Small-cap stocks can be incredibly lucrative investments because their lack of analyst coverage leads to frequent mispricings. However, these businesses (and their stock prices) often stay small because their subscale operations make it harder to expand their competitive moats.
These trade-offs can cause headaches for even the most seasoned professionals, which is why we started StockStory - to help you separate the good companies from the bad. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
DocuSign (DOCU)
Market Cap: $9.79 billion
Creating the digital equivalent of "sign on the dotted line" for over a billion users worldwide, DocuSign (NASDAQ: DOCU) provides an agreement management platform that enables businesses to electronically prepare, sign, and manage documents and contracts.
Why Is DOCU Not Exciting?
- ARR growth averaged a weak 8.7% over the last year, suggesting that competition is pulling some attention away from its software
- Projected sales growth of 8.4% for the next 12 months suggests sluggish demand
- Operating margin improvement of 2.6 percentage points over the last year demonstrates its ability to scale efficiently
DocuSign is trading at $48.72 per share, or 2.8x forward price-to-sales. Dive into our free research report to see why there are better opportunities than DOCU.
Elastic (ESTC)
Market Cap: $5.77 billion
Built on the powerful open-source Elasticsearch technology that powers search functionality for thousands of websites worldwide, Elastic (NYSE: ESTC) provides a search and AI platform that helps organizations find insights from their data, monitor applications, and protect against security threats.
Why Are We Cautious About ESTC?
- Offerings struggled to generate meaningful interest as its average billings growth of 12.5% over the last year did not impress
- Estimated sales growth of 13.6% for the next 12 months implies demand will slow from its two-year trend
- Operating profits increased over the last year as the company gained some leverage on its fixed costs and became more efficient
Elastic’s stock price of $55.75 implies a valuation ratio of 3.1x forward price-to-sales. Check out our free in-depth research report to learn more about why ESTC doesn’t pass our bar.
PacBio (PACB)
Market Cap: $401.7 million
Pioneering what scientists call "HiFi long-read sequencing," recognized as Nature Methods' method of the year for 2022, Pacific Biosciences (NASDAQ: PACB) develops advanced DNA sequencing systems that enable scientists and researchers to analyze genomes with unprecedented accuracy and completeness.
Why Are We Wary of PACB?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 10.7% annually over the last two years
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Negative earnings profile makes it challenging to secure favorable financing terms from lenders
At $1.35 per share, PacBio trades at 2.4x forward price-to-sales. If you’re considering PACB for your portfolio, see our FREE research report to learn more.
Stocks We Like More
ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.
Our AI system flagged Palantir before it ran 1,662%. AppLovin before it ran 753%. Nvidia before it ran 1,178%. Each week it produces 6 new names that pass the same tests. Get Our Top 6 Stocks for Free HERE.
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.
