In this article, we’re going to talk about the 10 Best Small-Cap AI Stocks to Buy According to Short Sellers.

The Prevalence of AI

Artificial intelligence is quite widespread in today’s economy. We have relied on search engines, virtual assistants, e-commerce websites, and navigation apps for a long time. But with the advancements in large language models (LLMs), AI has made its way into everyone’s life in a way never seen before.

Large language models are a type of AI that uses deep learning techniques and massive datasets to understand, generate, and predict human language. They’re trained for all of this through statistical relationships from vast amounts of text. The reason why they became so popular in such a short time is because they can be fine-tuned for specific tasks or understand language better through specific prompts. LLMs like Gemini and ChatGPT-4 are Multimodal AI platforms that allow processing and generating multiple types of data simultaneously, such as text, audio, and visual inputs.

However, with such strides come crucial concerns, including data privacy, cybersecurity, algorithmic bias, and other ethical considerations. These challenges show the importance of responsible AI development, prioritizing privacy, and security. While the general public agrees that responsible AI development and deployment requires regulation and big tech companies seem to oppose it. We covered this in our 10 Best Artificial Intelligence Stocks Under $50 According to Hedge Funds, here’s an excerpt from that:

“A significant development in the AI industry is California’s recent proposal of the AI regulation bill, SB 1047, introduced by State Senator Scott Wiener, which aims to establish strict safety protocols for advanced AI systems (those costing over $100 million to develop). The bill requires AI systems costing over $100 million to develop to have a ‘kill switch’ to deactivate models that malfunction, hire third-party auditors to evaluate safety practices, and empower the California Attorney General to sue developers for non-compliance.

Major tech companies have opposed it, citing concerns that it could stifle innovation and drive talent away from California. Some lawmakers, including prominent Democrats like Nancy Pelosi, agree on the potential negative impacts on AI development and open-source models. Despite these objections, the bill has passed the state Senate and is awaiting a vote in the Assembly. If passed, the bill will be sent to Governor Gavin Newsom for approval or veto by the end of September.”

Despite opposition, Google CEO, Sundar Pichai, in a conversation about the future of AI, highlighted the importance of addressing ethical concerns in AI as GenAI becomes more prevalent. Pichai says that AI systems need to be able to distinguish between objective information and synthetic content, which is crucial for maintaining trust in search results.

Pichai also talked about other developments in this discussion. His company is now rolling out AI-powered search results, called ‘AI Overviews’, providing users with direct answers at the top of search results. While this will streamline the search process by presenting summarized information without having to go through multiple links, such a feature raises concerns among content creators about traffic and visibility.

The company’s AI is being designed to integrate seamlessly across other products, such as Gmail and YouTube, to allow for functionalities like summarizing emails and responding to complex queries. While Pichai acknowledged that the company may not always be the first to market, it has the infrastructure and expertise to dominate in the long run.

We also see other tech giants making strides in AI development. Mark Zuckerberg mentioned the shift towards open-source AI, in contrast to closed-source competitors. He credits open source as foundational for building Facebook, allowing him to access code cost-efficiently as a student.

Zuckerberg wants his company’s AI to become the most used AI assistant globally by the end of 2024 and has made significant progress as of August. With other companies looking to make similar impacts, AI stocks have become favored investments by experts and analysts worldwide.

Given the potential for significant returns, it’s important to identify promising AI stocks. One way is to consider the opinions of short sellers. This article lists the 10 best small-cap AI stocks to buy according to short sellers. Given the increasing demand for AI technologies and the competitive landscape, these stocks offer the potential for significant growth.

Our Methodology

To compile our list, we sifted through ETFs and internet rankings to find the most popular small-cap AI stocks. We then selected 15 stocks with the smallest short interest that were the most popular among hedge funds. The 10 best small-cap AI stocks to buy according to short sellers are ranked in descending order of their short interest.

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 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

10 Best Small Cap AI Stocks to Buy According to Short Sellers

10. Lemonade (NYSE:LMND)

Market Cap as of August 26: $1.33 billion

Number of Hedge Fund Holders: 17

Short % of Shares Outstanding as of July 31: 23.70%

Lemonade (NYSE:LMND) is a digital insurance company that’s revolutionizing the industry in several countries through its innovative use of AI. By automating many of the traditional insurance processes through AI, the company takes a customer-centric focus to provide a seamless, affordable, and transparent experience for its customers and has more than 2 million customers.

The company is embracing GenAI to streamline its operations and enhance profitability by investing heavily in AI-powered automation, aiming to improve 100+ of its business processes. Early cost-saving prototypes are expected to materialize over the next year and a half.

In Q2 2024, the company recorded a $122 million revenue, exhibiting a 16.63% year-over-year growth. The loss per share was $0.8, beating estimates by $0.05.

Despite the industry-wide increase in catastrophic event losses, the company’s loss ratio improved to 79%, driven by a focus on products with lower exposure to catastrophic events, such as pet and renters insurance.

It is diversifying into Europe – the partnership with BNP Paribas Cardif in France underscores Lemonade’s (NYSE:LMND) commitment to providing innovative insurance solutions in global markets. The company plans to capitalize on the growing demand for digital, personalized insurance products through AI and is expected to position itself as a leader in the sector. This makes it one of the best small-cap AI stocks to buy, according to short sellers.

As of June 30, 17 hedge funds are long LMND. D E Shaw is the biggest shareholder with a stake of $16,328,137.

9. SoundHound AI (NASDAQ:SOUN)

Market Cap as of August 26: $1.80 billion

Number of Hedge Fund Holders: 15

Short % of Shares Outstanding as of July 31: 21.81%

SoundHound AI (NASDAQ:SOUN) is a competitive company in the voice AI and speech recognition niche. Major partnerships of the company include automakers like Hyundai and Kia, but while the automotive industry is a significant part of the company’s business, its technology is also used in various consumer electronics, smart home devices, and even enterprise applications.

In Q2 2024, it recorded a revenue of $13.46 million with a 53.83% year-over-year increase. The loss per share was $0.11, higher by $0.02 than street estimates.

The company recently announced acquiring Amelia, a conversational AI leader, to create a platform beyond human capabilities. It also acquired Allset to build a voice commerce ecosystem, expanding its product range and increasing customer reach.

Wedbush Analyst Dan Ives believes that the acquisition of Amelia will enhance the company’s capabilities in voice and conversational AI, opening up new market opportunities. The company’s partnerships with Stellantis and potentially with McDonald’s demonstrate its ability to integrate its technology into many industries.

The company is growing through innovative voice AI technology at a rather rapid pace, earning a strong position in the AI market. SoundHound AI’s (NASDAQ:SOUN) debt-free status and substantial cash reserves provide a solid foundation for its future growth, making it one of the best small-cap AI stocks to buy according to short sellers.

8. Fastly, Inc. (NYSE:FSLY)

Market Cap as of August 26: $884.27 million

Number of Hedge Fund Holders: 23

Short % of Shares Outstanding as of July 31: 11.97%

Fastly, Inc. (NYSE:FSLY) is a cloud computing services company that provides a global content delivery network (CDN) platform. This platform helps businesses deliver their websites, applications, and videos at high speeds and with low latency to global users. So, it acts as a bridge between a website’s server and its visitors.

The company earned a revenue of $132.37 million in Q2 2024, beating expectations by $853,800 and growing 7.77% year-over-year. The loss per share was $0.07. The top 10 customers comprised 34% of the total revenues.

The enterprise customer count increased by 4% sequentially, reaching 601. This exhibited a 50% year-over-year increase. Its channel partners, the intermediaries between the company and its end-users, continue to drive growth, with deal registrations increasing by 33%, and the channel’s revenue contribution more than doubling year-to-date.

The company recently released a Bot Origin Protection (BOP) mitigation solution which was well-received by customers. This strengthened its security portfolio and opened up opportunities for cross-selling.

With the appointment of Scott Lovett as the new CRO, the company is prioritizing customer acquisition, portfolio expansion, and innovative edge technologies. This is essential to achieve the aim of $1 billion in revenue in the next few years. As the company continues evolving through innovation in tech for future web application development, Fastly, Inc. (NYSE:FSLY) is one of the top small-cap AI stocks to buy according to short sellers.

As of July 30, it is held by 23 hedge funds. Opti Capital Management is the biggest shareholder with a position of $42,847,350.