Former House Speaker Kevin McCarthy joined CNBC’s ‘Squawk Box’ on November 26 where he emphasized the need for a new group he has created, the Alpha Institute, which aims to advocate for pro-technology proposals. He highlighted the importance of focusing on long-term technological advancements, particularly in AI and quantum technology, which he believes are critical for America’s future competitiveness.
McCarthy noted that legislators often become bogged down in daily issues and fail to consider the long-term implications of their policies. He shared that three years ago, he initiated a course to educate members of Congress on AI and quantum technologies, recognizing their significance in various sectors such as energy and defense. He argued that without reforming processes like permitting and enhancing the energy grid, the US risks falling behind in the AI race.
Later on December 2, Jay Jacobs, head of US BlackRock Thematic and Active ETFs, joined ‘Halftime Report’ with CNBC’s Bob Pisani to discuss the key themes to watch in the ETF space heading into 2025. Jacobs emphasized that one major trend for 2025 will be the acceleration of AI infrastructure and its integration into consumer issues. He outlined 3 distinct stages of the AI theme: the build phase, where significant investments are made in infrastructure; the mass adoption phase across enterprises and individuals; and the transformation stage, which will see entirely new industries emerge from AI advancements.
Jacobs pointed out that during the build phase, ETFs focused on semiconductors, such as SOXX, and digital infrastructure like IDTT will benefit significantly. As companies adopt AI technologies, software names are expected to gain traction, leading to a transformation that could create new market opportunities over the next five to ten years.
With this context, let’s take a look at the 12 best small cap AI stocks to buy according to hedge funds.
Methodology
We sifted through media reports and ETFs to look for AI companies trading under $5 billion. That’s our definition of small-cap stocks. We then selected the 12 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q3 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.
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).
12 Best Small Cap AI Stocks To Buy According to Hedge Funds
12. POET Technologies Inc. (NASDAQ:POET)
Market Cap as of December 2: $382.54 million
Number of Hedge Fund Holders: 5
POET Technologies Inc. (NASDAQ:POET) is pioneering innovative optical solutions for AI applications. Its core technology, the POET Optical Interposer, seamlessly merges electronic and photonic components, enabling high-speed data transfer, lower energy consumption, and superior computational power.
The company is gaining momentum through strategic partnerships. In Q3 2024, it secured a significant design win with Foxconn Interconnect Technology for 800G and 1.6T optical engines. Luxshare Tech, a major tech supplier, has also integrated its optical engines into its product line. To further strengthen its position, the company partnered with Mentech Technology and Mitsubishi Electric to develop cutting-edge 800G and 3.2T optical solutions — mostly all of these partnerships catering to AI and data center networks.
For its contributions to AI infrastructure, the company has earned industry recognition. In a strategic move to meet surging demand, it recently announced an expansion of its optical engine production facilities in Malaysia. These developments position POET Technologies Inc. (NASDAQ:POET) as a key player in the AI revolution.
11. BigBear.ai Holdings Inc. (NYSE:BBAI)
Market Cap as of December 2: $611.21 million
Number of Hedge Fund Holders: 7
BigBear.ai Holdings Inc. (NYSE:BBAI) uses AI to solve complex problems. Its AI-powered decision intelligence solutions are designed to assist organizations in sectors such as national security, supply chain management, and digital identity. By utilizing advanced technologies like machine learning and predictive analytics, it allows organizations to make informed decisions in challenging environments.
The company is making waves at the US Navy’s Mission Autonomy Proving Ground (MAPG) exercises. It’s showcasing its ConductorOS platform, designed to orchestrate AI models, data, and sensors from various sources. Through ConductorOS, BigBear.ai Holdings Inc. (NYSE:BBAI) aims to demonstrate the power of AI in unifying diverse technologies. This includes ensuring seamless interoperability between different AI models and sensors, regardless of their vendor. Additionally, the platform leverages edge computing to deploy AI algorithms in real time, enabling critical tasks such as forecasting enemy vessel routes.
By participating in MAPG, the company is positioning itself as a key player in advancing AI deployment within the Navy and the broader defense landscape. Its focus on AI-driven solutions is expected to significantly enhance maritime domain awareness, improve decision-making, and ultimately strengthen national security. This positions the company as a key player in the development and implementation of cutting-edge AI technologies.
10. SoundHound AI Inc. (NASDAQ:SOUN)
Market Cap as of December 2: $4.07 billion
Number of Hedge Fund Holders: 11
SoundHound AI Inc. (NASDAQ:SOUN) is a leading voice AI company that empowers businesses to create exceptional conversational experiences. Its suite of products, including voice assistant platforms, natural language understanding, and speech recognition technologies, caters to a diverse range of industries such as automotive, television, IoT, and customer service.
One notable example of its impact is the company’s Amelia AI Agents. These advanced AI-powered virtual assistants have successfully processed over 100,000 customer calls for Apivia Courtage, a prominent French insurance broker, by November of this year. By automating routine tasks and providing efficient customer support, Amelia AI Agents have reduced the workload of human agents by ~20%, freeing them to focus on more complex issues. This has significantly improved both efficiency and customer satisfaction.
The company’s strategic focus on AI has fueled impressive growth, as evidenced by an 89.13% year-over-year revenue increase in Q3 2024, driven by the rising popularity of voice-based interactions and the increasing demand for AI-powered customer service solutions. As SoundHound AI Inc. (NASDAQ:SOUN) continues to innovate and push the boundaries of AI technology, it is well-positioned to drive future growth.
9. Fastly Inc. (NYSE:FSLY)
Market Cap as of December 2: $1.27 billion
Number of Hedge Fund Holders: 14
Fastly Inc. (NYSE:FSLY) is an edge cloud platform provider that empowers businesses to deliver faster and more secure digital experiences. Its services, including content delivery networks, security solutions, and video streaming, cater to a range of industries such as technology, media, and finance. Using AI and machine learning, its platform optimizes content delivery, security, and performance.
A key highlight for Fastly Inc. (NYSE:FSLY) is the advancement of its AI accelerator, an innovative AI proxy designed to enhance the performance and cost-efficiency of LLM-powered applications. By expanding support to include Google Gemini, alongside OpenAI, the company aims to revolutionize the AI landscape.
The AI accelerator leverages Fastly Inc.’s (NYSE:FSLY) edge cloud platform to reduce latency for tasks like answering queries, which typically take several seconds on traditional cloud platforms. By optimizing request routing and utilizing the edge network, the accelerator significantly reduces the overall cost of AI solutions.
8. C3.ai Inc. (NYSE:AI)
Market Cap as of December 2: $4.83 billion
Number of Hedge Fund Holders: 17
C3.ai Inc. (NYSE:AI) is a leading provider of enterprise AI software that empowers businesses across various industries to harness the power of AI to drive innovation and solve complex challenges. Its platform enables organizations to develop, deploy, and manage AI applications, while its industry-specific solutions address critical business needs such as optimizing inventory, mitigating supply chain risks, and improving sustainability.
The company has further solidified its position as an industry leader by expanding its partnership with Capgemini recently, a global technology and consulting powerhouse. This strategic move empowers C3.ai Inc. (NYSE:AI) to accelerate the adoption of AI solutions across diverse industries, including life sciences, energy, utilities, government, banking, and manufacturing.
By combining C3.ai Inc.’s (NYSE:AI) cutting-edge AI applications with Capgemini’s deep industry expertise and global implementation capabilities, the partnership aims to deliver transformative solutions that drive operational excellence, boost productivity, and reduce costs.
Bireme Capital stated the following regarding C3.ai, Inc. (NYSE:AI) in its fourth quarter 2023 investor letter:
“Our final new short position is in a company called C3.ai, Inc. (NYSE:AI). Originally named “C3 Energy,” C3.ai has changed its name multiple times based on whatever hot new trend they were supposedly capitalizing on. The “energy” theme was about smart grid and cap-and-trade. Then the firm changed its name to “C3 IoT” to attempt to capitalize on the Internet of Things buzz. After that trend fizzled out, the moniker was altered once more, with the company capturing the “AI” ticker in December 2020 – a savvy move if it wants to sell stock to credulous investors, but irrelevant to its business prospects. As Kerrisdale put it, the company is a “minor, cash burning consulting and services business masquerading as a software company.”
7. Plexus Corp. (NASDAQ:PLXS)
Market Cap as of December 2: $4.51 billion
Number of Hedge Fund Holders: 17
Plexus Corp. (NASDAQ:PLXS) is a leading electronics manufacturing services (EMS) provider that uses AI to optimize its operations, such as predictive maintenance, quality control, supply chain optimization, and robotics, to enhance efficiency, reduce downtime, and ensure high-quality product delivery. These AI applications enable it to deliver innovative solutions to its customers across various industries.
The company’s fiscal fourth-quarter 2024 performance was significantly driven by robust demand in the healthcare and life sciences sector, as reflected in the higher-than-anticipated revenue of $1.05 billion, a 2.6% year-over-year improvement. This sector’s growth was primarily due to the successful launch of new products and increased demand for engineering solutions.
Its ability to develop and manufacture complex medical devices also contributed to its strong performance in this segment. AI-driven predictive analytics were used to identify potential supply chain disruptions and optimize inventory levels, ensuring timely delivery of critical components. Plexus Corp.’s (NASDAQ:PLXS) focus on innovation, coupled with the strategic use of AI, positioned it well to capitalize on the growing demand for advanced medical devices and life science instruments.
Bernzott Capital Advisors US Small Cap Value Fund stated the following regarding Plexus Corp. (NASDAQ:PLXS) in its first quarter 2024 investor letter:
“Within Information Technology, our position in Plexus Corp. (NASDAQ:PLXS) also hurt as the stock declined 12% as their earnings release was mixed due to temporary destocking amongst their customers, more specifically within the healthcare segment. Quarterly results were below expectations as the company felt the negative impact from de-stocking from their customers, more specifically within their healthcare segment. This should be temporary with growth reaccelerating in future quarters. Backlog continues to grow which gives us confidence going forward. We maintained our position.”
6. Consensus Cloud Solutions Inc. (NASDAQ:CCSI)
Market Cap as of December 2: $471.23 million
Number of Hedge Fund Holders: 17
Consensus Cloud Solutions Inc. (NASDAQ:CCSI) is a leading global provider of digital fax solutions and digital information exchange services. Its platform empowers businesses to streamline customer interactions across multiple channels, including voice, chat, and email. By using AI, it helps companies to enhance customer service, automate tasks, and gain valuable insights from customer interactions.
The company reported strong Q3 2024 results, driven primarily by the growth of its corporate channel, which caters to larger organizations, such as healthcare providers, financial institutions, and law firms. This channel experienced its best revenue growth in 6 quarters, with a 5.3% increase year-over-year, fueled by new customer acquisitions.
Its e-commerce platform, eFax Protect, has attracted significant new healthcare customers. Additionally, upselling existing SoHo (Small Office/Home Office) customers to the corporate channel and securing several key enterprise deals contributed to the overall growth of the corporate channel. The corporate customer base reached a record high of 58,000 accounts, with a stable average revenue per account of $310.
The company’s focus on customer retention yielded positive results, with a modest increase in revenue retention to 100% over the past 12 months in the corporate channel. Consensus Cloud Solutions Inc. (NASDAQ:CCSI) also leveraged AI-powered solutions to drive innovation and customer satisfaction.
Meridian Small Cap Growth Fund stated the following regarding Consensus Cloud Solutions, Inc. (NASDAQ:CCSI) in its first quarter 2024 investor letter:
“Consensus Cloud Solutions, Inc. (NASDAQ:CCSI), a leading supplier of both secure data delivery for enterprise healthcare interoperability and cloud fax solutions to small office home office (SoHo) customers, was spun out of longtime holding J2 Global (now Ziff Davis) in the fourth quarter of 2022. Consensus has historically enjoyed a high percentage of recurring revenues, low churn in the enterprise segment, and high margins. Much of the company’s current strategic focus is to build upon its legacy digital cloud fax service for the enterprise healthcare sector where data security and interoperability are key concerns. Despite an earnings report in line with expectations, the stock declined during the quarter on lower[1]than-expected guidance. The healthcare business continues to be under macro pressure, largely driven by IT staffing issues that are slowing enterprise-level adoptions of Consensus’ solutions. The company has rightly downshifted to a lower revenue reality and management is proactively shifting marketing spend from inefficient top-line growth efforts in its SoHo segment toward higher revenue generating customers in healthcare. We expect healthcare’s macro issues to eventually ease, resulting in revenue growth accelerating from the low single-digit growth today towards low double digits. The stock was recently trading at an attractive three times earning multiple with more than a 20% free cash flow yield. We believe that even modest growth from here and continued deleveraging could result in a materially higher share price. We maintained our position in the company during the quarter.”
5. Verint Systems Inc. (NASDAQ:VRNT)
Market Cap as of December 2: $1.60 billion
Number of Hedge Fund Holders: 19
Verint Systems Inc. (NASDAQ:VRNT) specializes in customer experience automation. By using AI-powered solutions, it helps businesses optimize their customer interactions across various channels, including voice, chat, and email. Its comprehensive suite of products and services includes analytics, workforce optimization, and security solutions.
The company’s AI-powered bots can automate tasks, answer customer queries, and provide real-time assistance to agents, leading to increased agent productivity and customer satisfaction. A major US travel services company has recently implemented the company’s AI-powered Intelligent Voice Assistant (IVA). This advanced AI solution has significantly improved the company’s self-service capabilities, leading to a remarkable 50% increase in call containment within one month.
By replacing the legacy touch-tone IVR system with Verint Systems Inc.’s (NASDAQ: VRNT) IVA, the company has streamlined customer interactions. The IVA’s advanced intent recognition and seamless integration with back-end systems enable it to accurately respond to customer inquiries, leading to significant cost savings and improved customer satisfaction.
Verint Systems Inc. (NASDAQ:VRNT) Systems’ AI-powered solutions have proven to be highly effective in driving significant business benefits for its customers and position the company as a leading player in its market.
4. Synaptics Inc. (NASDAQ:SYNA)
Market Cap as of December 2: $3.29 billion
Number of Hedge Fund Holders: 23
Synaptics Inc. (NASDAQ:SYNA) specializes in human interface solutions, including touchpads and touchscreens. Recently, it has shifted its focus towards edge AI, aiming to enhance device intelligence. By incorporating AI into its products, it enables devices to better understand and respond to user interactions.
It delivered strong quarterly performance, with revenue up 8.41% in FQ1 2025, as compared to the year-ago period. A key driver of this growth is the company’s focus on AI-powered solutions. One such solution is the AI hub, an innovative product that connects multiple devices, reducing the need for cloud connectivity, designed to empower edge devices with advanced AI capabilities, enabling them to perform complex tasks locally. This approach offers significant benefits, including reduced latency, improved privacy, and lower power consumption.
This shift towards edge computing aligns with industry trends and addresses the growing demand for intelligent and autonomous devices. The AI hub is poised to revolutionize the way devices interact and operate, opening up new opportunities for growth and innovation. The company’s commitment to innovation and focus on AI-driven solutions position it for continued success.
TimesSquare Capital U.S. Small Cap Growth Strategy stated the following regarding Synaptics Incorporated (NASDAQ:SYNA) in its first quarter 2024 investor letter:
“Among the wide variety of Information Technology companies, we prefer critical system providers, specialized component designers, and systems that improve productivity or efficiency for their clients. Synaptics Incorporated (NASDAQ:SYNA), a developer of human interface semiconductor solutions for electronic devices and products, sold off by -14%. The revenue picture for the fiscal second quarter was mixed with a strong rebound in mobile offsetting declines in Internet-of-Things as well as enterprise & auto. Earnings were better than expected due to strong operating expense control.”
3. Applied Digital Corp. (NASDAQ:APLD)
Market Cap as of December 2: $2.23 billion
Number of Hedge Fund Holders: 26
Applied Digital Corp. (NASDAQ:APLD) is a leading provider of digital infrastructure solutions and cloud services, specializing in high-performance computing (HPC) and AI. It offers a range of services, including data center hosting, GPU computing, and HPC hosting, to support demanding applications like cryptocurrency mining and AI workloads.
The company is committed to expanding its high-performance cloud computing business, with a particular focus on powering AI applications. Its strategic investments in AI-driven solutions have fueled significant growth, as evidenced by the successful fulfillment of existing contracts and the pursuit of new opportunities. As of the end of the FQ1 2025, it had 6 AI clusters operational, demonstrating its commitment to providing scalable and powerful computing infrastructure.
Applied Digital Corp. (NASDAQ:APLD) is also amending the lease financing for its GPUs, which is expected to be finalized in the current quarter. This amendment will allow for the amortization of GPU value over its useful life, resulting in improved financial reporting and a more accurate reflection of the long-term economics of the business.
The recent investment round has significantly increased Applied Digital Corp.’s (NASDAQ:APLD) visibility in the market, attracting attention to its innovative cloud solutions. The company plans to deploy additional AI clusters starting in H2 of fiscal year 2025, solidifying its position as a leading provider of AI-powered cloud services.
2. Ambarella Inc. (NASDAQ:AMBA)
Market Cap as of December 2: $2.92 billion
Number of Hedge Fund Holders: 30
Ambarella Inc. (NASDAQ:AMBA) is a leading-edge AI semiconductor company focused on high-performance, low-power video processing solutions. Its chips power a range of devices, including action cameras, drones, security cameras, and automotive systems. By enabling AI applications to be executed at the edge of a network, its technology reduces latency, enhances privacy, and optimizes system performance.
Its recent financial results highlight the strong demand for its AI-powered solutions. The company achieved record AI revenue in Q3, driven by the success of its new higher-priced AI processors, particularly the 5nm CV5 processor. This led to a 30% sequential revenue increase and a 63.36% year-over-year growth.
The company’s product roadmap is centered around a series of AI waves, each focusing on specific market segments and technologies. The first wave, driven by the CV5 and CV7 processors, is targeting both automotive and IoT applications. The second wave will introduce the CV3 AD family of SoCs, which are designed for advanced Level 2+ and higher levels of autonomy in the automotive market.
Its commitment to AI innovation is evident in its strategic investments in research and development. Ambarella Inc.’s (NASDAQ:AMBA) team of engineers is continuously pushing the boundaries of AI technology, developing cutting-edge solutions that address the evolving needs of the market.
1. Alight Inc. (NYSE:ALIT)
Market Cap as of December 2: $4.35 billion
Number of Hedge Fund Holders: 40
Alight Inc. (NYSE:ALIT) is a global technology company specializing in cloud-based human capital management solutions. It offers a range of services, including employee benefits, healthcare navigation, and financial well-being. It uses AI and ML to automate processes, improve decision-making, and enhance the overall employee experience.
Alight LumenAI, the company’s next-generation AI engine, is specifically designed to enhance the company’s Alight Worklife platform. The Worklife platform itself is designed to improve the overall employee experience through the strategic application of AI and analytics.
LumenAI takes this platform to the next level by integrating new and existing AI capabilities into a unified ecosystem. This integration empowers organizations to fully harness the potential of AI, offering a range of benefits. LumenAI enables personalized experiences for each employee, optimizing benefits, learning opportunities, and overall engagement. By automating routine tasks, LumenAI frees up human resources to focus on strategic initiatives and innovation.
Alight Inc.’s (NYSE:ALIT) commitment to AI innovation is reflected in its strategic investments in AI talent, infrastructure, and governance. The company is well-positioned to guide clients on their employee journey, streamlining operations, enhancing agility, and meeting both client needs and long-term financial goals.
Polen U.S. Small Company Growth Strategy stated the following regarding Alight, Inc. (NYSE:ALIT) in its Q3 2024 investor letter:
“We exited four positions during the quarter, including SiTime, AppFolio, RH, Doximity, and Alight, Inc. (NYSE:ALIT). Our position in Alight, a benefits outsourcing and business process-as-a-service company, was an unsuccessful investment. We decided to move on due to activist pressure that led to a breakup of the business. We were dissatisfied with both the plan and the new standalone business. This culminated with the CEO leaving and uncertainty over the company’s long-term strategic direction. As a result, we felt it was time to move on with better investment ideas in our pipeline.”
As we acknowledge the growth potential of Alight Inc. (NYSE:ALIT), 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 ALIT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
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