We recently compiled a list of the 10 Best NASDAQ Penny Stocks To Invest In. In this article, we are going to take a look at where Evolv Technologies Holdings, Inc. (NASDAQ:EVLV) stands against the other NASDAQ penny stocks.

Penny stocks are companies that are trading under $5 per share. They represent a unique and controversial segment of the financial market. Penny stocks are known for their low market capitalization, limited liquidity, and high volatility. While penny stocks can offer significant returns for investors, they are full of risks that often make them unsuitable for the average investor. Moreover, penny stocks are more prone to scams such as pump-and-dump schemes, chop stocks, and reverse mergers. We discussed these scams in detail in our article on the best books on penny stocks.

Despite the risks, penny stocks also come with huge advantages. One of the biggest advantages of penny stocks is their potential for massive gains even with a small increase in price. For example, a $1 stock rising to $2, provides a 100% return on investments, which makes them perfect for investors with high risk tolerance.

Assessing the Favorability of Current Market Conditions for Small-Caps

On July 15, Tom Lee, Fundstrat Global Advisors co-founder and head of research discussed the recent rotation of funds from large-cap stocks into small-cap stocks and expressed optimism about their potential rise, in a CNBC interview. The Russel 2000 small cap index is up 11.55% higher between July 9 and 16. He believes the current rally, which began last week, could be more substantial than the October to December 2023 rally that saw a 27% gain in the small-cap index over eight weeks. Lee attributed this rally to larger institutional short positions and even more oversold conditions, in addition to lower valuations, with median P/E ratios now at 10 times 2025 earnings. He predicts a 40% rise over ten weeks, further fueled by the June CPI data indicating softer inflation, which could lead the Fed to cut rates by September.

Regarding the S&P 500, Lee expects July to be positive and expects the broader market index to possibly reach 5700-5800 (0.6% to 2.3% increase from July 16 levels). However, he expects a more pronounced rotation into small caps in August, potentially leading to flat or slightly declining performance for the broader market. He noted that during the previous small-cap rally, large caps underperformed, and he expects a similar dynamic this time, given the significant current short positions against small caps. If Lee’s prediction holds, penny stocks, which account for a significant number of penny stocks, could prove to be attractive investments.

However, if we look at the broader market apart from the penny stocks, AI has been driving the NASDAQ but market participants have raised concerns about a potential AI bubble. This sentiment is shared by Jefferies analysts, Jim Covello from Goldman Sachs, and David Cahn from Sequoia Capital, among others. These analysts are showing skepticism about AI’s economic impact and suggesting that AI may not deliver substantial returns to justify its high costs. Jefferies highlighted difficulties in AI monetization and noted that global investments in AI servers are expected to range from $400 billion to $500 billion between 2023 and 2025, with high power costs adding to the challenge. The firm emphasized that considerable AI revenue is required for a satisfactory return on investment. While current AI stocks are supported by solid cash flows, unlike during the dot-com bubble, the market may see a correction if monetization goals are not met by 2025 or 2026.

On a positive note, other analysts such as Joseph Briggs of Goldman Sachs are optimistic about AI’s potential. They project that generative AI could automate a substantial portion of tasks, leading to significant productivity and GDP growth over the next decade. Despite high current expenditures, some analysts believe the investment in AI is comparable to past technology cycles. They argue that companies linking AI investments to revenue growth are being rewarded, indicating that the investments may pay off in the long run. While there are short-term challenges like chip shortages, the broader adoption of AI could positively impact various sectors, including utilities, in the future. Finally, the potential for AI to transform industries and drive efficiency remains high, with the possibility of future advancements that could justify current spending.

Our Methodology

For this article, we identified around 90 penny stocks listed on NASDAQ with Buy or better analyst ratings and market capitalizations of over $300 million. We narrowed down our list to 10 stocks based on multiple but different metrics such as future growth prospects, valuations, and analysts’ ratings and comments. We listed the stocks in ascending order of their hedge fund sentiment which was taken from Insider Monkey’s database of over 900 elite hedge funds.

Why do we care about what hedge funds do? 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).

Evolv Technologies Holdings, Inc. (NASDAQ:EVLV)

Share Price as of July 12: $2.86

Number of Hedge Fund Holders: 21

Our 5th best NASDAQ penny stock to invest in, Evolv Technologies Holdings, Inc. (NASDAQ:EVLV) offers artificial intelligence (AI)-based weapons detection for security screening. The company’s product offerings include a touchless security screening system called Evolv Express and Evolv Insights that offers self-serve access to data and analytics for clients to be able to carry out security screening operations.

All over the world, concerns over public safety have reached an all-time high with the increasing frequency of tragic events such as mass shootings and other acts of violence. Evolv Technologies Holdings, Inc. (NASDAQ:EVLV) is one of the companies of choice because of its approach to security screening. The company uses touchless screening technology powered by AI and advanced sensors to offer solutions designed to assess threat levels while minimizing false alarms to venues across various sectors like schools, retail outlets, workplaces, hospitals, and more.

Evolv Technologies (NASDAQ:EVLV) has been continuously seeing new customer acquisitions, expanded deployments among existing customers, and strengthened partnerships with channel distributors, which led to a 17% year-over-year increase in revenue in Q1. The growth points to the company’s focus on subscription-based models, and its moving away from traditional one-time product sales.

Evolv has seen significant adoption across major sporting events, as it has deployed around 75 Evolv Express systems since the beginning of 2024, including at high-profile events like the world’s largest sporting event in France (which one, name it) and in support of security operations for the Detroit Police Department.

Evolv Technologies Holdings, Inc.’s (NASDAQ:EVLV) management has mentioned that its Evolv Visual Gun Detect has sparked customer interest as it addresses a critical need across multiple vertical markets. The new offering enhances security measures by identifying individuals carrying concealed or openly displayed firearms within or near venues.

The strong market interest in Evolv Visual Gun Detect points to its potential to become an important solution in the ever-changing landscape of threat detection technologies. Evolv Technologies (NASDAQ:EVLV) expects its subscription-based products to further customer relationships and extend the reach of the Evolv ecosystem.

Evolv Technologies Holdings, Inc. (NASDAQ:EVLV) was part of 21 hedge funds’ portfolios in the first quarter with a total stake value of $91.515 million. The stock has a consensus Buy rating among 6 analysts, and its average price target of $5.88 represents an upside of 105.5% from current levels, as of July 12.

Even though Evolv Technologies (NASDAQ:EVLV) is unprofitable right now and might even be risky to invest in, its offerings, which will be both digital and physical, will be designed to meet the specific security requirements of diverse customer segments. The company is part of an industry that is expected to reach $2.3 billion by 2033 from $707 million in 2023, growing at a CAGR of 12.4%, as per a report by Future Market Insights.

Evolv Technologies (NASDAQ:EVLV) is one of the best penny stocks to invest in, given that its addressable market is going to expand and it has a lot of room to run, as evidenced by its balance sheet. As of Q1, the company had cash, cash equivalents, marketable securities, restricted cash of $81.3 million, and no debt. Moreover, the company has a strong recurring revenue model which grew by 96% annually by the end of Q1 to $82.5 million.

Overall EVLV ranks 5th on our list of the best NASDAQ penny stocks to buy. You can visit 10 Best NASDAQ Penny Stocks To Invest In to see the other NASDAQ penny stocks that are on hedge funds’ radar. While we acknowledge the potential of EVLV 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 EVLV but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

Read Next: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.

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