We recently published a list of 13 Best Small Cap Tech Stocks to Buy Now. In this article, we are going to take a look at where Applied Digital Corp. (NASDAQ:APLD) stands against other 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).
An overhead view of a large-scale data center with rows of servers and blinking lights.
Applied Digital Corp. (NASDAQ:APLD)
Number of Hedge Fund Holders: 42
Market Capitalization: $1.42 billion
Applied Digital Corp. (NASDAQ:APLD) is a specialist data center company that designs, develops, and operates sophisticated digital infrastructure throughout North America. The company offers digital infrastructure solutions for blockchain mining operations, as well as GPU computing solutions for essential AI and HPC workloads.
On January 15, Lake Street Capital Markets reiterated its Buy rating on Applied Digital Corp. (NASDAQ:APLD), with a steady price target of $11. Rob Brown, the firm’s analyst, expressed satisfaction with the company’s second-quarter results, which exceeded expectations and represented another period of strong execution in its Bitcoin hosting and AI Cloud sectors. Both sectors are approaching full capacity, resulting in an annual EBITDA rate of more than $80 million.
The company is also focusing on the expansion of its HPC services for hyperscale clients by developing next-generation data centers. To that end, Applied Digital Corp. (NASDAQ:APLD) recently announced a $375 million financing agreement with Sumitomo Mitsui to expand its Ellendale HPC Campus. The financing will enable the company to settle current debts and fund the construction of the first two buildings on campus.
Overall, APLD ranks 2nd on our list of best small cap tech stocks to buy now. While we acknowledge the potential of APLD as an investment, our conviction lies in the belief that certain AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than APLD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and 30 Best Stocks to Buy Now According to Billionaires
Disclosure: None. This article is originally published at Insider Monkey.
