In this article, we will take a look at the 13 Best Small Cap Tech Stocks to Buy Now.
The S&P Small Cap 600, whose components have an average market capitalization of $3 billion, is down 11% from its record closing high set late last year. A number of connected issues have pushed the market lower, including President Trump’s tariffs, which would raise the cost of importing hundreds of billions of dollars in products, reducing profit margins at firms that can’t raise prices enough to offset the costs. Higher prices will boost inflation, suggesting that the Federal Reserve may raise interest rates rather than cut borrowing costs, putting more strain on the economy. These trends disproportionately affect small cap stocks since they usually can’t come up with as many cost-cutting options as their larger competitors, which means declining sales significantly impact profit margins. On the other hand, some analysts believe small companies may profit from Trump’s plans, notably decreased restrictions, and support for local sectors because small enterprises are more US-focused than global corporations.
Looking ahead, RBC Capital believes that the current year may be a watershed moment for small caps. The Federal Reserve’s effort to cut interest rates may encourage companies to take greater risks, thus increasing M&A and IPO activity. As conditions improve, small caps may begin to close the gap between their large cap competition.
AI’s Dominance in the Tech World
The rapid expansion of artificial intelligence (AI) continues to transform sectors throughout the world, and experts are keenly watching its effects on the broader US stock market. Morningstar, reviewing the US market in 2024, stated the following on January 3:
“Out of the 24.09 percentage points gained by the US Market Index in 2024, 13.2 came from just eight stocks, which are mainly seen as benefiting from artificial intelligence technologies: Nvidia, Apple, Amazon.com, Meta Platforms, Tesla, Broadcom, Microsoft, and Alphabet. In other words, 55 percent of total market gains in 2024 can be attributed to these companies. These same companies contributed 53 percent of total market gains in 2023.”
UBS further stated that AI has and will continue to fuel the expansion of the larger technology sector. According to the bank, following the implementation of ChatGPT in November 2022, the total market valuation of companies listed on the NASDAQ exchange climbed to around $13.5 trillion.
On the other side, some are questioning the current condition of the AI business. Sky-high valuations were one of the primary reasons why AI stocks were struck so hard by the tariff sell-off. That said, the AI trade had already lost pace before Trump’s tariffs rattled the global stock market. Concerns over overspending on AI infrastructure and competition from Chinese rivals caused the AI rally to stop in late January and early February. UBS analysts, however, are optimistic that the current sell-off will be comparable to the one that occurred in 2018. The analysts said that today’s tech dip is similar to the one that occurred during Trump’s first term when geopolitics and “fundamentals-related noise” momentarily muddled investors’ assessment of an otherwise decent future.
Our Methodology
For our list of the best small cap tech stocks to buy, we used finviz and looked at firms in the technology sector with market capitalizations ranging from $200 million to $2 billion. Using Insider Monkey’s hedge fund data for Q4 2024, we ranked these companies in increasing order of the number of hedge funds that own a position in them.
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 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
13. Adeia Inc. (NASDAQ:ADEA)
Number of Hedge Fund Holders: 14
Market Capitalization: $1.51 billion
Adeia Inc. (NASDAQ:ADEA) is a premier R&D company that accelerates the adoption of new technologies in the media, entertainment, and semiconductor industries. It works as a licensing corporation, distributing its ideas under the Adeia brand.
Back in December, BWS Financial maintained a Buy rating on Adeia (NASDAQ:ADEA), with a $16 price target. Following Adeia’s announcement of a license arrangement with Amazon, the financial firm predicts an increased free cash flow by 2025. The arrangement with Amazon is the largest of numerous video streaming licenses that Adeia Inc. (NASDAQ:ADEA) has inked. This milestone underlines the notion that Adeia’s development is not exclusively based on legacy technology, but also new strategic relationships.
The technology company announced quarterly earnings per share of $0.47 in the fourth quarter of 2024, up $0.05 from the average estimate of $0.42. Revenue for the quarter also came above expectations, totaling $119.2 million vs $113.93 million. A succession of strategic collaborations, including new agreements with Amazon and Canon have contributed to the company’s excellent financial performance. These transactions have expanded Adeia’s client base and contributed to revenue growth.
12. Innodata Inc. (NASDAQ:INOD)
Number of Hedge Fund Holders: 15
Market Capitalization: $1.31 billion
Innodata Inc. (NASDAQ:INOD), originally Innodata Isogen, Inc., is an American IT company that provides business process, technology, and consulting services to help customers establish digital content creation and product strategies. It specializes in AI model training, data annotation, and digital transformation services, and serves a variety of sectors.
Innodata Inc. (NASDAQ:INOD) recently published Q4 2024 earnings, which showed a notable 127% year-over-year revenue increase, surpassing its own forecast. The company’s management further projects a 40% growth in revenue this year, citing the company’s position to take advantage of the increased demand for high-quality training data and AI-driven automation.
Following the company’s results, BWS Financial raised its price target for Innodata Inc. (NASDAQ:INOD) shares to $74, up from $45, and maintained a Buy rating on the stock. BWS Financial cited the company’s strategic efforts in increasing its staff, which are likely to help Innodata gain further projects. This development plan is consistent with the company’s aggressive revenue projections, which seek to exceed $300 million by 2026.
