11 Best Small Cap AI Stocks to Invest In

Published on December 26, 2022 at 10:12 pm by Swati Goyal in Tech

In this article, we discuss the 11 best small-cap AI stocks to invest in. If you want to read about more AI stocks, go directly to 5 Best Small Cap AI Stocks to Invest In.

Artificial intelligence is one of the most significant secular phenomena rapidly changing many facets of our daily lives. In the last ten years, there has been a considerable increase in the number of AI start-ups and initial public offerings (IPOs) due to the expanding technological trend. According to Gartner, businesses have adopted artificial intelligence at a pace of 270% over the previous several years. More than 1/3 of organizations now either employ AI or aim to do so. As a result, both long-term investors and short-term traders are becoming increasingly interested in AI investments. Over the years, many investors have been interested in major companies like Adobe Inc. (NASDAQ:ADBE), Alphabet Inc. (NASDAQ:GOOG), and Amazon.com, Inc. (NASDAQ:AMZN).

Growing investment in AI technology across industries and by businesses of all sizes is expected to gain traction over the next years. The global AI market is projected to grow at a CAGR of 20.1%, from $387.45 billion in 2022 to $1394.30 billion in 2029. In 2021, the size of the worldwide market was USD 328.34 billion (see 15 biggest AI companies in the world).

11 Best Small Cap Ai Stocks to Invest In

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However, due to inflation, rising interest rates, and other substantial headwinds throughout the preceding year, many of the market’s top artificial intelligence stocks were decimated as investors turned their focus to more traditional equities. While the year has been challenging for all stock indexes, the small-cap Russell 2000 Index started to buck the trend in July, when it increased by 3.6%. The S&P 500, on the other hand, rose by 3%, suggesting that the small-cap index may ultimately start to outpace it.

Small-cap firms continue to trade for less when markets are unstable, and many investors see them as suitable investment options with promising near-term returns. So now let’s look at the 11 best small-cap AI stocks to invest in.

Methodology

In order to come up with our list of the best small-cap stocks to invest in, we need to identify the list of small-cap artificial intelligence stocks. For this purpose we used iShares Robotics and Artificial Intelligence Multisector ETF’s (IRBO) holdings that are smaller than $10 billion in market cap. These stocks aren’t pure artificial intelligence stocks as all ETFs lump robotics and artificial intelligence in the same bucket and most of these companies operate in other sectors as well. In order to determine the best small-cap AI stocks we ranked IRBO’s small-cap holdings using Insider Monkey’s proprietary hedge fund sentiment data. So, our rankings list the best small cap AI stocks to buy according to hedge funds. You should keep in mind that some of these stocks are also shorted by another group of hedge funds, however, this doesn’t change the fact the following 11 AI stocks are very popular among hedge funds.

Best Small Cap AI Stocks to Invest In

11. Elastic N.V. (NYSE:ESTC)

Number of Hedge Fund Holders: 53

Elastic N.V. (NYSE:ESTC) is an open-source search and analytics engine services provider. It offers Elastic Stack, a set of software tools that receive and store data from many sources and formats while also doing search, analysis, and visualization. As a result, it helps companies acquire data about their operations to make wiser business decisions.

Big companies that Elastic has acquired as clients have generated a sizable income stream. For instance, Walmart Inc. (NYSE:WMT) employs Elastic for genuine fraud detection. Using Elastic’s free and open-source search tools, Pfizer Inc. (NYSE:PFE) organizes and evaluates its research data.

Many investors see a chance in the AI market since the sector is expanding quickly. There are several rivals of Elastic N.V. (NYSE:ESTC), like Splunk Inc. (NASDAQ:SPLK), Sumo Logic, Inc. (NASDAQ:SUMO), and Logz.io. One advantage of choosing Elastic products over Splunk (SPLK) or any of its rivals’ solutions is their open-source options. Users can access various code versions using open-source software, and developers can make modifications without obtaining consent from a third party. This implies that it may be altered to suit practically any application.

Like Adobe Inc. (NASDAQ:ADBE), Alphabet Inc. (NASDAQ:GOOG), and Amazon.com, Inc. (NASDAQ:AMZN), Elastic N.V. (NYSE:ESTC) is one of the best AI stocks to buy.

Elastic N.V. (NYSE:ESTC) was discussed in Greenhaven Road Capital’s Q3 2022 investor letter. Here’s what the firm said:

“Elastic N.V. (NYSE:ESTC) has not disclosed churn, but at their recent investor day, they disclosed that the software (which powers search for a wide range of customers, including Uber, and also provides observability and security solutions) has been downloaded over 3 billion times. While we cannot extrapolate cleanly to the number of active users because one user can do multiple downloads as versions are updated, the active users should dwarf the company’s 19,000 paying customers. One thing is clear – once a customer is “landed,” they tend to spend more in the subsequent years. Elastic’s net revenue retention has hovered around 130% for several years.…” (Click here to read the full text)

10. Peloton Interactive, Inc. (NASDAQ:PTON)

Number of Hedge Fund Holders: 45

Peloton Interactive, Inc. (NASDAQ:PTON) provides an interactive fitness platform. The company provides touchscreen-equipped connected fitness equipment with live and on-demand streaming sessions under the names Peloton Bike, Peloton Bike+, Peloton Tread, and Peloton Tread+.

Peloton Interactive, Inc. (NASDAQ:PTON) boasts more than 5.9 million users on its fitness platform. The majority of Peloton Interactive, Inc. (NASDAQ:PTON)’s income comes from selling cycles and treadmills, which have a price range of $1,895 to $4,295.

After a huge 2020, Peloton Interactive, Inc. (NASDAQ:PTON) stock has declined. As more individuals returned to in-person clubs and training programmes, competition on the fitness platform has intensified. Shares have plummeted about 73.88% year to date. Peloton Interactive, Inc. (NASDAQ:PTON) has partnered with Amazon.com, Inc. (NASDAQ:AMZN) to offer equipment and goods to clients in the United States through the e-commerce site. Executives anticipate that this strategy will expand their pool of potential clients.

Merion Road Capital mentioned Peloton Interactive, Inc. (NASDAQ:PTON) in its third-quarter 2022 investor letter. Here’s what the firm said:

“Peloton Interactive, Inc. (NASDAQ:PTON) is quite a different story. You may recall from my Q1 letter that I initiated a position in the stock given the potential for a new CEO to leverage the company’s passionate and engaged userbase. The investment had meaningful upside potential (multiples of the then trading price), but also presented real downside risk; as such, I kept our exposure to just a few percentage points of the portfolio. Fast forward six months and underlying trends like churn, engagement, and new users weakened dramatically. I sold our shares as the likelihood for the company to achieve financial success has become increasingly remote.”

9. Alteryx, Inc. (NYSE:AYX)

Number of Hedge Fund Holders: 40

Alteryx, Inc. (NYSE:AYX) offers a variety of data analytics and other services. These comprise machine learning, forecasting, optimization, multivariate analysis, simulation, and data mining. Alteryx, Inc. (NYSE:AYX) is trusted by more than 8,340 customers to deliver significant business results.

Business analysts may use Alteryx, Inc. (NYSE:AYX)’s platform to view applied analytics, meta-data, and underlying data at any stage of the procedure. Additionally, it can analyze data from social media sites like Meta Platforms, Inc. (NASDAQ:META) and Twitter and cloud applications like Google Analytics, Marketo, NetSuite, salesforce.com, and Workday. Alteryx holds a 7.63% market share in the data analysis market. Alteryx, Inc. (NYSE:AYX) competes in the data-analysis area with 25 other products.

8. Lattice Semiconductor Corporation (NASDAQ:LSCC)

Number of Hedge Fund Holders: 35

Lattice Semiconductor Corporation (NASDAQ:LSCC) is a semiconductor company that specializes in low-power programmable modules. The company is concentrated on resolving customer issues in the communications, computing, industrial, automotive, and consumer industries across the network, from the Edge to the Cloud.

Lattice Semiconductor Corporation (NASDAQ:LSCC) has announced 31% sales growth, fueled by its core divisions of industrial, automotive, communications, and computing. In addition, the firm expanded the breadth of its product portfolio with the launch of Lattice Avant, a new FPGA platform developed especially to bring the company’s power-efficient technology, small size, and performance leadership to mid-range FPGAs.

Every business relies on its ability to generate cash, and Lattice Semiconductor Corporation (NASDAQ:LSCC) is now outpacing many of its rivals by increasing its cash flow year over year by 51.3%. In reality, the rate is comparable to the 38.7% industry average.

Here is what Artisan Partners said about Lattice Semiconductor Corporation (NASDAQ:LSCC) in its Q2 2022 investor letter:

“Lattice Semiconductor Corporation (NASDAQ:LSCC) recently reported +30% revenue growth and +600bps of margin expansion. We believe multiple product and program launches throughout the remainder of the year will sustain the company’s solid fundamental momentum. Longer-term, Lattice is well-positioned to provide FPGA chips to data centers, new 5G infrastructure and to tap into low power/reprogrammable chips as well as the industrial and automotive end markets. In addition, its solid pipeline of new chips should expand its addressable market and margins.”

7. Lumen Technologies, Inc. (NYSE:LUMN)

Number of Hedge Fund Holders: 34

Lumen Technologies, Inc. (NYSE:LUMN) is a facility-based tech and networking firm. It provides integrated products and services to corporate and residential clients in the US and worldwide through the Lumen, Quantum Fiber, and CenturyLink brands. Lumen Technologies, Inc. (NYSE:LUMN) provides communities and small businesses with access to Quantum Fiber internet in more than 30 locations. Quantum Fiber is a pre-paid, subscription-based internet platform that offers homes and small businesses a reliable, safe fibre-based connection. In the third quarter, the company attracted 31,000 new Quantum fibre customers, bringing the total to 889,000.

Lumen Technologies, Inc. (NYSE:LUMN) has a competitive edge due to its powerful wire network and strong free cash flow. The firm offers the quickest, most secure platform for apps and data, serving clients in more than 60 countries and boasting around 400,000 route fibre miles.

The free cash flows for Lumen Technologies, Inc. (NYSE:LUMN) exceed $3 billion. The organization continues to make significant investments in research and development to update digital interactions, fulfil the needs of businesses, and enhance the consumer experience. Another expense Lumen Technologies, Inc. (NYSE:LUMN) intends to incur is the six million miles of additional fibre that will be added to the U.S. Intercity Network. The project is expected to be finished by 2026.

Longleaf Partners mentioned Lumen Technologies, Inc. (NYSE:LUMN) in its third-quarter 2022 investor letter. Here is what the fund said:

“Lumen Technologies, Inc. (NYSE:LUMN) – Global fiber company Lumen was the top detractor in the quarter. In September, the company announced a new CEO, Kate Johnson, would take over for Jeff Storey. Johnson has a strong track record of delivering organic revenue growth, the primary area where Lumen has struggled. Johnson held previous roles at GE and Microsoft, where she most recently served as head of Microsoft US and doubled her division’s revenue in only four years. Multiple checks through our network vouch for her and suggest this leadership change is a positive upgrade that will bring the discipline and focus on sales that Lumen has been missing. The market reacted negatively with concern over the potential for another dividend cut or strategy change. We are confident the stock price reaction is highly overblown versus any impact that a potential dividend cut would have on value per share. The stock now trades at 4.5x EBITDA, and we believe the best value accretive capital allocation move today is share repurchase. Shortly after quarter end, Lumen closed on the sale of part of its consumer business to Apollo, further improving its balance sheet and business mix.”

6. Dropbox, Inc. (NASDAQ:DBX)

Number of Hedge Fund Holders: 32

Dropbox, Inc. (NASDAQ:DBX) is a global content collaboration platform. It provides services to clients in the financial services, industrial, consumer, and retail, as well as professional services, technology, media, and education sectors. Dropbox, Inc. (NASDAQ:DBX) seeks to create a more ethical manner of functioning with its more than 700 million registered customers in 180 countries.

FormSwift, a cloud-based platform, was acquired by Dropbox, Inc. (NASDAQ:DBX) for $95 million in cash. FormSwift will improve Dropbox’s existing data backups, publishing, and sharing tools. This collaboration will assist Dropbox, Inc. (NASDAQ:DBX) in accomplishing its goal of creating an end-to-end contract processing capability. Dropbox, Inc. (NASDAQ:DBX) has completed 28 such acquisitions.

After a year of gradual but steady development, Dropbox, Inc. (NASDAQ:DBX) surpassed analysts’ expectations in the third quarter, growing its paying user base to 17.55 million (versus 16.49 million in Q3 2021). Net profit climbed to $83.2 million from $75.6 million in the third quarter of 2021, and revenues increased by 7% yearly to $591 million.

The historical EPS growth rate for Dropbox, Inc. (NASDAQ:DBX) is 162.1%. The company’s expected EPS growth for this year is 2.2%, which is higher than the predicted growth of -12.2% for the industry. The ROCE for Dropbox, Inc. (NASDAQ:DBX) is 23% which is an excellent return compared to the industry average of 10%.

In addition to Adobe Inc. (NASDAQ:ADBE), Alphabet Inc. (NASDAQ:GOOG), and Amazon.com, Inc. (NASDAQ:AMZN), Dropbox, Inc. (NASDAQ:DBX) is one of the AI stocks on the radar of investors.

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