Super Micro Computer (NASDAQ:SMCI) has been on an absolute tear this year, with the stock up more than 250% year-to-date already. The semiconductor stock has seen parabolic gains thanks to its leverage to the red-hot AI and machine learning trends. However, while SMCI stock may have more room to run, it’s unlikely to repeat its monumental rise. For investors chasing massive upside, it’s time to look beyond headline-grabbing AI stocks like SMCI and consider some under-the-radar penny stocks instead.
These AI penny stocks not only stand to benefit from the hype surrounding artificial intelligence, but they are delivering strong growth and have huge upside potential. Getting in early on these lesser-known names before Wall Street catches on could help you realize gains of 2,000% or more over the next few years. Right now, Wall Street is distracted by the ‘Magnificent 7’ AI stocks dominating headlines. However, I expect sentiment to shift soon, as these big names become overheated.
Here are the three AI penny stocks to look into right now.
Data Storage Corp (DTST)
I have been writing about Data Storage Corp (NASDAQ:DTST) for quite a while now, and that’s for good reason. My conviction has paid off time and time again, and I think the company still has more room to run going forward. Data Storage Corp has been showing excellent growth with cloud computing and data storage tailwinds at the company’s back, which is helping the company land many contracts. Startups – especially AI startups – are hungry for data right now, and they’re turning to companies beyond the big names like AWS and Azure.
The company achieved revenue of $6 million in Q3 2023, up 35% year-over-year. Data Storage also reported a net income of $158,000. Plus, the company’s CloudFirst business unit generated $3.7 million in revenue and over $800,000 in net income. Moreover, the equipment and software unit generated $2 million in revenue, an increase of nearly 100% from Q3 2022. Both business segments were merged recently.
Data Storage maintains a 94% renewal rate with its customers, and an average contract term of 24 months. These are great metrics for an AI startup that has a market capitalization of just $40 million. The company expects to enter 2024 with an annual recurring revenue (ARR) baseline of around $18 million on the service side. This stock deserves a lot larger of a premium, considering fast-growing SaaS companies often trade at 10-times sales or more. With that in mind, DTST stock definitely has multi-bagger potential still.
I think gains of 200-300% or more are achievable in 2024 alone if momentum continues. Data Storage Corp has a long runway for expansion in the thriving data center and cloud services space. I would not hesitate to take a calculated position here before the crowd catches on. It’s a penny stock (trades around $5.80 per share), but the company’s market cap definitely qualifies it as penny stock), so I wouldn’t recommend putting a big portion of your portfolio here either.
DHI Group (DHX)
DHI Group (NYSE:DHX) is a provider of online recruitment platforms for technology professionals and other skilled professionals. The company’s main platforms are Dice and ClearanceJobs (CJ). DHI uses AI for a lot of its software, so I would loosely consider it an AI company. This stock has not been as lucky as Data Storage Corp, as it is down over 65% from its June 2022 peak. However, this stock has stabilized around $2.50 per share and I believe a turnaround is nearing. If the stock takes makes a successful turnaround and improves its financials, we can easily see multi-bagger returns with this name.
However, I would warn that the company’s financials are far from flashy. Revenue has been basically stagnant since 2022, and profit margins are at a measly 2.3%. The company also expects a low single-digit revenue decline for all of 2024. However, management is targeting a full-year 2024 adjusted EBITDA margin of 24%. I believe this can lead to a much higher re-rating of the stock. Defense spending is increasing fast, and bookings growth could return in the second half of 2024 as tech hiring improves.
Total revenue in Q4 2023 was $37.3 million, down 6% year-over-year. DHI’s valuation is trading at distressed levels, so any signs of a turnaround should lead to notable gains.
Xtract One (XTRAF)
Xtract One (OTCMKTS:XTRAF) is a company that provides AI-driven weapons detection solutions. Their primary product is the SmartGateway, which is a frictionless screening system that can detect weapons, while allowing for a rapid throughput of people. The stock has been essentially flat, trading around 50 cents since the second quarter of 2020. That’s nearly four years of sideways trading with some ups and downs, and I believe a breakout is close since the business continues to expand.
Revenue is double what it was in 2020, and losses are slowly being trimmed. However, this is a more risky play since the company is still making very little revenue compared to its losses. Improvements are happening though.
The company booked (all metrics for this company are in Canadian dollars) $14.7 million in new bookings in the first half of fiscal 2024, with $5.1 million booked in Q2 2024 alone, which is a 4x increase year-over-year. In addition, at the end of Q2 2024, the company had a contractual backlog of $12.3 million (up 29% from Q1 2024) and an additional $10 million worth of signed agreements pending installation. This is due to a new channel sales program, which contributed to about 20% of the new bookings in Q2 2024.
I’m still placing this stock last since the company’s cash burn is very high. Now, this cash burn is being reduced quarter-over-quarter. However, management didn’t provide any timeline for cash flow breakeven. I don’t like when a company’s management says they’re “working towards” something, which is quite vague, so I’d remain a bit careful here.
Penny Stocks
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Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
