Artificial intelligence stocks are all the rage. Investors are constantly searching for the next big winner in artificial intelligence. While most large-cap artificial intelligence stocks have been discovered and priced, there may be many more stocks and opportunities in the small-cap segment.
If you're willing to accept and manage the risk, small-cap AI stocks can provide an outsized return compared to large caps, often because they are priced lower with more room to grow. We'll uncover those prospects with the five best small-cap AI stocks to buy now.
Overview of the best small cap AI stocks
Investors tracking artificial intelligence stocks are familiar with large-cap leaders like Microsoft Co. (NASDAQ: MSFT), Alphabet Inc. NASDAQ: GOOGL and Nvidia Co. NASDAQ: NVDA.
They have already risen on the AI trend and are not new ideas. Small-cap AI stocks may be a fit for investors willing to take on more risk for more potential rewards. They are cheaper than large-cap blue chip stocks but less speculative than penny stocks. These companies are by no means safe investments, as they can have a high level of volatility. They may have fundamental shortcomings and flaws that investors must be aware of.
The market prices risk to be proportionate to reward. Risk-tolerant investors looking to ride the artificial intelligence trend for larger gains and willing to absorb larger losses may consider AI small-cap stocks.
Why invest in small cap AI stocks?
Stocks with market capitalizations between $200 million and $2 billion are considered small caps. You can calculate market capitalization by multiplying a stock's price by its outstanding shares. Small caps tend to be young companies experiencing hyper-growth in emerging industries of niche segments.
They may even include startups. Small caps have inherently more volatility and less liquidity than mid-cap and large-cap stocks. Floats tend to be smaller with small caps, which can lead to more slippage and wider bid and ask spreads. Unusual volume can propel these stocks since their average daily trading volume is relatively light. Don't panic in or out of a position with small-cap stocks. The thinner liquidity can prove costly when in a panic.
Small caps are the underdogs of the major stock markets, hoping to grow into medium and large-cap stocks eventually.
Understanding small cap AI stocks
Small-cap AI stocks may seem like a risky investment, but they have the potential to provide substantial returns if you're willing to take on a bit more risk. These stocks, with market capitalizations between $200 million and $2 billion, often represent young companies with rapid growth in emerging industries or niche segments.
One of the reasons why small cap AI stocks can be attractive is their affordability compared to large cap stocks. While large-cap AI stocks like Microsoft, Alphabet and NVIDIA have already grabbed onto the AI trend and may have limited room for growth, small caps offer you the opportunity to get in on the ground floor of a burgeoning industry with a huge potential for expansion.
The appeal of small-cap AI stocks
Investors like small-cap AI stocks for a few reasons. These stocks are more affordable, so you can participate in the AI market if you have limited capital. Small caps also have the potential for rapid growth and innovation in emerging industries or niche segments.
The accessibility to niche markets and technologies adds to the allure. These companies often specialize in specific areas of artificial intelligence stocks, such as computer vision, natural language processing or machine learning algorithms in unique industries. With these, you can gain exposure to the cutting-edge advancements and specialized expertise that could be the future of AI.
5 best small cap AI stocks 2024
Here are the five best small-cap AI stocks 2024 for risk-tolerant investors.
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Name
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Ticker
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Market cap
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Industry
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Recursion Pharmaceuticals
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RXRX
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$1.97 billion
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AI Drug Discovery
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SoundHound
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SOUN
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$414.58 million
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Voice AI Products
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Duos Technologies
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DUOT
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$30.02 million
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AI Transportation Services Detection
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Dario Health
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DRIO
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$49.81 million
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AI Digital Health
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CXApp
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CXAI
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$18.15 million
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Workplace Experience App
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Recursion Pharmaceuticals Inc.
It costs an average of $2.5 billion and takes 10 to 15 years to bring a drug to market. The time and costs of creating drugs are an expensive and arduous process. The initial stage of drug discovery is an especially complicated and slow process, working through various billions of combinations of chemical and biological inferences. Recursion Pharmaceuticals Inc. NASDAQ: RXRX is a pharma-tech company that helps expedite the drug discovery process using artificial intelligence and machine learning algorithms that power its Recursion Operating System (ROS) platform. Its proprietary Recursion Data Universe has 23 petabytes of biological and chemical data, enabling hundreds of billions of inferences used for millions of weekly wet lab experiments.
A wet lab uses chemical, biological, liquid and fluid samples for testing, DNA sequencing, protein purification and gene expression analysis. Its AI platform ROS can analyze oceans of data from wet labs to identify relationships and patterns that would be impossible and difficult at best using traditional methods. ROS can identify potential drug targets, select lead compounds, design clinical trials and expedite drug discovery.
Recursion made headlines in 2023 after receiving a $50 million investment from AI chip maker Nvidia Co. NASDAQ: NVDA. This further validated the company and its technology. It has partnerships and collaborations with many of the big pharmaceutical companies, including Pfizer Inc. NYSE: PFE, Biogen Inc. NYSE: BIIB, Sanofi NASDAQ: SNY and GSK PLC NYSE: GSK, along with many academic institutions.
You can find Recursion Pharmaceuticals analyst ratings and price targets on MarketBeat.
SoundHound AI Inc.
SoundHound AI Inc. NASDAQ: SOUN, as a voice AI company, provides artificial intelligence solutions for voice-enabled applications and devices.
Its AI voice assistant can field 100% of calls 24/7 with applications for restaurants, automotive, hospitality and smart devices. It uses artificial intelligence to recognize, understand and respond to human speech and sounds. SoundHound AI can recognize sounds from music and animals to the environment. It can identify a song just from "listening" to it briefly. It can even identify a song if someone hums it. It's arguably better than Shazam, the largest song identification app.
SoundHound AI can understand natural language, enabling conversational search and generating natural language conversation. As with machine learning algorithms, it gets better with more usage and time. Its voice AI-powered millions of apps, TVs, cars and IoT devices that generated billions of user interactions over the years. The company has garnered strategic investments from NVIDIA, Samsung, Tencent, Hyundai, VIZIO and many more organizations.
The company launched SoundHound Chat AI for automotive, combining voice AI with generated AI. Some of its clients include BMW, Samsung and Toyota. The company will roll out its voice AI drive-thru service for White Castle to more than 100 lanes by the end of 2024. SOUN stock is part of the Russell 2000 and Russell 3000 indexes.
Look for SoundHound analyst ratings and price targets on MarketBeat.
Duos Technologies Group Inc.
Duos Technologies Group Inc. NASDAQ: DOUT is an engineering technology firm that develops AI-powered technology solutions for rail, transit and transportation systems. Its products help to improve the safety and efficiency of transportation systems. Its flagship product is a railroad inspection portal (RIP).
It utilizes machine vision and AI to identify potential problems and develop predictive maintenance models for rail systems to prevent train derailments and other calamities. Its systems have performed over 1.7 million comprehensive railcar scans of more than 238,000 railcars, 15% of North America's total freight core population.
The company has a competitive advantage from controlling all four control knobs (hardware, software, IT and AI) required to produce and deploy AI correctly in-house. Competitors may have three and send them out to a third party. This enables Duos to inspect railcars traveling up to 125 miles per hour, up from 40 miles per hour.
The company collects revenues from many AI models, Duos Zone portals with a subscription model and consulting. The company expects rising recurring revenues to boost its margins beyond 20%, which can lower the breakeven point. The company had a $9.4 million backlog comprised of 40% service and 6% project revenues. The company is looking to expand RIPS to truck fleets.
Look for Duos Technology Group analyst ratings and price targets on MarketBeat.
DarioHealth Co.
Digital healthcare continues to gain traction due to its convenience and access. DarioHealth Co. NASDAQ: DRIO is a digital health company providing monitoring and management solutions for chronic illness. Its AI-powered platform creates personalized treatment plans for chronic disease management. For diabetes, it offers the FDA-cleared and European CE-approved Dario Glucose Meter, which users can connect to their smartphone and Dario App to monitor their blood glucose levels. The artificial intelligence platform can identify problems and provide real-time feedback and solutions. Dario currently offers metabolic, musculoskeletal and behavioral health solutions.
Its behavioral solutions provide AI-driven assessments, support from certified behavioral health coaches and provide self-guided cognitive behavioral therapy (CBT) programs. Its data indicates that 48% of its users had an anxiety reduction, and 59% had decreased depression, with 82% of respondents feeling better afterward.
Look for DarioHealth analyst ratings and price targets on MarketBeat.
CXApp Inc.
The customer experience analytics and improvement segment has been gaining interest among enterprises. CXApp Inc. NASDAQ: CXAI focuses on the other end of the spectrum: employee experience. AI powers the CXApp Workplace SuperApp, which collects millions of data points with AI models built on a full-stack solution, providing contextual awareness utilizing on-device positioning and indoor mapping for spatial intelligence, helping to personalize the workplace experience. The app provides over 250 workplace features, from desktop and room booking to internal communications, amenities and office mapping.
The workplace experience seems like a niche segment, but CXApp has contracts with some large, well-known enterprises, including AT&T Inc. NYSE: T, Cisco Systems Inc. NASDAQ: CSCO, Walmart Inc. NYSE: WMT and Oracle Co. NASDAQ: ORCL. The company experienced a 55% year-over-year (YoY) booking growth in its second quarter of 2023. The company has filed 37 patents for its state-of-the-art platform and 17 were granted. It generates revenues on a recurring subscription SaaS model. For the November 14, 2023 quarter, the company had revenues totaling $1.77 million with a net profit of $1.4 million.
Look for CXApp analyst ratings and price targets on MarketBeat.
How to identify promising small cap AI stocks
To evaluate a small cap AI stock, assess its technology, market position and growth potential.
Consider the company's technological capabilities and how they utilize AI in their products or services.
Analyzing the company's market position and competitive advantage is also crucial. Look for small AI companies to invest in that have a unique offering or a strong foothold in their target market.
Lastly, evaluate the growth potential of the company. Assess factors such as revenue growth, customer acquisition and expansion plans. Look for signs of scalability and a clear strategy for future growth.
Also, examine analyst ratings and price targets on platforms like MarketBeat to gain insights from industry experts and gauge market sentiment toward the stock.
For example, if you're researching Duos Technology Group, you'd observe that the company has established itself as a frontrunner in transit and transportation systems. The flagship product, the railroad inspection portal (RIP), puts them at a competitive advantage because it uses AI to identify potential problems and develop predictive maintenance models for rail systems.
You'd also observe from news reports that the demand for AI continues to grow and that Duos Technology Group sees an opportunity to expand beyond rail systems. The success of their railroad inspection portal showcases their expertise in using AI to improve operational efficiency and safety. Now, the company has set its sights on truck fleets.
Recognizing that the trucking industry faced similar maintenance and performance optimization challenges, Duos Technology Group has begun to develop a new AI model specifically tailored for trucks.
If you decide to invest in Duos Technology Group, you would be betting on the company's ability to expand successfully into the trucking industry.
Strategies for investing in small cap AI stocks
If you're considering investing in small-cap AI stocks, evaluate the technology behind these companies and understand how it sets them apart from their competitors. Only by understanding their unique advantages can you truly gauge their growth potential.
Case studies and examples of successful small-cap AI companies can provide valuable insights into their strategies and tactics. By studying these examples, you can identify patterns and trends that mean future success for other small-cap AI stocks.
Furthermore, by spreading your investments across multiple companies, you can mitigate the risks associated with any single company or industry. Diversifying your portfolio can let you capture the potential growth of the small-cap AI sector while minimizing the impact of any individual company's performance.
Once you've identified promising small-cap AI stocks and devised a solid investment strategy, the next step is to decide between a long-term or short-term approach. A long-term approach involves holding onto your small-cap AI stocks for years or even decades. The goal is to benefit from the company's growth potential over time and capitalize on the increasing value of your investments. This strategy requires patience and a belief in the company's long-term viability. It allows you to ride out market fluctuations and potentially generate good future returns.
On the other hand, a short-term investment approach involves buying and selling small-cap AI stocks within a shorter time frame, taking advantage of market volatility and fluctuations. This strategy requires active monitoring and decision-making, as you aim to buy low and sell high. It can be a more dynamic and fast-paced approach but carries higher risks.
Ultimately, the choice between a long-term or short-term approach depends on your investment goals, risk tolerance and time horizon.
Future trends and predictions
As emerging technologies and industries shape the small-cap AI landscape, the possibilities for growth and evolution in the AI market are boundless. AI will be integrated into various sectors, including agriculture, healthcare and transportation.
With the global population on the rise, the demand for food production is increasing. AI-powered technologies can optimize crop yields, reduce resource waste and improve overall efficiency in farming. Small-cap AI companies specializing in agricultural solutions could disrupt traditional farming methods and generate substantial returns.
In the healthcare industry, small-cap AI stocks should play a crucial role in patient care. AI can assist in early diagnosis, personalized treatment plans and drug discovery.
The transportation sector will undergo a major transformation. Autonomous vehicles, smart traffic management systems and predictive maintenance are just a few examples of how AI can enhance efficiency and safety in transportation. Small-cap AI companies specializing in this sector could change how people and goods are transported, presenting lucrative investment opportunities.
Manage your risk exposure
As with any investment in the stock market, risk is proportionate to reward. Therefore, it is imperative to spread out the risk in a portfolio. AI small cap stocks offer potentially more upside but also potentially more downside. With this in mind, keep the exposure to a smaller percentage to limit the downside effects on the rest of your portfolio — never go all in on any single position or even a handful of positions.
It sounds like basic advice, but investors and traders tend to make exceptions when FOMO gets involved, which can cost them in more ways than one.
Methodology
We applied many filters and qualifications to assemble the list of the five best small-cap AI stocks for 2024. These had to be small-cap stocks with market capitalization maxing out at $2 billion.
The lower range requirement of a $200 million minimum market cap wasn't applied since that would have left out some strong potential movers. Each stock must include artificial intelligence in its business model, products, services or operations. The stocks were also required to be diverse and from different industries and market segments to give readers a wider selection of non-correlated stocks.
The list of best small cap stocks AI 2024 is purely subjective. Small-cap stocks are risky, and the five stocks are no exception. They are down from their highs and rely on positive catalysts to move back higher, either with the underlying company, industry or AI theme.
Before you consider VanEck Semiconductor ETF, you'll want to hear this.
MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and VanEck Semiconductor ETF wasn't on the list.
While VanEck Semiconductor ETF currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.
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