Mid-cap software and services have staged a sharp—but uneven—recovery since the 2022 bear market. Using mid-cap tech proxies, the S&P MidCap 400 Information Technology sector shows roughly ~22% annualized gains over the last three years (price return), reflecting a decisive rerating as rates stabilized and earnings re-accelerated.
Equal-weight software exposure tells a similar story but at a lower gear: the SPDR S&P Software & Services ETF (XSW), which tilts small/mid and excludes hardware, delivered ~19.8% three-year annualized total returns (to 6/30/2025). Cloud-pure-plays lagged: WisdomTree Cloud Computing (WCLD), a mid/small-cap cloud basket, compounded at ~9% over the same window. The spread captures the cycle’s core reality: profitable, diversified software outperformed narrow, consumption-sensitive cloud names.
Two structural forces explain most of the dispersion. First, rate sensitivity and the cost of capital: as “higher-for-longer” settled in, the market shifted from revenue-only growth to Rule-of-40 discipline (growth + margin). Names with durable gross margins, improving non-GAAP operating income, and visible free cash flow kept their multiples; cash-burn models were derated. S&P’s sector dashboard shows this with elevated intra-sector dispersion among small and mid-cap IT, an environment that rewarded selection over blanket beta.
Second, AI’s applied layer favored vendors embedded in workflows (security, DevOps, data plumbing, vertical SaaS) over pure infrastructure bets. Budget owners prioritized AI features that reduce unit costs (agentic automation, coding assist, anomaly detection) or lift net retention, not speculative “AI for AI’s sake,” reinforcing a profitability premium. Industry outlooks for 2025 point to rising IT spend tied to AI integration rather than net-new blank checks, keeping scrutiny on payback periods, as noted by Deloitte.
Definition matters. “Mid-cap” is typically $2–$10 billion in market value; this band captures firms past product-market-fit but still early in operating leverage. They are small enough to grow above GDP via share gains, yet large enough to fund R&D without constant dilution, hence their historic tendency to punch above their weight in upcycles.
Within software and services (excluding hardware), the last three years rewarded three playbooks: (1) platform consolidation: suites displacing point tools; (2) contracting to value: seat-to-usage shifts that align price with ROI; and (3) AI co-pilots bundled into existing SKUs, raising ARPU with minimal CAC.
The midcap tech industry can expect continued bifurcation. Pipelines suggest a pickup in outcome-based deals and vendor consolidation, with mid-caps increasingly competitive on AI-enabled services and tooling, sometimes outmaneuvering slower incumbents. (Large-ticket AI/automation wins flowing to mid-tier providers have already surfaced.) At the same time, M&A should re-open: private equity dry powder plus strategic buyers looking for accretive ARR and AI capabilities create an exit bid for sub-scale assets, another historical tailwind for quality mid-caps during late-cycle slowdowns.
Bottom line: mid-cap software/services delivered mid-teens to low-20s annualized over three years, but with wide outcome dispersion by business model. With capital still priced, the market will likely keep rewarding free-cash-flow compounding, disciplined AI monetization, and vendors that demonstrably lower customers’ cost to build, run, or secure software. In this segment, unit economics beat narratives, and selection matters more than ever.
Methodology
For our list of the best performing mid-cap tech stocks in the last 3 years, we picked stocks from the information technology industry in the mid-cap range ($2 billion – $10 billion) that had the highest 3-year return CAGR, and ranked them in ascending order. The 3-year return CAGR was sourced from Stock Analysis, and is calculated using the compound annual growth rate of the total return of each stock. Additionally, we have mentioned the hedge fund sentiment for each stock, as of Q2 2025.
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).
10. Formula Systems (1985) Ltd. (NASDAQ:FORTY)
Market Cap: $2.20 Billion
3Y CAGR: 22.18%
Number of Hedge Fund Holders: N/A
Formula Systems (1985) Ltd. (NASDAQ:FORTY) is one of the best-performing midcap tech stocks in the last 3 years, riding steady earnings growth and strategic portfolio realignment. On August 13, 2025, the Israel-based IT and software holding company announced that Advent International would acquire its insurance-software subsidiary Sapiens International Corporation N.V. in an all-cash transaction, a landmark deal underscoring private equity’s appetite for mature, cash-flowing AI-enabled software assets.
The move shows Formula’s ongoing effort to streamline its holdings and unlock value across its diverse technology portfolio. In the second quarter of 2025, Formula reported record revenues of $743.4 million, up 11.3% year-over-year, marking its strongest quarter on record. The results were powered by robust demand in software services and enterprise automation, even as global IT spending remained uneven.
Headquartered in Or Yehuda, Israel, Formula Systems (1985) Ltd. (NASDAQ:FORTY) operates as a tech investment group with stakes in IT services, software, and digital transformation platforms across multiple geographies, an archetype of the disciplined, high-cash-flow mid-cap now favored by the market.
9. Parsons Corporation (NYSE:PSN)
Market Cap: $9.37 Billion
3Y CAGR: 28.33%
Number of Hedge Fund Holders: 40
Parsons Corporation (NYSE:PSN) is one of the best-performing midcap tech stocks in the last 3 years. On October 2, 2025, Parsons (NYSE:PSN) announced that it had acquired Applied Sciences Consulting, Inc., a Tampa, Florida–based engineering firm specializing in water and stormwater management solutions. The all-cash transaction will integrate Applied Sciences into Parsons’ North America Infrastructure business unit, expanding its capabilities in water infrastructure, hydrology, and flood-control systems.
Parsons stated that the acquisition enhances its resilience and water-infrastructure delivery expertise, particularly in the southeastern U.S., a region expected to benefit from substantial federal and state investment in climate-resilient projects. The company emphasized that the deal aligns with its disciplined M&A strategy, targeting transactions that are accretive and meet revenue growth and adjusted EBITDA margin thresholds above 10%.
Parsons Corporation (NYSE:PSN) is based in Chantilly, Virginia. The company provides engineering, cyber, defense, and critical-infrastructure modernization services to government and private clients worldwide. The Applied Sciences acquisition underscores its focus on combining traditional engineering with advanced modeling and data-driven infrastructure solutions.
8. Varonis Systems, Inc. (NASDAQ:VRNS)
Market Cap: $6.72 Billion
3Y CAGR: 28.95%
Number of Hedge Fund Holders: 37
Varonis Systems, Inc. (NASDAQ:VRNS) is one of the best-performing mid-cap tech stocks in the past three years, buoyed by steady SaaS adoption and targeted AI integrations that have expanded its role in enterprise data security. On September 29, 2025, UBS reiterated its Buy rating on Varonis and raised its price target from $65 to $70, citing positive customer and partner checks that suggest sustained demand for the company’s cloud-native platform and strong execution in its transition to a recurring-revenue model.
The upgrade came shortly after a series of strategic moves in 2025, including Varonis’s September 2 acquisition of SlashNext, an AI-driven email-security firm, and its June integration with OpenAI’s ChatGPT Enterprise Compliance API, enabling real-time data-classification and monitoring in generative-AI environments. Together, these initiatives extend Varonis’s capabilities beyond file-system protection into email, collaboration, and AI-workload security—segments increasingly prioritized by enterprise buyers.
Through acquisitions and partnerships, Varonis Systems, Inc. (NASDAQ:VRNS) has steadily evolved from a data-governance specialist into a broad data-security platform that protects sensitive information across on-premise, cloud, and SaaS environments.
7. Aurora Innovation, Inc. (NASDAQ:AUR)
Market Cap: $9.96 Billion
3Y CAGR: 30.3%
Number of Hedge Fund Holders: 41
Aurora Innovation, Inc. (NASDAQ:AUR) is one of the best-performing midcap tech stocks in the last 3 years. On October 6, Ravi Shanker from Morgan Stanley reiterated a Buy rating on the shares with a price target of $12.
Earlier in September, on September 15 to be precise, Cantor Fitzgerald’s analyst Andres Sheppard also reiterated a Buy rating on the stock with the same price target. On September 2, Canaccord Genuity analyst George Gianarikas held a Buy rating for Aurora too, but was more optimistic with a price target of $15, which implies an upside of 191% from current levels.
Aurora Innovation, Inc. (NASDAQ:AUR), based in Pittsburgh, Pennsylvania, develops autonomous driving systems for long-haul trucking and freight logistics. The company designs, tests, and deploys its proprietary Aurora Driver platform, which integrates hardware, software, and machine learning to enable fully driverless operations.
6. Zeta Global Holdings Corp (NYSE:ZETA)
Market Cap: $4.75 Billion
3Y CAGR: 39.51%
Number of Hedge Fund Holders: 34
Zeta Global Holdings Corp. (NYSE:ZETA) is one of the best-performing mid-cap tech stocks in the last three years, powered by steady revenue growth, expanding data assets, and rising adoption of its AI-driven marketing cloud. On October 1, 2025, Canaccord Genuity reiterated its Buy rating on Zeta and raised its price target from $28 to $30, following the company’s announcement of its planned acquisition of Marigold, a fellow marketing software provider.
Canaccord said the deal is opportunistic rather than defensive, highlighting that Zeta’s core demand trends remain strong and management has reaffirmed both Q3 and full-year guidance. The firm expects the Marigold acquisition, which is slated to close by late Q4 2025, to contribute about $190 million in incremental annual revenue and $30–35 million in adjusted EBITDA once integrated. Analysts also emphasized Zeta’s competitive advantage in first-party data, an embedded customer data platform, and integrated omnichannel marketing tools, which continue to differentiate it in a crowded martech landscape.
Zeta Global Holdings Corp. (NYSE:ZETA), headquartered in New York City, operates an AI-powered cloud platform that helps enterprises identify, engage, and retain customers across digital channels using proprietary data and predictive intelligence.
5. Kyndryl Holdings, Inc. (NYSE:KD)
Market Cap: $6.91 Billion
3Y CAGR: 49.97%
Number of Hedge Fund Holders: 36
Kyndryl Holdings, Inc. (NYSE:KD) is one of the best-performing mid-cap tech stocks in the last three years, reflecting its successful pivot from traditional IT services to next-generation infrastructure and AI-driven solutions. In early October 2025, the company unveiled a series of major launches centered on its Agentic AI strategy, positioning itself as a key player in enterprise-grade autonomous systems.
On October 7, Kyndryl introduced an Agentic AI-powered Aviation Industry Cloud Solution, built in collaboration with Google Cloud. The platform is designed to modernize airline and travel-sector operations by connecting carriers, travel agencies, and logistics providers through AI-coordinated workflows, aimed at cutting operational delays and improving passenger experiences. The announcement followed the October 1 rollout of expanded capabilities within Kyndryl’s Agentic AI Framework, which enables customers to orchestrate, secure, and scale AI agents across business environments, moving projects from proof-of-concept into full enterprise deployment.
Kyndryl Holdings, Inc. (NYSE:KD) is based in New York City. The company designs, builds, and manages critical technology systems for enterprises worldwide, increasingly layering AI-native automation atop its core IT modernization services.
4. Avepoint, Inc. (NASDAQ:AVPT)
Market Cap: $3.20 Billion
3Y CAGR: 58.03%
Number of Hedge Fund Holders: 33
AvePoint, Inc. (NASDAQ:AVPT) is one of the best-performing mid-cap tech stocks in the last three years, supported by strong SaaS growth and demand for cloud data protection. On October 8, 2025, DBS Bank upgraded AvePoint to a “Moderate Buy” rating, reflecting confidence in the company’s execution and sustained momentum across its subscription-based offerings.
The upgrade followed AvePoint’s solid second-quarter results, where the company reported $102.0 million in total revenue, up 31% year over year, and SaaS revenue growth of 44% to $77.3 million. Annual Recurring Revenue climbed 27% to $367.6 million, underscoring continued enterprise adoption of its Confidence Platform, which provides governance, backup, and risk management solutions across Microsoft 365 and other collaboration ecosystems.
AvePoint, Inc. (NASDAQ:AVPT) has also been expanding its platform capabilities, adding command centers for risk posture, optimization, and resilience, strengthening its position as a data protection and compliance provider in the modern workplace ecosystem. Headquartered in Jersey City, New Jersey, the company develops cloud-based software that helps organizations manage, secure, and optimize their collaboration data across hybrid environments.
3. BigBear.ai Holdings, Inc. (NYSE:BBAI)
Market Cap: $2.76 Billion
3Y CAGR: 70.90%
Number of Hedge Fund Holders: 20
BigBear.ai Holdings, Inc. (NYSE:BBAI) is one of the best-performing mid-cap tech stocks in the last three years, known for applying artificial intelligence and data analytics to defense and logistics systems. On September 23, 2025, the company announced a collaboration with SMX to enhance maritime domain awareness for the U.S. Navy’s 4th Fleet during UNITAS 2025, the world’s longest-running multinational maritime exercise.
The partnership will integrate BigBear.ai Holdings, Inc. (NYSE:BBAI)’s AI-driven decision-support platform with SMX’s operational systems to deliver real-time insights through sensor fusion, predictive analytics, and AI orchestration across naval assets and data streams. The system is designed to improve fleet situational awareness and mission readiness by consolidating multiple intelligence sources into a unified operating picture.
The collaboration shows BigBear.ai’s growing role in AI-enabled defense analytics, where it provides modeling, simulation, and data integration solutions for federal and allied military clients. Headquartered in McLean, Virginia, BigBear.ai specializes in delivering predictive analytics, machine learning, and decision-intelligence software for complex operational environments spanning defense, logistics, and critical infrastructure.
2. Applied Digital Corporation (NASDAQ:APLD)
Market Cap: $7.48 Billion
3Y CAGR: 156.32%
Number of Hedge Fund Holders: 28
Applied Digital Corporation (NASDAQ:APLD) is one of the best-performing mid-cap tech stocks in the last three years. On October 1, 2025, Roth Capital Partners maintained its Buy rating on Applied Digital and raised the price target to $43 from $24; the note also pointed to the potential for another HPC colocation agreement at the company’s 280-MW Harwood, North Dakota site by the end of 2025 or into early 2026.
The Harwood “Polaris Forge 2” AI campus is slated to begin initial operations in 2026 and reach full capacity in early 2027, according to the company’s August announcements. Meanwhile, Applied Digital signed two 15-year leases with CoreWeave for 250 MW at its Ellendale, North Dakota campus, a deal the company expects to generate roughly $7 billion over the term.
Based in Dallas, Texas, Applied Digital Corporation (NASDAQ:APLD) designs, builds, and operates next-generation digital infrastructure and HPC data centers supporting AI and high-performance computing workloads.
1. Innodata Inc. (NASDAQ:INOD)
Market Cap: $2.79 Billion
3Y CAGR: 197.7%
Number of Hedge Fund Holders: 16
Innodata Inc. (NASDAQ:INOD) is one of the best-performing mid-cap tech stocks in the last three years. On October 8, Craig-Hallum’s Chase Knickerbocker reiterated a Buy rating on the stock. While no updated price target was disclosed, his stance seems to show ongoing confidence in Innodata’s AI-first strategy and growth trajectory.
Just three weeks prior, on September 18, Wedbush analyst Daniel Ives boosted his price target from $58 to $75, maintaining an Outperform rating.
The company’s recognition by Wedbush Securities as one of the 30 firms defining the future of AI further boosted visibility, framing Innodata as a small but indispensable cog in the broader AI ecosystem. Innodata Inc. (NASDAQ:INOD), headquartered in Ridgefield Park, New Jersey, now sits squarely at the intersection of enterprise data engineering and applied AI, a spot investors increasingly view as high ground in the generative boom.
While we acknowledge the potential of INOD to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and have limited downside risk. If you are looking for an AI stock that is more promising than INOD and that has 100x upside potential, check out our report about this cheapest AI stock.
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