Small-cap stocks are risky investments in a volatile market. These are shares of companies with market capitalizations ranging from $250 million to $2 billion. They are typically emerging and early stage growth companies. Their small size allows for an affordable investment. However, it comes with greater risk and price volatility. 

As such, small-cap stocks may be best for long-term investors who can stomach more volatility. Here, we have two such small-cap tech stocks that are riding the high tides of the artificial intelligence (AI) revolution.

Small-Cap Stock #1: Innodata

Innodata (INOD) is a data engineering and AI company that helps other businesses turn data into useful and actionable insights. Innodata offers high-quality training data for machine learning and generative AI models. It also provides services such as content digitization, document processing, and information extraction. The company has grown dramatically since the AI revolution began.

Valued at $1.03 billion, Innodata stock has fallen 24.2% year-to-date, compared to the dip of 12.8% in the S&P 500 Index ($SPX).

Innodata reported strong financial results for the fourth quarter and full year of 2024. Q4 revenue increased a whopping 127% year-over-year to $59.2 million, exceeding the company’s previous guidance of $52 million to $55 million. Revenue for the full fiscal year 2024 increased 96% to $170.5 million. Net income increased to $0.31 per diluted share, up from $0.05 a year ago. Net income for the year increased to $0.89 per share, up from a $0.03 loss in 2023.

The company is riding the waves of large-scale AI investments by Big Tech. In Q4, Innodata increased its annualized run rate with its largest customer, believed to be one of the “Magnificent Seven,” to $135 million, thanks to new program awards worth $24 million annually. The “Magnificent Seven” is made up of seven tech titans: Tesla (TSLA), Meta Platforms (META), Amazon (AMZN), Alphabet (GOOGL), Nvidia (NVDA), Apple (AAPL), and Microsoft (MSFT). 

According to CEO Jack Abuhoff, revenue from this customer increased 8% sequentially in Q4. Additionally, revenues from seven other major tech clients increased 159% sequentially, demonstrating the company’s rapid expansion strategy. The company’s balance sheet remains strong, with cash, cash equivalents, and short-term investments totaling $46.9 million, as well as an undrawn credit facility of $30 million. 

Innodata begins 2025 with a bold prediction of at least 40% revenue growth, with the possibility of upward revisions as new deals are secured. Abuhoff stated in the Q4 earnings call that the company is “laser-focused” on serving Big Tech’s generative AI ambitions and anticipates “lucrative markets” in both the tech and enterprise segments. Analysts predict that revenue will increase by 42%, but earnings might fall by 16.7% to $0.74 in 2025. However, earnings may rise by 42.5% in 2026, followed by a 20.7% increase in revenue. Innodata’s strong financial performance, strategic initiatives, and focus on AI solutions make it an attractive investment opportunity.

Overall, Innodata stock remains a “Strong Buy,” on Wall Street. Of the four analysts covering the stock, three rate it a “Strong Buy,” and one says it is a “Moderate Buy.” The average analyst target price for INOD is $66, representing a more than 100% increase from current levels. Furthermore, analysts have set a high price target of $75, implying that the stock could rise up to 150% over the next 12 months. 

Small Cap Stock #2: PubMatic

PubMatic (PUBM) is a global advertising technology company that offers a sell-side platform (SSP) to help digital publishers and app developers increase their advertising revenue. In other words, it allows publishers to manage and monetize their ad inventory across multiple formats and devices, such as mobile, video, display, and connected TV (CTV).

Valued at $443 million, PubMatic stock is down 38.7% year-to-date, presenting an opportunity to buy this growth stock on a dip.

PubMatic has significantly increased its focus on CTV, with revenue from this segment doubling year-over-year and accounting for 20% of total revenue in Q4 2024. This places the company well in the rapidly expanding CTV advertising market. Furthermore, diversifying revenue streams beyond traditional advertising channels has resulted in significant growth for fiscal year 2024. Total revenue rose 9% year-over-year to $291.3 million. Adjusted net income increased to $0.78 per share, from $0.57 in 2023. PubMatic ended the fiscal year with $140.6 million in total cash, cash equivalents, and marketable securities, with no debt. Additionally, it generated $34.9 million in free cash flow and repurchased $134.6 million in shares during the year.

CFO Steve Pantelick stated, “In Q4, strong growth in the underlying business helped offset softer spending from the large DSP buyer we previously called out mid year. Going forward, we are taking a conservative approach as it relates to this buyer and expect total revenues to grow year over year in the second half of the year once we lap this impact at the end of Q2 2025.” Analysts predict revenue growth of 1.8% in fiscal 2025, followed by 9.7% in fiscal 2026, respectively. 

PubMatic’s consistent financial growth, strategic expansion into high-growth areas such as CTV, and strong operational efficiency make it an appealing stock for investors in the digital advertising industry.

Overall, PubMatic stock remains a “Moderate Buy” on Wall Street. Of the 12 analysts covering the stock, five rate it a “Strong Buy,” one says it is a “Moderate Buy,” and six say it is a “Hold.” The average analyst target price for PUBM is $16.67, representing an 82.6% increase from current levels. Furthermore, analysts have set a high price target of $21, implying that the stock could rise up to 130% over the next 12 months.