DXC Technology: Evaluating an IT Player in the AI Landscape
Small-cap AI stocks offer compelling investment prospects, especially when compared to their large-cap counterparts. While the tech giants have reaped substantial rewards from early AI enthusiasm, smaller, lesser-known companies often present more attractive valuations. These companies are developing specialized AI solutions that could significantly impact diverse sectors, offering investors a potential entry point into the next phase of AI-driven growth. As the market recognizes the commercial viability of these smaller players, their stocks may provide substantial upside compared to their larger, more established peers.
In the initial phase of AI advancements, beneficiaries mainly included GPU manufacturers and Big Tech firms that invested heavily in data centers. However, as we move into 2025, questions are being raised about the necessity of such massive hardware investments. With no major breakthroughs since the early stages of AI, analysts are questioning whether the hardware spending is justified. This situation was further amplified by a Chinese startup that claimed to have an AI model with similar performance to U.S. large language models at a significantly lower cost, potentially disrupting the market and lowering barriers to entry for startups. These new developments may have significant implications for global markets. Companies that benefited from the initial wave may face a correction as demand for GPUs decreases; however, a second wave of beneficiaries may emerge as a result of cheaper AI training and inferencing.
Lowering the cost of AI training and inferencing will allow many startups and small-cap companies to accelerate the development of AI products and solutions with practical use cases. To spot potential second-wave AI winners, investors should examine small-cap companies with market capitalizations under $5 billion.
Favorable macroeconomic conditions could further assist small-cap companies. Despite the Federal Reserve holding interest rates steady, forecasts of deteriorating GDP growth might lead to interest rate cuts, which could be beneficial for small-cap firms as they would reduce financing costs and facilitate capital allocation.
Methodology
To identify potential AI-focused companies, we used Finviz to screen for technology stocks with a market cap under $5 billion. We then selected companies with significant revenue exposure or growth opportunities related to AI products and solutions. Finally, we compared the list with our proprietary Q4 2024 database of hedge funds’ ownership. This method helps us identify companies that are attractive to hedge funds.
Our research has shown that we can outperform the market by imitating top stock picks of leading hedge funds.
DXC Technology Company (NYSE:DXC)
DXC Technology Company (NYSE:DXC) is a global provider of IT services and solutions. It focuses on digital transformation, IT modernization, and cloud computing. The company serves clients across various industries, and its core offerings include consulting, systems integration, and data-driven analytics.
DXC is actively expanding its AI capabilities, providing AI-driven solutions and advanced analytics to position itself for growth in the AI market.
DXC reported a strong Q3 performance with revenue, adjusted EBIT margin, and non-GAAP EPS exceeding guidance. DXC’s financial metrics showed total revenue declined 4.2% year-over-year on an organic basis, while adjusted EBIT margin expanded 140 basis points year-over-year to 8.9%, and non-GAAP diluted EPS grew 7% YoY to $0.92. The company demonstrated significant improvement in bookings with a book-to-bill ratio of 1.3x, the highest in 8 quarters, reflecting the success of their revamped go-to-market approach. The pipeline continues to grow with a higher mix of deals in consulting and engineering services, though these engagements have less near-term revenue impact but build a foundation for future growth.
DXC is actively investing in AI, as shown through partnerships and successful implementations for clients. The company faces global uncertainties, including trade policy, geopolitical conflicts, inflation, and labor costs, which affect corporate spending, and clients must balance cost optimization with AI investments. DXC’s top priority is to drive profitable and sustainable revenue growth.
With 24 hedge funds owning the stock, DXC ranks 15th on our list of the best small-cap AI stocks to buy right now. However, our conviction lies in the belief that other AI stocks hold greater promise for delivering higher returns within a shorter time frame.
