We recently compiled a list of the 12 Best Small Cap AI Stocks To Buy According to Hedge Funds. In this article, we are going to take a look at where Applied Digital Corp. (NASDAQ:APLD) stands against the other small cap AI stocks.

Former House Speaker Kevin McCarthy joined CNBC’s ‘Squawk Box’ on November 26 where he emphasized the need for a new group he has created, the Alpha Institute, which aims to advocate for pro-technology proposals. He highlighted the importance of focusing on long-term technological advancements, particularly in AI and quantum technology, which he believes are critical for America’s future competitiveness.

McCarthy noted that legislators often become bogged down in daily issues and fail to consider the long-term implications of their policies. He shared that three years ago, he initiated a course to educate members of Congress on AI and quantum technologies, recognizing their significance in various sectors such as energy and defense. He argued that without reforming processes like permitting and enhancing the energy grid, the US risks falling behind in the AI race.

Later on December 2, Jay Jacobs, head of US BlackRock Thematic and Active ETFs, joined ‘Halftime Report’ with CNBC’s Bob Pisani to discuss the key themes to watch in the ETF space heading into 2025. Jacobs emphasized that one major trend for 2025 will be the acceleration of AI infrastructure and its integration into consumer issues. He outlined 3 distinct stages of the AI theme: the build phase, where significant investments are made in infrastructure; the mass adoption phase across enterprises and individuals; and the transformation stage, which will see entirely new industries emerge from AI advancements.

Jacobs pointed out that during the build phase, ETFs focused on semiconductors, such as SOXX, and digital infrastructure like IDTT will benefit significantly. As companies adopt AI technologies, software names are expected to gain traction, leading to a transformation that could create new market opportunities over the next five to ten years.

Methodology

We sifted through media reports and ETFs to look for AI companies trading under $5 billion. That’s our definition of small-cap stocks. We then selected the 12 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q3 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.

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).

Applied Digital Corp. (NASDAQ:APLD)

Market Cap as of December 2: $2.23 billion

Number of Hedge Fund Holders: 26

Applied Digital Corp. (NASDAQ:APLD) is a leading provider of digital infrastructure solutions and cloud services, specializing in high-performance computing (HPC) and AI. It offers a range of services, including data center hosting, GPU computing, and HPC hosting, to support demanding applications like cryptocurrency mining and AI workloads.

The company is committed to expanding its high-performance cloud computing business, with a particular focus on powering AI applications. Its strategic investments in AI-driven solutions have fueled significant growth, as evidenced by the successful fulfillment of existing contracts and the pursuit of new opportunities. As of the end of the FQ1 2025, it had 6 AI clusters operational, demonstrating its commitment to providing scalable and powerful computing infrastructure.

Applied Digital Corp. (NASDAQ:APLD) is also amending the lease financing for its GPUs, which is expected to be finalized in the current quarter. This amendment will allow for the amortization of GPU value over its useful life, resulting in improved financial reporting and a more accurate reflection of the long-term economics of the business.

The recent investment round has significantly increased Applied Digital Corp.’s (NASDAQ:APLD) visibility in the market, attracting attention to its innovative cloud solutions. The company plans to deploy additional AI clusters starting in H2 of fiscal year 2025, solidifying its position as a leading provider of AI-powered cloud services.

Overall APLD ranks 3rd on our list of the best small cap AI stocks to buy according to hedge funds. As we acknowledge the potential of APLD as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than APLD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.

Disclosure: None. This article is originally published at Insider Monkey.