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

ChatGPT logo is seen in this illustration taken, February 3, 2023. REUTERS/Dado Ruvic/Illustration

(Reuters) - Retail investors are piling into small-cap firms that are into building artificial intelligence tools as companies including Google-parent Alphabet and Microsoft jostle to pull ahead in the race for the next big growth driver.

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 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 fell 14.7% on Tuesday, although it is up about 140% 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, which offers voice AI platform services, and Thailand's security firm Guardforce AI have more than doubled in value so far this year, while those of analytics firm have seen a nine-fold rise.

SoundHound AI was last down about 14.9% and fell 18%, while Guardforce AI slipped 3%.

Shares of Microsoft, which backs ChatGPT parent OpenAI, gained about 2.4% after the tech giant said it was revamping its Bing search engine with AI such that users will be able to chat with the search engine naturally.

The new Bing chatbot will help users refine queries and even draft and translate emails, with the company calling Bing the "AI-powered robot for the web."

(AI stocks gain as chatbot wars gather steam

Alphabet said on Monday it would launch a chatbot service called Bard, along with more AI tools to power its search engine.

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, Barclays analyst Raimo Lenschow said.

"If you're investing in AI, you should consider the fact that these smaller companies are competing against Goliath, and Goliath has the scale, efficiency and capital to own the space," eToro analyst Callie Cox said, adding there has been a lot of interest around AI lately.

U.S.-listed shares of Baidu Inc climbed 9.9% 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."

(Reporting by Medha Singh in Bengaluru; additional reporting by Bansari Mayur Kamdar and Akash Sriram and Chavi Mehta in Bengaluru, Editing by Sriraj Kalluvila and Anil D'Silva)

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