In this article, we’re going to talk about the 10 worst small-cap AI stocks to buy according to short sellers to short sellers.
The September Interest Rate Cut
Analysts have been anticipating interest rate cuts for a while now, with bets on either a 25- or a 50-basis point reduction. Concerns about potential economic instability and the impact of these cuts on net interest income for banks added complexity to the market outlook. However, the situation was sorted when the Fed cut interest rates by 50 basis points on September 18 this week, marking its first easing of monetary policy since the pandemic began.
This reduction was prompted by growing concerns about the labor market’s health. Following this decision, the Fed’s benchmark rate now stands at a range of 4.75% to 5.0%.
The Fed’s Summary of Economic Projections indicates that policymakers anticipate further cuts, with expectations of a half-point reduction by the end of this year, an additional full percentage point in 2025, and another half-point cut in 2026, ultimately targeting a range of 2.75% to 3.00%. Fed Chairman Jerome Powell stated that the projected rate cuts are not urgent and that the timing for easing is appropriate.
As political dynamics unfold ahead of the presidential elections in November, Powell emphasized that monetary policy decisions are based solely on data and economic outlooks rather than political considerations.
While a lot of analysts suggested that a 50 basis-point rate cut could be an over-exaggeration, Erika Najarian, UBS senior equity research analyst, just earlier this week, mentioned that small- and mid-cap stocks could benefit from a 50 basis-point cut. We talked about this in another one of our articles, 16 Best Mid Cap Growth Stocks To Buy Now, here’s an excerpt from it:
“Najarian attributes the recent underperformance of financial stocks to market concerns about the implications of potential rate cuts for economic stability, leading investors to question a less favorable economic outlook. She believes some anticipated cuts may already be reflected in money center bank stock prices due to their strong year-to-date performance. A 50 basis point cut could especially benefit mid-cap stocks affected by commercial real estate issues.
She explains that a 50 basis point cut would significantly impact net interest income. Money center banks benefit more from rising rates, while mid-caps are liability-sensitive and may see deposits repriced faster, favoring them if rates are cut aggressively…. She points out that banks must choose between cutting rates to remain competitive or maintaining volume, complicating forecasts for net interest income.”
Right after the Fed’s announcement, Mark Avallone, president at Potomac Wealth Advisors, discussed his reaction to the Fed’s 50 basis-point rate cut, considering the recent financial market fluctuations sparked by this decision. The move led to a volatile trading session, with the Dow Jones Industrial Average initially reaching all-time highs before briefly turning negative. By the end of the session, the Dow was up 188 points, while the S&P 500 rose by half a percent and the NASDAQ climbed approximately 0.8%.
Mark Avallone expressed surprise at the Fed’s decision but emphasized that investors shouldn’t make impulsive decisions, but rather utilize potential opportunities in small and mid-cap stocks, which he believes will benefit from a lower interest rate environment. He noted that these stocks are currently valued at about 50% of the forward price-to-earnings ratio compared to large-cap stocks, making them an attractive investment option.
Avallone warned investors to be cautious with traditional banks, especially mid-sized and large ones, based on his experience at Bank of America. He believes that the recent changes in loan pricing after the Fed’s rate cut would hurt banks’ overall revenue and income from interest. Since deposit rates are likely to stay high due to competition from non-bank financial companies and money market funds offering attractive rates above 5%, traditional banks might find it hard to stay profitable.
He suggested that it may be too late for significant moves in fixed-income investments, as many investors have already lengthened their bond durations. He recommended pausing further adjustments until it’s clear whether the rate cut is due to an economic slowdown or a preemptive action.
So, while the Fed’s interest rate cut has created uncertainty in the markets, Avallone’s analysis highlights specific sectors and strategies that could offer potential growth amid these challenges. With that context, we’re bringing you a list of the 10 worst small-cap AI stocks to buy according to short sellers to short sellers.
Methodology
We used stock screeners to look for AI companies trading between $1 billion and $10 billion, that’s our definition of small-cap stocks. We then selected 10 stocks that were shorted but at the same time popular among elite hedge funds and that analysts were bullish on. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers. The stocks are ranked in ascending order of their short interest.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Worst Small Cap AI Stocks To Buy According to Short Sellers
10. Ambarella Inc. (NASDAQ:AMBA)
Short % of Shares Outstanding As of August 30: 3.64%
Market Capitalization as of September 14: $2.22 billion
Number of Hedge Fund Holders: 29
Ambarella Inc. (NASDAQ:AMBA) is an edge AI semiconductor company that specializes in high-performance, low-power video processing solutions. Its chips are used in action cameras, drones, security cameras, and automotive systems, and are designed to enable AI applications to be executed at the edge of a network, rather than in a centralized cloud data center.
In FQ2 2025, revenue for Ambarella Inc. (NASDAQ:AMBA) was $63.72 million, up 2.58% year-over-year, and 17% sequentially. The loss per share came out at $0.13.
Auto revenue grew slightly sequentially with stronger growth in IoT, representing ~70% of the total revenue. The company also achieved record edge-AI inference revenue. Two logistics companies, WT Microelectronics and Hakuto, accounted for ~10% of FQ2 revenue. WT Microelectronics represented 63% of revenue, while Hakuto contributed 10%.
The company’s new 5-nanometer products, including the CV5, CV7, and CV3-AD families (featuring advanced AI capabilities), are driving strong initial revenue growth in IoT and automotive. CV2 products, used for computer vision applications, are primarily driving AI revenue. The CV7 family will enter production in late fiscal 2025.
It’s pursuing OEMs and Tier 1 customers for its CV3-AD family, targeting L2+ and higher autonomy levels. Production is expected to begin in 2026/fiscal 2027. The company is also developing new products like N1, 4D radar, and autonomous driving software.
Despite industry challenges, like the ongoing shakeout in EV OEMs and mixed enterprise and consumer IoT spending, the company has achieved strong results and maintains a positive outlook, due to its strategic focus on monetizing increasing demand for AI-powered solutions, including AI inference and edge computing. Management expects the fiscal year 2025 revenue to grow by a mid- to high-teen percentage compared to the previous year.
Meridian Contrarian Fund made the following comment about Ambarella, Inc. (NASDAQ:AMBA) in its Q3 2023 investor letter:
“Ambarella, Inc. (NASDAQ:AMBA) designs system-on-a-chip semiconductor solutions that specialize in visual processing for the security, industrial, and automotive markets. We have owned Ambarella since the third quarter of 2017 when earnings declined due to sales shortfalls at large customer GoPro. Our thesis was that emerging artificial intelligence (AI), automotive, industrial, and security markets would soon dwarf the company’s declining consumer market. After significant outperformance in 2021driven by strong demand for AI-enabled computer vision chips in a variety of applications, Ambarella’s stock has been weak since2022 and was again this quarter. Ambarella’s legacy products, mainly image processors for low-end security cameras, are in decline while the company re-focuses its resources on its computer vision chips, which are enabled for AI processing. The company has a core competency in placing very complicated algorithms on individual chips in a very power-efficient way, placing Ambarella in a strong leadership position as AI capabilities shift from centralized data centers to inference at the edge, a fast-growing future market. We also believe that the company’s superior technology makes it a highly attractive acquisition target for many larger technology companies. As such, the stock remains in the portfolio, though we reduced the position during the quarter as we believe an earnings growth catalyst may be several quarters in the future.”
9. AeroVironment Inc. (NASDAQ:AVAV)
Short % of Shares Outstanding As of August 30: 4.56%
Market Capitalization as of September 14: $4.92 billion
Number of Hedge Fund Holders: 24
AeroVironment Inc. (NASDAQ:AVAV) is an American defense contractor that designs and manufactures unmanned aerial vehicles (UAVs) and robotic systems, harnessing advanced AI to enhance operational efficiency. For instance, its drones incorporate advanced AI capabilities for autonomous navigation, image and video analysis, and data processing.
In late August, it secured a $1 billion US Army 5-year sole-source IDIQ contract for the Switchblade 600 drones. The US government also approved the company to sell Switchblade 300 drones to Taiwan. It recently received a $128 million contract for its drones, which is part of the larger $1 billion contract.
AeroVironment Inc. (NASDAQ:AVAV) was able to set a new first-quarter revenue record this time, generating $189.48 million in FQ1 2025, recording a 24.38% year-over-year increase.
The Loitering Munition Systems (LMS) business made a revenue of ~$52 million in FQ1, up 68% year-over-year. The Uncrewed Systems segment made $120 million, up 22%. Demand for Switchblade 300 and 600 remains high.
The Uncrewed Systems segment remains a top revenue driver, led by Puma and JUMP 20 platforms. The new P550 platform, designed for long-range reconnaissance (LRR), is gaining traction. The company is optimistic about its potential, especially after submitting it for the US Army’s LRR program. The MacCready Works segment is also advancing AI and autonomous capabilities.
The company’s positive outlook is fueled by strong demand for its UAVs and tactical missile systems, such as the Puma, Raven, and Switchblade models, which are essential for modern defense. Its continuing focus on innovation, production, and customer service helps it stay ahead in this fast-growing market. As defense budgets increase worldwide, AeroVironment Inc. (NASDAQ:AVAV) is well-positioned for long-term growth.
