Small companies rising quickly to rival Big Tech as AI ‘s best trade

Artificial intelligence is no longer just a niche technology sector. It is now playing a significant role in reshaping various industries, including energy markets, infrastructure spending, and portfolio construction. According to experts on CNBC’s “ETF Edge,” investors who solely focus on AI-related chips and software may be overlooking where the next wave of value creation is happening.

One of the key drivers of market trends and innovations is the physical requirements of AI technology. Factors such as power, cooling, grid stability, and data center efficiency have become crucial considerations. For example, Bloom Energy, a company that struggled to gain traction after its IPO in 2018, experienced a significant surge in its stock price when its onsite fuel cells were in high demand for data centers. This highlights how AI is influencing the rapid growth of companies in the market.

Investing opportunities are emerging in small- and mid-cap companies that are quickly gaining prominence. These companies, which were once overlooked, are now moving up the ladder in terms of market capitalization. Many of them operate in niche segments with limited competition, allowing their fundamentals to improve rapidly without attracting much investor attention.

Energy reliability has become a central issue in the AI-driven market landscape. The shift towards renewable energy sources has led to a renewed focus on nuclear power, as data centers require a constant and reliable power supply to prevent downtime. This has prompted increased investment in servicing existing nuclear plants and developing small modular reactors, creating opportunities for specialized players in the industry.

Efficiency within data centers is also a critical aspect of AI technology. As AI workloads increase, cooling and power management have become bottlenecks. Investors are increasingly interested in companies that excel in specific technologies and have a strong market position. Concentrated markets with limited providers can offer operating leverage but also pose risks in case of missteps.

Active management strategies, including actively managed ETFs, are gaining popularity as they aim to identify promising companies early on and hold them through different growth phases. However, investing in AI-powered ecosystems carries risks, especially with financially weak companies that are sensitive to electricity demand. Diversification is key to managing these risks and avoiding overexposure to a single AI theme.

As investors incorporate the AI theme into their portfolios, active rebalancing and clear risk management strategies will be crucial in navigating the market volatility. By staying informed and maintaining a balanced approach, investors can capitalize on the opportunities presented by AI technology while mitigating potential downsides.