We find ourselves over a year into a new bull market, but an interesting trend has emerged: small-cap stocks are lagging behind their larger counterparts. Typically, small-cap stocks, which represent companies with market caps under $2 billion, have historically outperformed large-cap stocks in the wake of bear markets. Yet, since the conclusion of the last downturn in 2022, the small-cap focused Russell 2000 index has risen by 24%, while the S&P 500, which emphasizes large-cap stocks, has surged 50%. This discrepancy marks a departure from historical norms, as seen in past recoveries following downturns in 2002 and 2008, during which the Russell 2000 outpaced the S&P 500 by an average of 61% in the subsequent five years.
Understanding the returns of various asset classes and industries reveals how they often correlate with broader economic conditions, such as interest rate cycles and consumer behavior. However, companies demonstrating robust growth often see their stock prices climb over time, regardless of market trends. There’s every indication that small-cap stocks will shine once more, as they offer significant growth potential in their respective sectors.
For those on the lookout for promising investment opportunities, consider the following two small-cap stocks that are well-positioned for impressive growth.
1. SoundHound AI
The rapid emergence of artificial intelligence (AI) is transforming the way individuals interact with technology, from smartphones to vehicles. SoundHound AI (NASDAQ: SOUN) is carving out a niche as a pioneer in voice recognition technology and is poised to experience tremendous expansion. The company holds over 155 patents and has established a solid customer base that includes major brands in sectors such as hospitality, retail, and automotive.
With advancements like SoundHound Chat AI, which delivers conversational voice assistance across a range of devices, the company is gaining traction. This technology pairs seamlessly with leading large language models, such as OpenAI’s ChatGPT, allowing for nuanced and accurate responses. In its most recent quarterly report, SoundHound demonstrated impressive growth, boasting a 54% year-over-year revenue increase.
Moreover, SoundHound is aiming to diversify its applications by expanding into healthcare and insurance. The recent acquisition of Amelia, a leading enterprise software provider, for $80 million, illustrates its commitment to rapid market growth. A partnership with AI chip leader Nvidia, designed to offer generative AI chat functionalities in vehicles powered by Nvidia DRIVE, further highlights its innovative trajectory. Given its current market cap of approximately $1.7 billion, SoundHound presents a compelling case for investors eager to tap into the potential of the burgeoning generative AI market, projected to reach $356 billion by 2030.
2. Archer Aviation
The air taxi sector, a small but rapidly expanding market, is drawing significant attention and investment. Morgan Stanley anticipates this industry could balloon into a $1 trillion market by 2040. Archer Aviation (NYSE: ACHR), with a current market cap of $1.1 billion, is strategically positioned to capitalize on this growth.
While Archer is yet to generate revenue as it awaits final certification from the Federal Aviation Administration (FAA) to commence full operations, significant progress has been made. The company has received authorization for commercial flights in preparation for launching its Midnight aircraft with partner airlines.
In recent developments, Archer signed a memorandum of understanding to establish electric air-taxi networks in California in collaboration with Southwest Airlines and has secured agreements for aircraft purchases from both Southwest and United Airlines, potentially worth up to $1 billion. In August 2023, Archer also landed contracts with the U.S. Air Force valued at up to $142 million, showcasing its credibility and potential for military applications. Funding support from Stellantis, earmarking around $400 million to assist with manufacturing expenses, ensures Archer is on solid financial footing as it gears up for future operations.
Investors seeking to get in on the ground floor of a small-cap company with significant upside potential should pay close attention to both SoundHound AI and Archer Aviation. As market dynamics shift, the opportunity for gains in these sectors remains ripe.
For anyone considering their next investment move, evaluating these two innovative companies could be a worthwhile pursuit. Whether pioneering AI technologies or disrupting the aviation industry, small-cap growth stocks like SoundHound AI and Archer Aviation are worth watching as they carve out their places in the market.