The AI market is considered overheated. Are there any undervalued stocks left?

Concerns around AI center on the scale of investment and whether it will pay off. The largest cloud companies have budgeted more than $700 billion in capex this year, according to Bloomberg calculations. Michael Burry doubts that future profits will justify tech giants’ spending, while Ray Dalio warns that rising borrowing costs are bringing the AI bubble closer to bursting.

Some smaller companies, meanwhile, are already making money from AI, even as their stocks have plummeted. For example, Innodata, which supplies data to train models, grew second-quarter revenue 58% and doubled net income versus a year earlier. AI app developer Meitu boosted first-half revenue 22% and adjusted profit almost 40%. 

Oninvest analyst Aldiyar Anuarbekov looks at how much of the potential of these companies and others with exposure to AI is reflected in current prices and whether undervalued stocks can still be found within a market widely described as overheated.

Anuarbekov examined 31 smid-cap companies and selected five that still look undervalued, including a supplier of model-training data, an enterprise software developer, and AI app developers. Factors considered included revenue growth, margins, and profitability, as well as multiples, declines from 52-week highs, and the so-called relative strength index, which measures the speed and magnitude of price changes. Below, we explain what supports the selected companies’ businesses, how attractive their valuations look, and what risks could prevent a recovery in the share price.

Innodata (INOD)

Innodata prepares data for training and evaluating AI models. In the second quarter, revenue rose 58% year over year to $92.1 million, while net income doubled to $14.4 million. The management reiterated its guidance for full-year revenue growth of at least 40%. Innodata’s two largest customers account for 71% of sales, limiting the benefits of diversification: a reduction in either customer’s program could materially affect results.

The stock has fallen almost 35% over the last 12 months. At the current price of $53 per share, its forward price/earnings ratio, which compares the share price with expected annual earnings, is approximately 32, based on the consensus estimate for adjusted 2026 earnings. Maxim Group estimates that the company trades at approximately 24 times projected 2027 adjusted EBITDA, versus a multiple of 39 that the firm itself considers fair. At the end of 2025, the valuation was around 37 times EBITDA, according to Maxim Group. On August 7, Maxim Group reiterated its “buy” rating at a target price of $111 per share, implying approximately 109% upside from Wednesday’s close.

According to MarketWatch data, the stock has three “buy” ratings and one “overweight.” The average target price is $123.70 per share, implying almost 133% upside from the last close.

Progress Software (PRGS)

Progress Software develops enterprise software, including tools for working with data and deploying AI. In its fiscal third quarter, revenue declined 2% to $246 million, but adjusted free cash flow rose 17% to $87.2 million.

At a stock price of $38.60 per share, Progress Software’s forward price/earnings ratio is around 6.2. Guggenheim estimates the company trades at approximately 2.6 times annual recurring revenue, versus a fair multiple of 5.4-6.2, according to a note seen by Oninvest. This is one of the lowest valuations in our selection and may reflect investor concerns about debt and the outlook for traditional software.

The next test for the business is its acquisition of Domo’s AI and data platform business. According to the management, more than 85% of that business’s recurring revenue comes from consumption-based pricing. This model could reduce the risk of lost sales as AI agents reduce the number of user licenses needed. However, the acquisition was financed with debt, so the outcome for shareholders will depend on integration and debt repayment.

On October 1, D.A. Davidson reiterated its “buy” rating at a target price of $55 per share, implying around 40% upside from Wednesday’s close. The main risk for the stock is debt: net leverage reached 3.8 times annual EBITDA following the Domo acquisition. On September 30, Guggenheim reiterated its “buy” rating at a target price of $83 per share, 115% above the last close.

The stock has six “buy” ratings versus one “hold” on Wall Street, according to MarketWatch data. The average target price is $56.20 per share, approximately 45% above the last close.

Meitu (1357.HK)

Meitu develops apps for editing photos and videos and creating visual content with AI. In the first half, revenue rose 22.1% year over year to RMB2.21 billion, or around $330 million, while adjusted net income attributable to shareholders increased 39.5% to RMB652 million. The company is expanding its tools for professional use, such as creating marketing materials. By June, annual recurring revenue from this business had reached approximately RMB620 million.

Meanwhile, the gross margin declined to 71.5% from 75.3% amid computing costs. The company attributes this to a shift in the revenue mix: newer AI apps, which have higher costs for third-party models relative to revenue, are growing faster, while higher-margin advertising accounts for a smaller share of sales.

The stock is down 46.6% year to date and 57% over the last 12 months. JPMorgan estimates that Meitu trades at 12 times projected earnings for both 2026 and 2027, versus a multiple of 15 that the bank considers fair and comparable to mature app developers, according to a note seen by Oninvest.

JPMorgan identifies risks including the commoditization of standard editing features and shareholder dilution from the conversion of $250 million in bonds issued to Alibaba. On September 23, JPMorgan initiated coverage with a “neutral” rating at a target price of HKD4.50 per share, 28.5% above Wednesday’s close. On September 3, Jefferies reiterated its “buy” rating at a target price of HKD7 per share.

According to MarketScreener data, the stock has 11 “buy” calls versus two “hold” ratings. The average target price is HKD6.60 per share, 88.5% above the last close.

Phancy Group (6682.HK)

Phancy Group, formerly Beijing Fourth Paradigm, develops enterprise AI platforms and provides access to models through application programming interfaces, or APIs. In the first half, revenue rose 43.4% year over year to RMB3.77 billion. API revenue increased almost tenfold to RMB464 million, but still accounts for only around 12% of total sales.

Phancy Group swung to profitability, posting net income attributable to shareholders of the parent company of around RMB119 million, versus a loss a year earlier. However, sales growth has come with rising computing costs: the gross margin declined to 32.8% from 37.7%, while borrowing increased from RMB202 million at the end of 2025 to RMB1.66 billion at the end of June. The company also placed 38.8 million new shares in April.

JPMorgan estimates a forward price/earnings ratio of around 89 based on expected 2026 earnings and 33 based on 2027 earnings, according to a note seen by Oninvest. That valuation assumes substantial earnings growth, which makes the stock’s attractiveness singularly dependent on whether the company can meet those expectations. Phancy Group shares are off 50% year to date and 60% over the last 12 months.

The company is benefiting from demand among Chinese customers to optimize workloads across both Nvidia accelerators and domestic chips. JPMorgan expects the API business’s gross margin to approach 30% and forecasts adjusted net income for 2028 that is 37% above consensus.

On September 23, JPMorgan initiated coverage with an “overweight” rating at a target price of HKD50 per share, implying that the stock could more than double. The bank sees capital intensity as the main risk: server purchases and leases could consume cash flow even as revenue grows rapidly.

According to Stock Analysis data, the stock is a unanimous “buy” among seven analysts. The average target price is HKD51.66 per share.

Intsig Information (688615)

Intsig Information created the CamScanner app and TextIn, an enterprise platform for document recognition and processing. The company sells tools that allow AI agents to extract data from invoices and other documents, turning it into structured information.

In the first half, revenue rose 22.3% year over year to RMB1.03 billion. Overseas sales increased approximately 41%, while the gross margin was around 87%. However, net income attributable to shareholders grew just 4.8% to RMB246.7 million: R&D expenses increased almost 30%, while administrative expenses rose partly because of a one-time charge for previously capitalized intermediary service fees.

The stock has lost approximately 50% of its value year to date. At its current price, it trades at around 29 times projected 2026 earnings, versus a multiple of 57.8 that Huatai Securities considers fair, based on the average for comparable Chinese companies, according to a note seen by Oninvest. Thus, Intsig trades at approximately half its peers’ valuation, but the market is waiting for evidence that the slowdown in bottom-line growth is temporary.

Its overseas user base and the development of its TextIn enterprise platform for AI agents could drive growth, while risks include tighter data protection requirements and competition abroad. On August 20, Huatai Securities maintained its “buy” rating at a target price of RMB163.07 per share, implying 96% upside.

According to MarketScreener data, Intsig Information is also a unanimous “buy” among five analysts. The average target price is RMB173.04 per share, almost double the last closing price.

This text is for informational purposes only and does not constitute personalized investment advice.