We recently compiled a list of the 12 Best AI Penny Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Red Cat Holdings, Inc. (NASDAQ:RCAT) stands against the AI penny stocks.
AI penny stocks are typically small-cap companies that focus on artificial intelligence technologies, such as machine learning, automation, and data analytics. These stocks, typically trading under $5.00 per share, belong to emerging tech firms that develop AI-powered software, robotics, or cloud-based AI solutions. Investors are drawn to AI penny stocks due to their high growth potential, as advancements in AI continue to disrupt and/or complement industries like healthcare, finance and cybersecurity. However, these stocks also come with significant risks, including volatility, low liquidity, lack of financial stability, and the potential for the share price to go to zero. These risks are even more pronounced in the context of the Chinese startup called “DeepSeek” potentially disrupting the AI inferencing market, meaning that some of the AI software and applications developed by penny stocks could eventually become commoditized and thus impossible to profitably monetize.
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Hedge funds have been quite active in the AI space, as the most widely owned companies by hedge funds are large cap technology stocks with strong exposure to the AI megatrend. However, as hedge funds are striving to maximize their potential alpha, they are also actively seeking investments in the less followed small cap space and especially penny stocks. Hedge funds are also very keen to react to major market shifts and thus provide insights into potential major risks. Here is what Horizon Kinetics commented about the DeepSeek development during their Q4 2024 letter published in January 2024:
“How terrible are the implications for spending growth of the AI hyperscaler companies now that AI models can be developed for $6 million instead of a gazillion dollars? If that order-of-magnitude performance/cost breakthrough is true, that might be an even greater boon to AI spending. The use cases for AI are so deep, wide and all-pervading in the true economic productivity sense, that the pace of adoption and the volume load upon data storage, retrieval and processing might even accelerate. The build-it-and-they-will-come phenomenon.”
It is certain that some hedge funds view the recent developments as favorable and potentially fueling more research and progress from AI developers, many of which are penny stocks. If training and inferencing of leading AI models become exponentially cheaper, this per se means exponentially lower barriers to entry for startups and much lower budget requirements for the budget-tight small cap stocks. This shift could lead to a surge in innovation, allowing smaller AI firms to compete with established players by developing cutting-edge models at a fraction of the previous cost. Additionally, reduced computational expenses may attract more venture capital and institutional interest, further accelerating the growth of AI-focused penny stocks. The key takeaway for investors is that, while the 2023-2024 market gains were fueled by large caps, it may be finally that moment when mid and small caps, including penny stocks, follow through, by leveraging the growing GPU infrastructure base at big tech hyperscalers as well as the Chinese technology contribution. If that is the case, then observing where smart money (hedge funds) is flowing may offer unique insights into the best AI penny stocks to buy. Given this, we will take a look at some of the best penny stocks according to hedge funds.
A drone hovering over a vibrant field of crops, demonstrating the company’s agricultural products.
Our Methodology
To compile our list of AI penny stocks, we used Finviz to filter the technology companies with a share price of less than $5.00, as of March 14. We then individually identified companies that have significant revenue exposure to AI products or services. Finally, we compare the list with our proprietary database of hedge fund ownership as of Q4 2024 and include in the article the top 12 stocks with the highest number of hedge funds that own the stock.
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).
Red Cat Holdings, Inc. (NASDAQ:RCAT)
Number of Hedge Fund Holders: 9
Red Cat Holdings, Inc. (NASDAQ:RCAT) is a drone technology company that integrates robotic hardware and software for military, government, and commercial applications. Through its subsidiaries, RCAT has developed a Family of Systems, including the Black Widow™, a small unmanned ISR system that was awarded the US Army’s Short Range Reconnaissance Program (SRR) of Record contract. Other products in their lineup are the TRICHON™, a fixed-wing VTOL drone designed for extended endurance and range, and the FANG™, the industry’s first line of NDAA-compliant FPV drones optimized for military operations with precision strike capabilities. These offerings provide critical situational awareness and actionable intelligence to on-the-ground warfighters, battle commanders, firefighters, and public safety officials.
Red Cat Holdings, Inc. (NASDAQ:RCAT) has secured a significant sole source contract for the Black Widow drone program with the US Army’s SRR program, which involves 12,000 drones. The company has formed a strategic partnership with Palantir to integrate visual navigation and artificial intelligence capabilities into the Black Widow drone, making it one of the most capable military drones that can fit in a rucksack. RCAT has updated its revenue guidance from $50 million to $55 million, with expanded goalposts of $80 million to $120 million, incorporating expected SRR-related revenue. The Black Widow drone addresses two critical battlefield challenges: electronic warfare and GPS denial, with successful testing completed in EW World.
Red Cat Holdings, Inc. (NASDAQ:RCAT) is preparing for Low Rate Initial Production (LRIP) in the first half of 2025 and full rate production in the second half of 2025. Management expects the company to achieve up to 50% gross margins under mass production, with additional margin improvement potential from the high-margin Palantir software integration. The company has also acquired FlightWave, adding the Edge 130 drone to their product mix, which has the best flight time among Blue UAS list products. Recent quotes for Black Widow customers, excluding SRR, have reached approximately $14.7 million, primarily from US DoD customers. Given the significant technological advancements and at least nine hedge fund holders, RCAT is one of the best AI penny stocks to buy according to hedge funds.
Overall RCAT ranks 8th on our list of the best AI penny stocks to buy according to hedge funds. While we acknowledge the potential of RCAT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RCAT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.