As Big Tech companies report strong Q2 earnings driven by sustained artificial intelligence demand, Wall Street analysts are raising price targets across the sector. However, savvy investors are identifying lucrative opportunities beyond the mega-cap tech giants, focusing instead on small and mid-cap stocks positioned to benefit from the AI infrastructure boom.
The Russell 2000 small-cap index has struggled in 2025, but investment professionals see this as creating historically undervalued opportunities. Alexander Wah, founder and chief investment officer of Prince Capital, emphasized that “small caps are historically undervalued” and noted many companies are “quietly chipping away at larger industries” while being overlooked by mainstream investors.
Sterling Infrastructure has emerged as a standout example of a small-cap AI play. The company provides AI infrastructure solutions and has delivered impressive returns, rising approximately 2.5x since Prince Capital’s initial investment. Both Wah and Brandon Nelson, senior portfolio manager at Calamos Investments, highlighted Sterling as an effective way to gain exposure to the AI boom without paying premium valuations for mega-cap tech stocks.
Nelson emphasized that “AI-enabling infrastructure is a big theme” and identified several small to mid-cap companies positioned in the data center building supply chain that should benefit from continued AI expansion. He specifically named Lumentum Holdings and Argan alongside Sterling as examples. All three stocks have demonstrated strong growth and are up substantially year-to-date.
Beyond pure AI infrastructure plays, small-cap stocks may receive additional tailwinds from policy changes in Washington. Joe Alger, investment research analyst at Crestwood Advisors, noted that “small caps tend to benefit from strong merger and acquisitions markets” and predicted the Trump administration would take a less regulatory approach toward M&A activity. While M&A activity has slowed recently, Alger expects a resurgence once investors gain clarity on tariff policies.
Wah concluded with a striking observation: “I think that the small cap index is the most undervalued in comparison to the large cap index that I’ve ever seen. This is great because it means that there is a lot of opportunity to find things that others are overlooking.”
Key Quotes
Small caps are historically undervalued. There’s a lot of [companies] that are being overlooked, that are quietly, quietly chipping away at larger industries, making their names known.
Alexander Wah, founder and CIO of Prince Capital, explained why investors should look beyond mega-cap tech stocks to find AI-related opportunities in the small-cap space that the market has overlooked.
AI-enabling infrastructure is a big theme. Several small and mid-caps are exposed; anything in the data center building food chain should benefit.
Brandon Nelson, senior portfolio manager at Calamos Investments, highlighted the broader AI infrastructure ecosystem as an investment opportunity, emphasizing that multiple small-cap companies stand to benefit from data center expansion.
I think that the small cap index is the most undervalued in comparison to the large cap index that I’ve ever seen. This is great because it means that there is a lot of opportunity to find things that others are overlooking.
Alexander Wah provided a striking assessment of the current valuation gap, suggesting the disconnect between small-cap and large-cap valuations has reached unprecedented levels, creating exceptional opportunities for diligent investors.
Our Take
This article reveals a critical inflection point in AI investing. While headlines focus on Big Tech earnings and trillion-dollar valuations, the real alpha may lie in the infrastructure layer supporting AI deployment. The 2.5x return on Sterling Infrastructure demonstrates that execution matters more than market cap when companies are positioned in high-growth segments.
The convergence of three factors—historic valuation gaps, sustained AI infrastructure demand, and favorable M&A policy—creates a compelling setup for small-cap outperformance. However, investors must recognize that small-caps require deeper due diligence and carry higher volatility. The key insight is that AI’s impact cascades through the economy in ways that create opportunities beyond the obvious plays. As data center construction accelerates and specialized components become critical bottlenecks, companies like Lumentum and Argan may capture disproportionate value despite their modest market capitalizations.
Why This Matters
This development signals an important democratization of AI investment opportunities beyond the concentrated mega-cap tech stocks that have dominated market gains. As AI infrastructure demands continue accelerating, the supply chain supporting data centers and AI-enabling technologies creates a broader investment landscape.
The valuation gap between small-caps and large-caps reaching historic levels suggests potential for significant returns as the market recognizes these overlooked opportunities. For businesses, this indicates that AI’s economic impact extends far beyond software and cloud services into physical infrastructure, construction, and specialized components.
The policy dimension adds another catalyst, as a more permissive M&A environment could trigger consolidation that benefits small-cap shareholders through acquisition premiums. This matters for the AI ecosystem because it provides exit opportunities for innovative smaller companies and allows larger firms to quickly acquire specialized capabilities.
For investors and industry observers, this represents a maturation of the AI investment thesis—moving from speculative bets on AI leaders to identifying the picks-and-shovels providers enabling the infrastructure buildout. The strong year-to-date performance of companies like Sterling Infrastructure validates this approach and suggests the trend has momentum.
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Source: https://www.businessinsider.com/big-tech-ai-bullishness-small-cap-opportunity-investing-2025-8