When it comes to artificial intelligence (AI), much of the attention has focused on larger companies like Nvidia or Microsoft. One can understand that, given their technical capabilities and financial resources.
Nonetheless, a few smaller AI stocks also hold considerable potential for long-term growth. To that end, investors should consider three smaller companies bringing transformation through AI.
1. Super Micro Computer
In addition to AI, Super Micro Computer (SMCI 8.89%) innovates in the cloud, enterprise, metaverse, and 5G worlds. Describing itself as a "rack-scale total IT solutions provider," the company offers combined hardware and software solutions, creating servers, switches, storage systems, and other products that are AI-ready. Super Micro also emphasizes energy efficiency and reductions in environmental impact, and manufactures its products primarily in the U.S.
Despite a relative lack of name recognition, it operates in more than 100 countries, and its rapid growth has attracted increased attention from investors.
Although its $2.2 billion in revenue for the first quarter of fiscal 2024 (ended Sept. 30) grew 14%, revenue increased 37% in fiscal 2023. Supply constraints and capital expenditures weighed on the company in fiscal Q1.
Those challenges led to net income falling to $157 million versus $184 million in the year-ago quarter. Still, that temporary setback has not deterred investors, who have bid the share price more than 200% higher over the last year.
That places its P/E ratio at just 27. Moreover, the market cap of $16 billion has just recently crossed into large-cap status. That market cap may not guarantee that it is going to mint millionaires, but it leaves Super Micro at a size where investors may benefit from its massive growth potential.
2. UiPath
UiPath (PATH 0.26%) is a company specializing in robotics process automation (RPA). RPA applies robotics and software to perform repetitive tasks. Admittedly, performing repetitive tasks has long been a purpose of programming.
However, UiPath has stood with its end-to-end platform, connecting the company's software with enterprise products and applications. That has attracted companies such as Nielsen to help drive digital transformation or a retailer that used the company's RPA to process nearly all of its invoices.
It has also earned business over competitors by fostering a UiPath community. In this community, millions of professionals in the development space create and share applications within the company's ecosystem.
The growth continues, as UiPath earned $903 million in revenue in the first nine months of 2023, 20% more than 12 months ago. The company has also slowed expense growth despite reporting operating losses. Still, the $124 million operating losses in the first three quarters of the year fell from $301 million in the same year-ago period.
With that growth, UiPath stock is up 90% over the last 12 months, and its price-to-sales (P/S) ratio of 12 is still near historic lows. At a market cap of just $15 billion, it is small enough to potentially make investors millionaires as more customers turn to its RPA technology.
3. Upstart
Upstart Holdings (UPST 2.76%) has leveraged AI to develop a loan evaluation tool. If successful, it could take market share from Fair Isaac, whose FICO score has been the standard for credit ratings since 1989.
But without a major update for FICO, Fair Isaac has left its industry ripe for disruption. According to Upstart, its AI-driven solution can approve 44% more loans without increasing risks, meaning it could serve as that agent for change.
The stock fell by as much as 97% from 2021 highs, as rising rates reversed Upstart's massive revenue growth. But now, Chairman Jerome Powell indicated the Federal Reserve would cut rates three times in 2024, which could spur a rebound.
Still, that recovery has not occurred yet, as revenue of $408 million in the first nine months of 2023 fell 46% versus the same period in 2022. As Upstart ramped up engineering and product development spending, net losses increased to $198 million in the year's first three quarters, far above the $53 million lost in the same period one year ago.
With a recent increase in the stock price, the P/S ratio is now 7, which is well below the peaks in 2021. Still, a market cap of around $4 billion makes it a mid-cap stock, and assuming lower rates will again translate into heightened demand for loans, it could bode well for Upstart as banks seek ways to approve more loans safely.
