Mid-cap technology stocks have demonstrated impressive performance over the last three years, recovering sharply from the 2022 bear market. The S&P MidCap 400 Information Technology sector reported approximately 22% annualized gains, reflecting a significant rerating as interest rates stabilized and earnings began to re-accelerate. This resurgence is particularly evident in the software and services segments, which have consistently outperformed hardware-focused companies.
The SPDR S&P Software & Services ETF (XSW) recorded annualized total returns of around 19.8% over the same period, while mid-cap cloud computing stocks, represented by the WisdomTree Cloud Computing (WCLD), lagged behind with a compound annual growth rate (CAGR) of only 9%. This disparity underscores a broader trend: diversified software solutions are achieving superior results compared to their narrower, consumption-sensitive counterparts.
Factors Driving Performance
Two primary structural forces contribute to this performance divergence. First, the sensitivity to interest rates and the cost of capital has shifted market expectations. As the “higher-for-longer” interest rate environment took hold, investors began prioritizing companies demonstrating profitability, strong gross margins, and visible free cash flow. This shift has resulted in a marked preference for firms exhibiting a balance of growth and margin discipline, commonly referred to as the Rule of 40.
Second, the integration of artificial intelligence (AI) into various business workflows has favored companies that embed AI features into their products. Organizations are increasingly investing in AI capabilities that enhance efficiency and reduce costs, moving away from speculative AI investments. According to Deloitte, the industry outlook for 2025 points to increased IT spending primarily linked to AI integration rather than new initiatives, emphasizing the importance of return on investment.
Defining “mid-cap” in this context refers to companies with market values between $2 billion and $10 billion. These firms have typically surpassed the crucial product-market fit stage yet remain agile enough to expand faster than GDP through market share growth. Their size allows them to invest in research and development without the constant threat of dilution, making them well-positioned for growth during economic upturns.
Top Mid-Cap Technology Performers
Over the past three years, several mid-cap tech stocks have emerged as standout performers, each demonstrating unique strategies and growth trajectories.
1. **Innodata Inc. (NASDAQ: INOD)**
Market Cap: $2.79 billion
3-Year CAGR: 197.7%
Innodata has positioned itself at the forefront of the AI-driven landscape, gaining recognition for its significant contributions to enterprise data engineering. The company has attracted attention from analysts, with recent upgrades reflecting confidence in its growth strategy.
2. **Applied Digital Corporation (NASDAQ: APLD)**
Market Cap: $7.48 billion
3-Year CAGR: 156.32%
Focused on high-performance computing and AI infrastructure, Applied Digital is set to begin operations at its Harwood site, expected to generate substantial revenue from new agreements.
3. **BigBear.ai Holdings, Inc. (NYSE: BBAI)**
Market Cap: $2.76 billion
3-Year CAGR: 70.90%
BigBear.ai specializes in AI and data analytics for defense applications, recently partnering with SMX to enhance military operational capabilities.
4. **AvePoint, Inc. (NASDAQ: AVPT)**
Market Cap: $3.20 billion
3-Year CAGR: 58.03%
AvePoint’s growth is driven by demand for cloud data protection solutions, supported by strong performance in its subscription model.
5. **Kyndryl Holdings, Inc. (NYSE: KD)**
Market Cap: $6.91 billion
3-Year CAGR: 49.97%
Kyndryl has shifted towards next-generation infrastructure and AI solutions, launching new products aimed at modernizing operations in various sectors.
6. **Zeta Global Holdings Corp. (NYSE: ZETA)**
Market Cap: $4.75 billion
3-Year CAGR: 39.51%
This AI-driven marketing cloud provider has seen growth through strategic acquisitions, enhancing its competitive edge in the marketing technology landscape.
7. **Aurora Innovation, Inc. (NASDAQ: AUR)**
Market Cap: $9.96 billion
3-Year CAGR: 30.3%
Aurora focuses on autonomous driving technology, recently receiving positive ratings from analysts based on its growth potential and innovative solutions.
8. **Varonis Systems, Inc. (NASDAQ: VRNS)**
Market Cap: $6.72 billion
3-Year CAGR: 28.95%
Varonis’s focus on enterprise data security has been bolstered by strategic acquisitions and partnerships, expanding its service offerings.
9. **Parsons Corporation (NYSE: PSN)**
Market Cap: $9.37 billion
3-Year CAGR: 28.33%
Parsons has enhanced its infrastructure capabilities through recent acquisitions, aligning with its growth strategy in climate-resilient projects.
10. **Formula Systems (1985) Ltd. (NASDAQ: FORTY)**
Market Cap: $2.20 billion
3-Year CAGR: 22.18%
This Israeli IT holding company reported record revenues and strategic acquisitions, reflecting a robust approach to value creation.
The mid-cap technology sector is expected to continue its upward trajectory, driven by strong fundamentals and the ongoing integration of AI across various applications. As companies adapt to evolving market conditions, selection and strategic focus will play critical roles in determining future performance.