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Retail investors flock to small-cap AI firms as Big Tech battles for share

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Retail investors are piling into small-cap firms that employ artificial intelligence amid intensifying competition between tech titans Google parent Alphabet and Microsoft to secure leadership in the next big driver of growth.

The viral success of ChatGPT has turned the spotlight on AI on Wall Street, reminiscent of the blockchain hype from a few years ago when shares of companies remotely associated with the technology surged.

The $3-billion AI software firm (AI.N) was the fifth most actively traded on Fidelity’s platform for small investors on Monday, while drawing record daily retail inflows worth $31.4 million, as per Vanda Research. The stock slipped 4.5 per cent on Tuesday, but is up about 140 per cent so far this year.

“Small-cap firms have AI as a much larger part of their business than the larger ones,” said Matthew Tuttle, chief executive officer of Tuttle Capital Management on the reason behind retail investors’ focus on the smaller firms.

Tuttle said he had shorted shares about a week ago, but was looking to switch to the long side because “that’s where the action is.”

Shares of SoundHound AI (SOUN.O), which offers a voice AI platform services, and Thailand’s security firm Guardforce AI (GFAI.O) have more than doubled so far this year, while analytics firm gained nine-fold in value.

SoundHound AI was last up 4 per cent and Guardforce AI (GFAI.O) added 12 per cent, while slipped 10 per cent.

Shares of Microsoft (MSFT.O), which backs ChatGPT parent OpenAI, gained about 2 per cent ahead of a potential AI launch later in the day.

Google-owner Alphabet Inc (GOOGL.O) on Monday said it would launch a chatbot service Bard and more artificial intelligence for its search engine as well as developers.

Microsoft is in a strong position in the AI race due to the combination of its close partnership with OpenAI and its Azure capabilities around compute and data, said Barclays analyst Raimo Lenschow.

US-listed shares of Baidu Inc climbed nearly 15 per cent on Tuesday after the Chinese search engine said it would complete internal testing of a ChatGPT-style project called “Ernie Bot” in March. Earlier in the day, a clutch of Chinese AI stocks had also rallied.

“The market is right now trying to search for what would the next big thing that’s going to lead markets over the next 10 years and AI is that,” said Chen Zhao, chief global strategist at Alpine Macro.

“It could be speculative in nature, but everybody thinks that it’s going to be a big deal going forward.”

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