find the most popular small-cap AI stocks. We then selected 15 stocks with the smallest short interest that were the most popular among hedge funds. The 10 best small-cap AI stocks to buy according to short sellers are ranked in descending order of their short interest.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Best Small Cap AI Stocks to Buy According to Short Sellers
10. Lemonade (NYSE:LMND)
Market Cap as of August 26: $1.33 billion
Number of Hedge Fund Holders: 17
Short % of Shares Outstanding as of July 31: 23.70%
Lemonade (NYSE:LMND) is a digital insurance company that’s revolutionizing the industry in several countries through its innovative use of AI. By automating many of the traditional insurance processes through AI, the company takes a customer-centric focus to provide a seamless, affordable, and transparent experience for its customers and has more than 2 million customers.
The company is embracing GenAI to streamline its operations and enhance profitability by investing heavily in AI-powered automation, aiming to improve 100+ of its business processes. Early cost-saving prototypes are expected to materialize over the next year and a half.
In Q2 2024, the company recorded a $122 million revenue, exhibiting a 16.63% year-over-year growth. The loss per share was $0.8, beating estimates by $0.05.
Despite the industry-wide increase in catastrophic event losses, the company’s loss ratio improved to 79%, driven by a focus on products with lower exposure to catastrophic events, such as pet and renters insurance.
It is diversifying into Europe – the partnership with BNP Paribas Cardif in France underscores Lemonade’s (NYSE:LMND) commitment to providing innovative insurance solutions in global markets. The company plans to capitalize on the growing demand for digital, personalized insurance products through AI and is expected to position itself as a leader in the sector. This makes it one of the best small-cap AI stocks to buy, according to short sellers.
As of June 30, 17 hedge funds are long LMND. D E Shaw is the biggest shareholder with a stake of $16,328,137.
9. SoundHound AI (NASDAQ:SOUN)
Market Cap as of August 26: $1.80 billion
Number of Hedge Fund Holders: 15
Short % of Shares Outstanding as of July 31: 21.81%
SoundHound AI (NASDAQ:SOUN) is a competitive company in the voice AI and speech recognition niche. Major partnerships of the company include automakers like Hyundai and Kia, but while the automotive industry is a significant part of the company’s business, its technology is also used in various consumer electronics, smart home devices, and even enterprise applications.
In Q2 2024, it recorded a revenue of $13.46 million with a 53.83% year-over-year increase. The loss per share was $0.11, higher by $0.02 than street estimates.
The company recently announced acquiring Amelia, a conversational AI leader, to create a platform beyond human capabilities. It also acquired Allset to build a voice commerce ecosystem, expanding its product range and increasing customer reach.
Wedbush Analyst Dan Ives believes that the acquisition of Amelia will enhance the company’s capabilities in voice and conversational AI, opening up new market opportunities. The company’s partnerships with Stellantis and potentially with McDonald’s demonstrate its ability to integrate its technology into many industries.
The company is growing through innovative voice AI technology at a rather rapid pace, earning a strong position in the AI market. SoundHound AI’s (NASDAQ:SOUN) debt-free status and substantial cash reserves provide a solid foundation for its future growth, making it one of the best small-cap AI stocks to buy according to short sellers.
8. Fastly, Inc. (NYSE:FSLY)
Market Cap as of August 26: $884.27 million
Number of Hedge Fund Holders: 23
Short % of Shares Outstanding as of July 31: 11.97%
Fastly, Inc. (NYSE:FSLY) is a cloud computing services company that provides a global content delivery network (CDN) platform. This platform helps businesses deliver their websites, applications, and videos at high speeds and with low latency to global users. So, it acts as a bridge between a website’s server and its visitors.
The company earned a revenue of $132.37 million in Q2 2024, beating expectations by $853,800 and growing 7.77% year-over-year. The loss per share was $0.07. The top 10 customers comprised 34% of the total revenues.
The enterprise customer count increased by 4% sequentially, reaching 601. This exhibited a 50% year-over-year increase. Its channel partners, the intermediaries between the company and its end-users, continue to drive growth, with deal registrations increasing by 33%, and the channel’s revenue contribution more than doubling year-to-date.
The company recently released a Bot Origin Protection (BOP) mitigation solution which was well-received by customers. This strengthened its security portfolio and opened up opportunities for cross-selling.
With the appointment of Scott Lovett as the new CRO, the company is prioritizing customer acquisition, portfolio expansion, and innovative edge technologies. This is essential to achieve the aim of $1 billion in revenue in the next few years. As the company continues evolving through innovation in tech for future web application development, Fastly, Inc. (NYSE:FSLY) is one of the top small-cap AI stocks to buy according to short sellers.
As of July 30, it is held by 23 hedge funds. Opti Capital Management is the biggest shareholder with a position of $42,847,350.
7. Serve Robotics Inc. (NASDAQ:SERV)
Market Cap as of August 26: $403.52 million
Number of Hedge Fund Holders: 3
Short % of Shares Outstanding as of July 31: 11.63%
Serve Robotics Inc. (NASDAQ:SERV) designs, develops, and operates zero-emission autonomous robots that serve people in sectors like food delivery. The self-driving robots are equipped with sophisticated sensors and AI algorithms and aim to revolutionize the last-mile delivery industry through a sustainable and efficient solution for transportation.
In the second quarter of 2024, Serve Robotics Inc. (NASDAQ:SERV) made a revenue of $0.47 million, ahead of Street expectations by $68,380. The loss per share was $0.27. $0.30 million of the revenue came from the software services segment from the Magna agreement, which is a contract between Serve Robotics Inc. (NASDAQ:SERV) and Magna International to help scale up production and reduce costs.
It completed a public equity offering earlier this year, raising $40 million and listing its common stock on NASDAQ. A follow-up private placement transaction generated an additional $15.0 million.
It ramped up production of its 2,000-robot fleet, led by newly appointed Chief Hardware and Manufacturing Officer, Euan Abraham. Strategic partnerships, like the one mentioned with Magna, and Ouster will streamline manufacturing greatly. The company increased its daily supply hours by 106% year-over-year in Q2, with the number of daily active robots increasing by 85% year-over-year.
Serve Robotics Inc. (NASDAQ:SERV) expanded its delivery operations into Koreatown, and Los Angeles, and partnered with Uber Eats to bring on new local merchants. This expansion showcases the company’s broader geographic growth strategy, which is necessary for it to achieve its full growth potential. This is why it is one of the top small-cap AI stocks to buy according to short sellers. It is currently held by 3 hedge funds.
6. Innodata Inc. (NASDAQ:INOD)
Market Cap as of August 26: $554.87 million
Number of Hedge Fund Holders: 6
Short % of Shares Outstanding as of July 31: 10.20%
Innodata Inc. (NASDAQ:INOD) is a global data engineering company that provides business processes, technology, and consulting services. It specializes in AI-powered products that help clients create, manage, use, and distribute digital information. It uses AI to extract valuable and organized insights from large datasets for data-driven decisions.
In the second quarter of this year, the company generated $32.55 million in revenue, which was higher than analyst estimates by $4.96 million, and up 66% year-over-year. However, the earnings per share were zero. The company’s PR CoPilot AI layer, integrated with the Agility platform, is delivering great business value. Despite being only 30% complete, its revenue surpassed $5 million.
The company has secured businesses with 2 major LLM development programs from a leading Big Tech customer. The programs are valued at about $44 million. This success builds upon existing programs and expansions with this customer, bringing the total account value to around $110.5 million.
It announced that there will soon be business with a major social media platform as a new customer for its GenAI solutions. There’s another deal with a clinical provider in the healthcare market, marking the first application of the Synodex platform in a clinical use case. There’s an additional contract with a federal government agency to provide news briefs and media monitoring using the Synodex platform’s new GenAI capabilities.
Due to strong organic growth, Innodata Inc. (NASDAQ:INOD) increased its full-year 2024 revenue guidance to 60% or more, up from the previously projected 40%. It’s trying to take on newer assignments actively with highly valuable Big Tech companies. Plans towards such gains and this serial deal making make INOD stock one of the best small-cap AI stocks.
This stock is held by 6 hedge funds, Renaissance Technologies being the largest one with a value of $7,100,456.
5. Evolv Technology (NASDAQ:EVLV)
Market Cap as of August 26: $641.23 million
Number of Hedge Fund Holders: 19
Short % of Shares Outstanding as of July 31: 8.66%
Evolv Technology (NASDAQ:EVLV) uses AI to develop safer and faster security technology. It designs devices used for scanning people for weapons, and other threats accurately, without the need for invasive manual pat-downs, reducing wait times. The company’s technology can also be integrated into existing security infrastructure anywhere ranging from small businesses to giant corporations. The company added 84 new customers this quarter.
Evolv Technology (NASDAQ:EVLV) generated a revenue of $25.54 million in Q2 2024, representing a 28.83% year-over-year increase. The earnings per share were $0.02 and beat expectations by $0.14.
There was a 60% sequential increase in the number of Evolv Express units sold to education in this quarter. In August, Evolv Technology (NASDAQ: EVLV) secured a patent from the US Patent and Trademark Office for its innovative technology used in the Evolv Express, a leading concealed weapons detection system.
Deployed in over a thousand locations worldwide, the company detects an average of 500+ firearms per day. It expects to sell subscription-based products to new and existing customers, driving recurring revenue. Evolv Technology (NASDAQ: EVLV) expects 25% revenue growth by the end of 2024, and given its use in a diverse range of organizations, ranging from schools to casinos, it is likely to achieve this goal. This is why it’s one of the best small-cap AI stocks to buy now. 19 hedge funds hold long positions in the stock as of Q2 2024.
4. BigBear.ai Holdings, Inc. (NYSE:BBAI)
Market Cap as of August 26: $430.12 million
Number of Hedge Fund Holders: 9
Short % of Shares Outstanding as of July 31: 6.75%
BigBear.ai Holdings, Inc. (NYSE:BBAI) utilizes AI solutions and provides software to make data-driven decisions across various industries. It specializes in Vision AI, a type that uses computer vision to analyze visual data, like images and videos, and extract insights. The company wants to help customers conveniently gain the ability to adopt Al-powered solutions in an edge computing network topology by 2025.
In Q2 2024, the company reported $39.78 million in revenue, with a 3.44% year-over-year growth. The loss per share was $0.05, lower than estimates by $0.02.
Earlier this year, the company acquired Pangiam Intermediate Holdings, LLC to enhance its capabilities in computer vision and biometrics, particularly in sectors such as national security, supply chain management, and digital identity. The deal combined BigBear.ai Holdings, Inc.’s (NYSE:BBAI) existing computer vision technologies with Pangiam’s expertise in facial recognition and image-based unusual pattern detection, creating a strong Vision AI portfolio.
In Q2, it partnered with Heathrow Airport to improve its security, and operations through advanced AI technologies. Later, it acquired a new $7.7 million, 7-month contract with the US Army, and an $8.5 million, 6-month extension on another US Army project, solidifying BigBear.ai Holdings, Inc.’s (NYSE:BBAI) role as their prime contractor.
A recent contract with the Federal Aviation Administration (FAA) caused the company’s stock price to go up by 35% in August. As evident from such partnerships, the company has made a big name for itself in the defense space and if it continues executing like this, it will grow its market share meaningfully over the next several years. BBAI is one of the top small-cap AI stocks to buy according to short sellers. The stock was held by 9 hedge funds at the close of the second quarter of 2024.
3. Helix Energy Solutions Group, Inc. (NYSE:HLX)
Market Cap as of August 26: $1.68 billion
Number of Hedge Fund Holders: 29
Short % of Shares Outstanding as of July 31: 3.85%
Helix Energy Solutions Group, Inc. (NYSE:HLX) is an oil and gas services company that provides offshore services in well intervention and Remotely Operated Vehicle (ROV) operations of new and existing oil and gas fields. Its focus is to use AI to optimize operations, navigate efficiently, perform tasks with greater precision, and use analytics to help predict failures and reduce downtime.
In Q2 2024, Helix Energy Solutions Group, Inc. (NYSE:HLX) generated a revenue of $364.80 million, exhibiting 18.13% year-over-year improvement. The earnings per share were $0.21, which was $0.01 higher than analysts’ estimates.
The company reported that the deployment of specific models or designations for offshore vessels or equipment, Q4000 and Q7000, in Nigeria and Brazil, resulted in significant mobilization delays impacting its second-half 2024 outlook.
The shallow water decommissioning market in the Gulf of Mexico has underperformed this year. It is expected to rebound in 2025, though at a slower pace than in 2023. Management also claims that there’s a growing demand for work in West Africa, and the company will assess deployment based on market conditions.
The company’s robotics end market is robust, with supply tightening and increasing demand for cables and wind farms. There’s a strong project pipeline through 2028, with year-over-year growth expected. Such projections show that Helix Energy Solutions Group, Inc. (NYSE:HLX) is well-positioned for continued growth and value creation, making it a top small-cap AI stock to invest in.
The stock was spotted on 29 hedge funds’ portfolios at the close of Q2 2024. Millennium Management was the largest shareholder, with a position of $37,618,857.
2. Perion Network Ltd. (NASDAQ:PERI)
Market Cap as of August 26: $417.38 million
Number of Hedge Fund Holders: 26
Short % of Shares Outstanding as of July 31: 3.46%
Perion Network Ltd. (NASDAQ:PERI) is a global technology company that specializes in digital advertising products and services. It uses AI to deliver personalized and effective advertising solutions to various industries.
The company delivered $108.69 million in revenue for Q2 2024. This was higher than analyst expectations by $1.76 million but there was a 39.10% year-over-year decrease. The loss per share was $0.13.
Perion Network Ltd. (NASDAQ:PERI) is making significant strides in technology, creating key integrations and partnerships. Perion Network Ltd. (NASDAQ:PERI) recently acquired Hivestack which strengthened its programmatic digital out-of-home capabilities. It also successfully executed omni-channel campaigns for clients like Colorado Tourism, combining CTV, audio, and mobile ads.
The company’s CTV solutions gained traction in Q2, with brands utilizing location-based capabilities for targeted advertising. The CTV technology now extends to YouTube. Additionally, it introduced features like “click to cart” to enhance retail campaigns and drive purchases. Perion Network Ltd. (NASDAQ:PERI) is setting the standard for programmatic digital out-of-home advertising.
The company saw a leadership change with the CFO, Maoz Sigron, being promoted to COO. Elad Tzubery became the new CFO, starting in August. Perion Network Ltd.’s (NASDAQ:PERI) commitment to innovation and strategic partnerships is driving strong growth and positioning it as a leader in the digital advertising space. This is why it is one of the top small-cap AI stocks to buy according to short sellers.
With 29 hedge fund holders, Private Capital Management is the largest stakeholder with a position of $15,009,726, as of Q2 2024.
Richie Capital Group made the following comment about Perion Network Ltd. (NASDAQ:PERI) in its Q1 2023 investor letter:
“Perion Network Ltd. (NASDAQ:PERI) (PERI up +56.4%) – Our investment in the Israeli based ad-tech company has now been a top performer for two quarters in a row. In February, Perion announced full year 2022 earnings which included guidance for 14% revenue and EBITDA growth in 2023. This implies meaningful growth in a challenging environment where their peers continue to struggle. Despite the stock’s strong performance, Perion is still trading at a modest 19x earnings.
In addition to the optimistic growth outlook, Perion seems to be benefiting from anticipation of Bing’s new ChatGPT driven search engine. Bing is Perion’s largest customer. We, along with Perion’s management, believe that the “new Bing” offers a meaningful growth opportunity. The more users convert to Bing, the more publishers will advertise on the platform and drive Perion revenue. On Microsoft’s Q4 earnings call, CFO Amy Hood discussed the impact of growing Bing market share: “every percentage point of share it gains in search equals roughly $2 billion in additional advertising revenue.” It is difficult to envision a scenario where Perion is not a direct beneficiary of Bing’s success…” (Click here to view the full text)
1. Matterport, Inc. (NASDAQ:MTTR)
Market Cap as of August 26: $1.39 billion
Number of Hedge Fund Holders: 25
Short % of Shares Outstanding as of July 31: 1.71%
Matterport, Inc. (NASDAQ:MTTR) is a 3D spatial mapping company that leverages AI to capture, analyze, and share 3D digital twins of real-world spaces. The company’s platform, integrated with AR, enables users to create immersive virtual experiences, streamline workflows, and gain valuable insights from spatial data.
In Q2 2024, the company generated $42.22 million in revenue, which was lower than Street estimates by $2.27 million. It represented a 6.69% year-over-year growth. The loss per share was $0.02, in-line with Street expectations.
Subscription revenue was responsible for 57% of the total revenue. It increased by 16% year-over-year, reaching a record $24.2 million. Total subscribers grew 28% year-over-year, to 1.06 million. The company expanded its area of operations by 33% from the previous year, reaching a total of 44.0 billion square feet.
In Q2, the company acquired CoStar in a cash and stock transaction valued at approximately $2.1 billion. It also partnered with Crunch Fitness and BMO to provide digital twin solutions for marketing and operational needs. The company integrated with FBS’s Flexmls platform, enabling seamless upload of digital twins and data. Additionally, it achieved AWS IoT Competency status, demonstrating its expertise in IoT technology and cloud transformation.
Matterport, Inc. (NASDAQ:MTTR) is looking to capitalize on the Japanese market. Miho Technos Co., Ltd., a leading Japanese general contractor, adopted the company’s solutions for various construction projects. As we continue seeing examples of expansion efforts by Matterport, Inc. (NASDAQ:MTTR), the company is expected to grow substantially and is therefore one of the best small-cap AI stock to buy now.
The company has 25 hedge fund holders, as of Q2 2024, and the most prominent one is Magnetar Capital with a stake of $27,597,632.
As we acknowledge the growth potential of Matterport, Inc. (NASDAQ:MTTR), our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MTTR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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