3 Promising Small-Cap AI Stocks for the Next Market Rally

Key Points

• An AI bubble burst, but another will soon follow, and these stocks will be among the winners. 
• As big as the NVIDIA-AI bubble is, the following services-driven bubble will be larger. 
• Companies like Verint Systems, Innodata, and SoundHound AI deliver utility for enterprises today and regularly attract new business.

A bubble burst in AI, aiding weakness in the broad market, but it is not the end of an era rather than the first of many bubbles yet to form. AI is an emergent technology; the first wave of spending has focused on infrastructure, specifically NVIDIA NASDAQ: NVDA semiconductors and data centers. Now, it's time for the second wave to form. That wave will be centered on peripheral technologies, technologies that harness the power of AI to provide utility for clients. 

Among the winners will be the small-cap names like Verint Systems NASDAQ: VRNT, Innodata NASDAQ: INOD, and SoundHound AI NASDAQ: SOUN, which are producing results today. Among the many opportunities for investors is the economic shift implied by FOMC interest rate cuts. Lower rates are expected to spur economic activity, driving a broader rally than we’ve seen for years, and will aid the small-cap and mid-cap players that rely on debt financing far more than others. All three are set to report Q2 earnings within the month, providing a catalyst for their markets. 

Verint Systems: Automating Customer Engagement 

Verint Systems offers an end-to-end solution for automating and improving businesses' customer experience. The CX universe is well-suited to automation, which streamlines consumers' experiences and aids businesses' margins. The company's solutions include back-end, call center, scheduling, and forecasting, all aided by AI. 

Highlights from the Q1 report include top- and bottom-line outperformance driven by a 20% increase in SaaS services and robust guidance driven by demand for AI. The guidance expects YoY growth above the analysts' consensus forecast and may be cautious due to the building momentum in subscription sales. As important, the analysts have set the bar low for Q2, expecting a sequential sales decline contrary to guidance and bookings data. Bookings were up 25% YoY, with 80% requesting AI bots. 

Innodata's Expertise in AI Model Training and Data Solutions

Innodata is a data engineering firm headquartered in the US. The company operates in three segments: Digital Data Solutions, Synodex, and Agility. Digital Data Solutions manages and preps data for AI modeling. This segment also provides training, deployment, and AI integration services that are seeing increased demand. Synodex and Agility are two industry platforms. Synodex converts medical records into usable digital data for healthcare operators, while Agility serves the communications and P/R industries. It aggregates, sorts, manages, and delivers news from multi-media sources to various industries, including financial, insurance, and retail. 

Highlights from the Q1 results include a 41% YoY top-line growth, profits versus losses compared to last year, and improved guidance. The company now expects at least 40% YoY annual growth and may be cautious in its estimate. Recent news releases detail nearly $45 million in new contracts, which already account for the expected growth; additional business wins are expected. Two analysts cover this stock, rating it a Buy with a potential 60% upside at consensus. 

SoundHound AI Makes Your Computers Talk

SoundHound AI is integral to the AI services industry, creating software applications that provide human-like speech. Industries embracing this technology include automotive, entertainment, and customer services. Highlights from Q1 include a 73% surge in revenue to nearly $12 million and 1000 basis points of outperformance. The company CEO says AI-voice assistance is becoming a must-have tool, as seen in the 80% jump in bookings. 

Among the opportunities for SoundHound investors are a partnership with NVIDIA to deliver in-vehicle AI assistance without connectivity and another with Stellantis. Stellantis is deploying SoundHound AI generative voice-assisted chat across its network of brands, including Fiat, Dodge, Jeep, Chrysler, and Alpha Romeo. Six analysts rate SoundHound AI a Moderate Buy with a potential 50% upside at the consensus.