Forget Microsoft and NVIDIA: 3 Small-Cap AI Stocks to Buy

Why UiPath, SoundHound, and Lemonade are worth a look today

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Forget Microsoft and NVIDIA: 3 Small-Cap AI Stocks to Buy

In a market dominated by tech giants like Microsoft (NASDAQ: MSFT) and NVIDIA (NASDAQ: NVDA), it's easy to overlook the smaller players that are carving out significant niches for themselves in the rapidly growing field of artificial intelligence (AI).

The behemoths have their appeal of course; I’ve (Steve here) even personally owned NVIDIA since 2010, and it even became my first 100-bagger last year. But we think another trio of small-cap AI stocks — UiPath (PATH), SoundHound AI (SOUN), and Lemonade ( LMND) — offer unique growth prospects that could be lucrative for investors willing to diversify their portfolios with companies poised for exponential growth.

UiPath Inc. (PATH): Pioneering Robotic Process Automation

UiPath Inc. (PATH)
UiPath stands at the forefront of the robotic process automation (RPA) revolution, offering an end-to-end automation platform that blends artificial intelligence at its core with intuitive visualization tools, low-code development environments, and comprehensive management tools. This powerful combination enables businesses to streamline operations, enhancing efficiency and productivity across various sectors including banking, healthcare, and government.

To be clear, UiPath doesn’t want to replace humans. But it does want to use its software robots to offload automatable tasks and enable people to focus on more valuable work that only humans can do.

Recently, UiPath's stock has shown promising movement, rising more than 50% over the past year on the heels of its strong third-quarter report in November. Consensus estimates call for revenue growth of around 19% next fiscal year — and we should get some clarity on management’s expectations to that end when it reports fiscal Q4 2024 results next month (on Mar. 13, 2024). But this is also a company enjoying significant operating leverage and generating healthy cash flows (GAAP operating cash flow flipped to positive $153.5 million through the first three quarters of this fiscal year, from negative $104 million in the same period last year).

Assuming UiPath can extend its profitable growth at scale in the coming quarters, I see no reason the stock price won’t continue to follow suit.

SoundHound AI, Inc. (SOUN): Redefining Voice AI

SoundHound AI, Inc. (SOUN)

SoundHound AI is reshaping how businesses interact with their customers through its independent voice AI platform. Offering a suite of tools for building conversational voice assistants, SoundHound's Houndify platform supports automatic speech recognition, natural language understanding, and other essential voice AI functionalities. Despite a high P/S ratio of 11.3x, we think SoundHound's revenue growth justifies investor optimism, with a notable 43% increase over the last year and projections suggesting a 68% growth in the next year, significantly outpacing its software-based AI peers.

This performance underscores SoundHound's potential to dominate the conversational AI market — including voice AI partnerships with restaurants, smart vehicles, and even general customer service for any business — making it an attractive investment for those betting on the proliferation of voice-enabled technologies across various sectors.

SoundHound should be poised to next release quarterly results in early March, 2024. Stay tuned for a recap of the quarter here at BLI.

Lemonade, Inc. (LMND): Disrupting Insurance with AI

Lemonade, Inc. (LMND)

Lemonade is transforming the insurance industry with its AI-driven platform, offering a range of products from renters to pet insurance. Leveraging bots and machine learning for seamless customer experiences, Lemonade aims for zero paperwork and instant service — with around a third of its claims paid out in three seconds (not a typo). The company is a certified Public Benefit Corporation (B-Corp), with a focus on social impact through its Giveback program, where unused premiums support nonprofits, adding to its appeal among socially conscious investors.

With its Q4 2023 financial results set to be released on Feb. 28, 2024, investors will be keenly watching whether Lemonade’s steadily improving loss ratios support management’s prediction that they’ll be able to reach sustained profitability without raising additional capital in the coming years. The company's innovative approach to insurance, combined with its expansion into new markets, positions it as a low-overhead disruptor with significant growth potential in a traditionally slow-moving industry.


A New Era of AI Investment Opportunities:

While giants like Microsoft and Nvidia continue to make headlines, UiPath, SoundHound AI, and Lemonade represent a new wave of AI innovation, each in unique sectors ripe for disruption. Their recent performances and growth prospects highlight the potential for outsized gains, making them compelling choices for investors looking to capitalize on the AI revolution beyond the usual suspects. As these companies continue to evolve and expand their market footprints, they offer a glimpse into the future of AI, where smaller players can not only compete but thrive against well-funded industry incumbents.

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