Mega-cap AI leaders have driven much of the market’s recent gains, with strong earnings sending indexes to record highs. Some fund managers believe the next wave of performance may come from AI small caps. These smaller companies, many in data-center infrastructure and AI component supply, trade at lower valuations than blue-chip peers. If AI demand continues, small caps could see capital rotate their way as investors seek value beyond the usual mega-caps.
AI Small Caps Versus Blue Chips
Blue-chip AI names like Nvidia, Microsoft, and Alphabet offer scale, stability, and deep R&D pipelines. Their valuations leave less room for multiple expansion. Many AI small caps remain priced below historical averages despite improving fundamentals. Alexander Wah of Prince Capital told Business Insider that smaller caps are historically undervalued and often overlooked despite solid business models.
AI-enabling infrastructure remains a key focus for investors looking for better value. Companies building data centers, supplying optical components, or delivering power solutions for AI workloads are among those stocks that could benefit as adoption quickens. Brandon Nelson of Calamos Investments describes the “data-center food chain” as an area where smaller firms can win large contracts without competing directly with the tech giants they serve.
AI Small Caps: Policy Tailwinds and Deal Potential
AI small caps may gain from active mergers and acquisitions. Joe Alger of Crestwood Advisors notes they are frequent takeover targets, and the current administration’s lighter M&A stance may encourage deal flow. Clarity on trade policy could also improve sentiment and support capital inflows into undervalued sectors.
These potential catalysts differ from those behind blue-chip AI stocks, which move on product releases, platform adoption, or enterprise contracts. For small caps, triggers include contract wins, acquisitions, or policy shifts.
Five AI Small Caps to Watch (with Performance and Quotes)
Here are five companies to track that illustrate whether AI small caps could outrun blue-chip tech in the next rally:
- Sterling Infrastructure (STRL) – Shares are trading near $263 as of August 1, 2025. The stock rose roughly 140 percent over the past 12 months, up 56 percent year-to-date. It also maintains a backlog exceeding $2 billion and continues scaling high-margin e-infrastructure operations (gross margin ~21 percent).
- Argan Inc. (AGX) – AGX trades around $225 per share. The stock climbed approximately 204 percent year-over-year, far surpassing Nvidia’s ~54 percent gain. Earnings rose 176 percent and revenue expanded 23 percent year-over-year, positioning Argan as a top performer in AI-related infrastructure.
- Lumentum Holdings (LITE) – The current price is about $106.68. The stock has gained nearly 27 percent year-to-date and nearly 70 percent over the quarterly period. It recently hit a new 52-week high near $114, supported by margin expansion and improved non-GAAP earnings.
- Super Micro Computer (SMCI) – Current price $56.64, down -3.9% today. Despite being lower than its 52-week peak, SMCI recently posted a ~9% rebound over the past month following strong demand for AI-optimized server hardware.
- Ebang International (EBON) – EBON is trading near $3.89. Shares have declined roughly 3.7 percent in the past 24 hours, contributing to a down-marked year-to-date run. The company is pivoting toward AI computing systems manufacturing, making it a high-risk, high-upside speculative play.
Risks and the Rotation Question
AI small caps can carry more risk than blue-chip peers as their smaller market capitalizations invite significant price swings. At the same time, high interest costs may limit growth. Large competitors entering the same markets could pressure margins.
Still, lower valuations and growing demand set the stage for possible rotation. If blue-chip AI names pause in momentum, investors might shift to smaller, under-owned plays. While not guaranteed, conditions for relative outperformance exist.
Could AI small caps outrun blue-chip tech in the next big rally? Investors prepared to endure volatility may see this as an opportunity before broader market attention shifts.
Do you think AI small caps can outperform blue-chip tech over the next market cycle? Tell us what you think.
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