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Bank of America sees additional AI investing opportunities in small and mid-cap stocks.
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AI mentions on earnings calls have increased, especially among Russell 2000 companies.
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The bank shared four buy-rated AI stock picks that go beyond the Magnificent Seven.
The Magnificent Seven and the AI trade have become synonymous, but there are opportunities for investors to get exposure to the AI mega-trend outside of the biggest names in the market.
Small and mid-cap companies are adopting AI technology to drive earnings growth, according to Bank of America analysts. As the AI trade progresses, the next wave of beneficiaries will be companies that adopt AI into their product offerings and revenue models.
While AI infrastructure companies like Nvidia benefit from size and scale, more small-cap companies are participating in the next leg of the AI trade.
Jill Carey Hall, equity and quant strategist at Bank of America, wrote in a recent report that earnings calls of Russell 2000 companies have mentioned AI more frequently over the last few quarters.
Software companies are particularly well-positioned to take advantage of the nascent trend of agentic AI, or AI systems that operate autonomously with limited human supervision, according to the bank.
Senior technology research analyst Brad Sills reported increased signs of “green shoots” in the development of agentic application adoption at the bank’s Global Technology Conference earlier this month. Examples include increased database activity to handle running AI applications and more AI-focused code.
Small-cap companies in particular present AI opportunity for active stock pickers. While the overall category has lagged behind its large-cap counterpart, the current backdrop allows investors to buy up promising high-growth companies at a discounted price. Additionally, Hall sees the potential for easing inflation and a pick-up in M&A transaction volume to provide a boost to small-cap technology valuations.
Below are Bank of America’s four top buy-rated small and mid-cap AI picks, along with their 12-month price targets and relevant analyst commentary.
Datadog
Ticker: DDOG
Market cap: $42.1 billion
Price target: $138
Company description: Datadog provides cloud-based tools that help tech teams monitor application performance and infrastructure in real time.
BofA commentary: “We believe Datadog is a share gainer in the generative AI theme, as AI-native companies are already driving 8.5% of its annual recurring revenue (ARR). As more AI-native companies scale, and non-AI native organizations release their own AI experiences, we believe Datadog stands to benefit. We believe Datadog has the potential to deliver durable 20%+ revenue growth and attractive 20%+ free cash flow margins over the coming year.”
Seagate Technology
Ticker: STX
Market cap: $27.8 billion
Price target: $135
Company description: Seagate designs and manufactures data storage products, including hard drives and SSDs, for consumer and enterprise use.
BofA commentary: “Seagate’s HAMR ramp has begun after announcing the 2nd & 3rd hyperscaler qualifications at the May 2025 Analyst Day (1st qual. was December 2024). The company has already achieved record margins coming out of the 2023 HDD downcycle and we believe the HAMR ramp in C2H25 will propel margins higher.”
Kyndryl Holdings
Ticker: KD
Market cap: $9.3 billion
Price target: $44
Company description: Kyndryl, spun off from IBM, is an IT services company that provides infrastructure services including cloud, data center, and network modernization to enterprises around the world.
BofA commentary: “We continue to view Artificial Intelligence (AI)/Generative AI (GenAI) as a net tailwind for the [IT services industry] … Recent large deal signings at attractive high-single-digit pre-tax-income margins provide incremental visibility into out-year earnings power.”
JFrog
Ticker: FROG
Market cap: $4.8 billion
Price target: $48
Company description: JFrog offers a DevOps platform known for its artifact repository manager, Artifactory, which streamlines software development by enabling continuous integration and delivery across the software release lifecycle.
BofA commentary: “Increasing binaries from AI-related packages (Docker, Hugging Face, Python, etc.) are driving increasing usage of the platform. We think that it should benefit from increased usage as generative AI likely catalyzes the pace of software development over the medium-term.”
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