Numerous publicly traded companies with significant AI interests stand to gain from the industry's expansion. AI investments typically belong to one of two groups: established tech giants with AI ventures or partnerships, and smaller firms dedicated solely to AI development.
While investing in smaller AI companies might appear to be a direct way to engage with AI, it's not always the wisest choice. Developing large language models requires extensive data and substantial financial resources. Small companies might innovate new models, yet to scale commercially, they often need to collaborate with larger entities with more extensive infrastructure.
However, current hype around AI might lead to overvaluation, with companies being boosted by the buzz rather than proven AI application. In private markets, significant investments are flowing into AI startups lacking a clear product-market fit, raising questions about the future monetization of their growth potential.
Recently, CXApp (CXAI), a firm focused on enhancing workplace experiences, experienced a significant 151% increase in its stock price, triggered by the announcement of a strategic partnership with Alphabet's Google Cloud. The notable stock jump, from a close of $2.40 to a peak of $7.07, highlighted investors' search for the Next Big Thing in AI. The stock has been able to hold most of its gains as it has settled around the $5 psychological level.
The move led us to a search for some of the best small cap AI names as they will be on a lot of radars in the coming weeks and months. Here is a list of five small cap I names that investors will want to track.
CXApp (CXAI)
CXAI- Weekly Chart
Shares of CXApp (CXAI), a company specializing in workplace experience platforms, saw a remarkable 151% surge following the announcement of a major partnership with Alphabet's Google Cloud. This partnership, coupled with the potential for a short squeeze—given the company's 13 million float and 11% short interest—has drawn significant investor attention, particularly as the stock jumped from $2.40 to a high of $7.07, settling around $5.
The collaboration with Google Cloud, expected to enhance CXApp's enterprise customer applications through advanced services like security, analytics, and monitoring, is a key driver behind this momentum, suggesting investors keep an eye on CXAI for potential volatility.
This strategic alliance with Google Cloud is poised to bolster CXApp's offerings, leveraging the intersection of customer experience (CX) and artificial intelligence (AI) to drive digital transformation in the workplace. CXApp's CEO, Khurram Sheikh, emphasized the deal's role in the company's growth strategy, aiming to increase subscription revenues and expand their SaaS offerings.
Furthermore, Google's decision to feature the CXAI application platform on the Google Marketplace and establish a go-to-market partnership could significantly widen CXApp's reach and market potential. This partnership represents a crucial step in CXApp's ambition to expand its service capabilities and market footprint, making it an intriguing prospect for investors considering the company's future growth and market expansion strategies.
On March 29, the company announced that it would delay filing its Fiscal Year 2023 results. CXAI did say that it requires additional time to finalize its 10-K in light of a review of financial statements from the company's recent business combination announced in 3Q23. It said that it did not anticipate any significant changes to its report. Still, for a stock that has doubled, investors may want to wait to see the results so they can get a better grip on valuation.
As of September 30, 2023, CXAI reported working capital of around $1.21 mln and cash reserves totaling approximately $7.17 mln. During the three-month period ending on September 30, 2023, the Company achieved a net income of roughly $1.44 mln. However, from March 15, 2023, to September 30, 2023, it faced a net loss of $10.5 mln. In the same timeframe, the Company spent about $8.94 mln in operating activities, with a significant portion ($4.66 mln) attributed to settling liabilities related to merger transactions.
The Company faces uncertainties regarding its ability to generate revenue sufficient to sustain operations or to become profitable. The ongoing losses and cash consumption raise concerns about its ability to continue operating. Nonetheless, with its current financial resources, the Company is actively reducing operational costs to streamline its cost structure. Future financing strategies may include generating capital through operational activities and potentially pursuing equity financing options.
Mitek Systems (MITK)
MITK- Weekly Chart
Mitek Systems, Inc., headquartered in San Diego, California, leverages AI to offer cutting-edge mobile image capture and digital identity verification solutions globally. Its suite of products includes Mobile Deposit, allowing users to deposit checks via mobile devices; Mobile Verify, an identity verification solution; and Mobile Fill, which speeds up form completion through automatic image capture. This small yet profitable software company has shown robust double-digit sales growth in its mobile deposits and identity verification lines, demonstrating resilience and innovation despite the challenges posed by past financial restatements and management turnovers, including the hiring of a new CFO. The company has made strides in resolving these issues, indicating a promising direction with potential for excess cash to support stock buybacks.
Mitek's two primary product lines, mobile deposits and identity verification, continue to be the cornerstone of its success, with mobile deposit solutions leading the market and enabling the company to exercise pricing power. Despite the decline in check usage due to digital payment alternatives, Mitek's mobile deposit adoption is on the rise, highlighted by significant numbers of mobile deposits and the introduction of a new product to combat check fraud, Check Fraud Defender (CFD), expected to generate substantial revenue. These developments underscore Mitek's strong market position and its strategic response to evolving industry trends. The company's forward-looking statements, including its unchanged FY24 revenue guidance and the optimistic rollout of CFD, suggest a keen focus on leveraging its technological edge for sustained growth and market expansion.
However, Mitek faces challenges and uncertainties, notably past financial restatements and ongoing litigation issues that have raised investor concerns. Despite these hurdles, the company's non-capital-intensive nature and strategic financial management, including potential future stock buybacks, paint a cautiously optimistic picture. With a mixed valuation perspective due to strong revenue growth against a backdrop of weaker GAAP net income, Mitek's strategic partnerships and product innovations, particularly in identity verification and fraud prevention, position it well for future profitability and operational efficiency. As Mitek continues to navigate its financial and legal complexities, its commitment to product development and market expansion remains critical for achieving long-term success and operational leverage, particularly as it eyes significant opportunities in the burgeoning digital identity verification market.
Shares of MITK edged above its 200-weekly moving average ($13.08) last week. The chart looks constructive over the long term, but investors will want to see it hold above the $13 level. The stock trades at a Forward P/E of 11.6x which suggests this is not being valued as an AI company.
Lemonade (LMND)
LMND Weekly Chart
Lemonade Inc. (NYSE:LMND) operates as a digital-first property and casualty insurance firm, utilizing artificial intelligence to enhance its insurance services. It functions as a holding company, offering a range of insurance products including renters, homeowners, and pet insurance. Lemonade aims to modernize the insurance industry through its AI-driven platform, which facilitates the mobile and digital provision of various insurance services under homeowners multi-peril, inland marine, and general liability lines of business. The company's innovative approach positions it as a disruptor in the traditional insurance market, appealing to a tech-savvy demographic seeking a more streamlined and user-friendly insurance experience.
The fourth quarter report and the outlook for 2024 painted a promising picture for Lemonade, highlighting a 20% year-on-year growth in in-force premium (IFP) and a 31% revenue increase. Significant improvements were noted in the gross loss ratio, gross profit, and gross profit margin, demonstrating the company's robust financial health and operational efficiency.
Lemonade's strategic focus on expanding its product offerings and market footprint, especially in Europe, alongside smart portfolio management to minimize risk, has contributed to its positive trajectory. Moreover, the company's plans to accelerate growth through increased customer acquisition investments indicate a forward-looking approach to capitalizing on market opportunities and enhancing its competitive edge.
However, Lemonade faces challenges inherent to the volatile insurance industry, including maintaining profitability and managing losses. Despite strong quarterly results and a positive growth outlook, profitability remains elusive, and the company's stock has experienced significant volatility. Concerns have been raised regarding Lemonade's gross loss ratio and the sustainability of its financial performance in the face of aggressive growth strategies and the competitive landscape. As Lemonade continues to innovate and expand its digital insurance model, it must balance growth ambitions with financial stability and risk management to ensure long-term success and investor confidence.
The stock has traded in a tight range since its earnings pop in early November. Shares of LMND have chopped between $15-19 since early December. One thing that jumps out to us about LMND is its position in the insurance industry. One of the primary drivers in inflation, and the Consumer Price Index in particular, has been the rising costs of insurance. This should act as a tailwind for LMNDs business model.
Verint Systems, Inc. (VRNT)
VRNT- Weekly Chart
Verint Systems, Inc. specializes in providing actionable intelligence through its two main segments: Customer Engagement Solutions and Cyber Intelligence Solutions. The company focuses on helping customer-centric organizations optimize customer engagement, foster customer loyalty, and maximize revenue opportunities while driving operational efficiencies, reducing costs, and mitigating risks. Verint's innovative approach combines AI technology with its vast array of products, including customer and homeowner insurance, and pet insurance, aiming to streamline the traditionally complex processes of insurance provision and claims management.
Verint reported strong Q4F24 results with a positive outlook for FY25, slightly ahead of expectations, suggesting stability and potential growth within its business model. Management anticipates a 20% growth in bundled SaaS bookings for the year, signaling an acceleration from the previous year, due in part to a stabilizing macroeconomic environment. Furthermore, Verint's leadership in the Workforce Management (WFM) market is bolstered by AI bot add-on products that support growth re-acceleration. The introduction of the Verint TimeFlex Bot, which redefines scheduling flexibility and enhances employee experience by leveraging AI, highlights the company's commitment to innovation and its ability to adapt to changing market demands.
However, Verint faces challenges with its near-term results and the need to demonstrate accelerated growth to justify a revaluation. While the company's long-term growth outlook appears positive, recent performance has shown weaknesses in non-GAAP recurring revenue and operating margins. Despite these challenges, Verint's strategy to increase the adoption of its AI-powered bots presents a potential growth opportunity. As the company continues to navigate the balance between maintaining its core WFM leadership position and innovating within the AI space, it remains to be seen how these efforts will translate into improved financial performance and market positioning.
The stock trades at a Current P/E of 110x but a Forward P/E of only 10x, suggesting analysts believe it can easily grow into its current valuation. The stock is down -15% over the past year but has been able to rebound 16% year-to-date as it makes a round trip in the weekly.
The stock has held above its 50-weekly and is making a nice base at the $30 level. This looks primed for a push to the 200-weekly ($37.96) which lines up with the level it traded at last July.
Fastly (FSLY)
FSLY- Weekly Chart
Fastly, Inc. specializes in providing real-time content delivery network services, focusing on edge computing, edge delivery, edge security, and edge applications such as load balancing, image optimization, video on demand, and managed edge delivery. The company aims to optimize customer engagement and enhance digital experiences through its comprehensive suite of services.
Despite its innovative edge computing platform, Fastly faced a challenging year in 2023, marked by stiff competition and guidance for a softer fiscal year 2024. Issues such as a skewed customer mix and lagging product adoption have emerged as significant challenges that Fastly must address to recover and enhance its market position. Additionally, the valuation of Fastly indicates potential upside, but investor sentiment remains cautious due to internal challenges and competitive pressures.
In response to these challenges, Fastly has been undergoing a transition period, aiming to revitalize its business model and regain investor confidence. The arrival of CEO Todd Nightingale in September 2022, along with other top management changes, signaled a strategic shift towards improving customer acquisition, reducing losses, and strengthening the balance sheet.
Despite a 30% negative operating margin and concerns over sustaining customer growth and revenue recovery, Fastly has shown improvements under new management. The company reported a 7.8% year-on-year revenue growth in the fourth quarter of 2023 and significant customer acquisition, including 31 new enterprise customers. This performance, driven by a new sales compensation structure and simplified pricing, reflects Fastly's efforts to adapt and innovate in a highly competitive market.
However, Fastly's fourth-quarter revenue growth of 15% year-on-year, although positive, fell short of expectations, contributing to a sharp decline in its stock price. This reaction from the market underscores the high expectations placed on Fastly and the challenges it faces in a sector experiencing cost-cutting measures across the enterprise software industry.
Despite these setbacks, Fastly continues to expand its global footprint, with operations in 34 countries outside the US. While revenue fluctuations and the ongoing weakness in the enterprise software sector pose hurdles, Fastly's stabilization in revenue slowdown and strategic adjustments under new leadership provide a foundation for potential recovery and growth in the coming years, especially with an anticipated revenue growth resurgence from FY2025.
This is arguably the worst looking chart of the group we have discussed. However, it is showing some signs of stabilization at the $12 area. The stock trades at a Forward P/E of 84x which makes it the most expensive name on the list. The poor technicals and high valuation are a bad mix which would keep us on the sidelines. However, it does present an intriguing turnaround story if the new management team can improve on its profitability.
We would keep this one on the radar but would not be in a rush to put money to work in the name.
In conclusion, investors contemplating AI stocks should proceed with caution. Investing in specific stocks or sectors carries higher risks compared to broader investments like S&P 500 index funds, which historically offer about a 10% annual return. A suggested strategy is to limit individual stock holdings to no more than 10% of one's total portfolio. Those in a position to accept the volatility of individual stocks, incorporating AI-related companies into a diversified portfolio could be a strategic move, especially for retail investors and those managing their retirement accounts.
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