3 Small-Cap Stocks with Warning Signs

Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.

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.

DigitalOcean (DOCN)

Market Cap: $5.76 billion

Built for simplicity in a world of complex cloud solutions, DigitalOcean (NYSE:DOCN) provides a simplified cloud computing platform that enables developers and small businesses to quickly deploy and scale applications.

Why Does DOCN Worry Us?

1. ARR growth averaged a weak 14.2% over the last year, suggesting that competition is pulling some attention away from its software
2. Platform has low switching costs as its net revenue retention rate of 99.2% demonstrates high turnover
3. Sky-high servicing costs result in an inferior gross margin of 59.5% that must be offset through increased usage

DigitalOcean is trading at $62.75 per share, or 6x forward price-to-sales. To fully understand why you should be careful with DOCN, check out our full research report (it’s free).

Bumble (BMBL)

Market Cap: $363 million

Started by the co-founder of Tinder, Whitney Wolfe Herd, Bumble (NASDAQ:BMBL) is a leading dating app built with women at the center.

Why Do We Think Twice About BMBL?

1. White space opportunities may be dwindling as its growth in paying users averaged a weak 4.8%
2. Demand has fallen off a cliff over the last two years as its average revenue per buyer fell by 3.9% annually while it struggled to expand its customer base
3. Projected sales decline of 13.8% for the next 12 months points to a tough demand environment ahead

Bumble’s stock price of $3.23 implies a valuation ratio of 3.1x forward EV/EBITDA. Read our free research report to see why you should think twice about including BMBL in your portfolio.

Sprinklr (CXM)

Market Cap: $1.48 billion

With a proprietary AI engine processing 450 million data points daily across 30+ digital channels, Sprinklr (NYSE:CXM) provides cloud-based software that helps large enterprises manage customer experiences across social, messaging, chat, and voice channels.

Why Do We Think CXM Will Underperform?

1. Products, pricing, or go-to-market strategy may need some adjustments as its 6.9% average billings growth over the last year was weak
2. Estimated sales growth of 4.1% for the next 12 months implies demand will slow from its two-year trend
3. Operating margin was unchanged over the last year, suggesting it failed to gain leverage on its fixed costs

At $6 per share, Sprinklr trades at 1.7x forward price-to-sales. Check out our free in-depth research report to learn more about why CXM doesn’t pass our bar.

Stocks We Like More

Your portfolio can’t afford to be based on yesterday’s story. The risk in a handful of heavily crowded stocks is rising daily.

The names generating the next wave of massive growth are right here in our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).

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 Exlservice (+354% five-year return). Find your next big winner with StockStory today.