The AI-led stock rally that rewarded mega-cap technology stocks has finally started to trickle down to other industry players that were seemingly not related to the AI and tech industry. Consider this: The information technology sector gained about 11% over the past three months, while the S&P 500 utilities sector jumped 18% in the same period. Why? Because investors are scrambling to pile into utilities since they are set to benefit from the dramatic rise in power demand thanks to the data center boom caused by the mass AI adaption. As Nvidia’s CEO Jensen Huang put it in the company’s latest earnings call, the “next industrial revolution” has started with the dawn of AI and across the globe data centers are being “converted into AI factories.”

AI-Led Stock Market Boom: “No Longer Dependent on Just One Stock”

A Wall Street Journal report recently quoted Nadia Lovell, senior U.S. equity strategist, global wealth management at UBS, who said that the market is “no longer dependent on just one stock” when it comes to AI as she sees a “broadening out of the AI trade.”

Insider Monkey’s research backs this notion. Our research recently unlocked several AI stocks that are better than mega-cap AI stocks with soaring valuations. If you are looking for an AI stock that is as promising as Microsoft but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

For this article we first conducted thorough research to see which lesser-known companies are offering products and services set to see demand in the AI revolution. These companies included firms making hardware, software, infrastructure and backend products necessary for mass AI deployment and consumption. From these companies we chose 7 stocks with the highest number of hedge fund investors. 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).

7. AXT Inc. (NASDAQ:AXTI)

Number of Hedge Fund Investors: 19

California-based AXT makes semiconductor substrates, the base material used in wireless device fabrication. This makes AXT Inc. (NASDAQ:AXTI) a strong AI play since there is and will be a continued rise in semiconductor demand amid the AI boom. The stock is already up about 40% so far this year.

Earlier in May AXT Inc. (NASDAQ:AXTI) posted Q1 results. Adjusted EPS in the quarter came in at -$0.03, surpassing estimates by $0.05. Revenue in the quarter jumped 17% year over year to $22.7 million, beating estimates by $0.95 million.

6. Recursion Pharmaceuticals Inc (NASDAQ:RXRX)

Number of Hedge Fund Investors: 21

AI-based drug discovery is one of the biggest trends major companies and venture capitalists are betting on. Some estimates suggest AI-led drug discovery could soon be a $100 billion business. Recursion Pharmaceuticals Inc (NASDAQ:RXRX) is an AI drug discovery play, as Recursion Pharmaceuticals Inc (NASDAQ:RXRX) uses high-dimensional data and predictive results for drug discovery and development. Last year, Nvidia decided to invest $50 million in Recursion Pharmaceuticals Inc (NASDAQ:RXRX) in a partnership that would see the combination of Recursion Pharmaceuticals Inc’s (NASDAQ:RXRX) chemical and biological datasets with NVIDIA DGX™ Cloud and other AI tech stack for drug discovery.

As of the end of the first quarter of 2024, 21 hedge funds tracked by Insider Monkey reported owning stakes in Recursion Pharmaceuticals Inc (NASDAQ:RXRX). The biggest stakeholder of Recursion Pharmaceuticals Inc (NASDAQ:RXRX) during this period was Catherine D. Wood’s ARK Investment Management which had a $245 million stake in Recursion Pharmaceuticals Inc (NASDAQ:RXRX).

5. Littelfuse Inc. (NASDAQ:LFUS)

Number of Hedge Fund Investors: 36

Littelfuse Inc. (NASDAQ:LFUS) makes circuit-protection devices, switches and automotive sensors. Earlier this month, Baird upgraded the stock to Outperform and set a $300 price target, up from $270. Baird is bullish on the stock amid strengths in transportation and electronics segments.

Littelfuse Inc. (NASDAQ:LFUS) is poised to benefit from autonomous driving, data center and semiconductor boom thanks to the AI wave. During its Q1 earnings call, the company talked about semiconductors, AI and growing demand:

 “We are seeing new product launches gain traction as customer design activities accelerate. In the quarter, we secured a meaningful medical win with our custom power semiconductors for a customer in China. We also won business for multiple appliance customers in China for both fuses and switches. We delivered a semiconductor win for a space-related communications application. We also won business for data server power supplies for a customer in Taiwan. Finally, we delivered a meaningful telecom win in India that will utilize our core circuit protection offering. Beyond near-term trends, structural electronics end market drivers such as artificial intelligence, automation and technology reliability remain key opportunities as our customers continue to depend on us for innovative engineering expertise.”

Read the full earnings call transcript here

Like other under-the-radar AI stocks, Littelfuse Inc. (NASDAQ:LFUS) also got the attention of hedge funds in the first quarter, as 36 funds reported owning stakes in Littelfuse Inc. (NASDAQ:LFUS) as of the end of March, significantly more than 22 funds in the previous quarter.