Small-cap tech names are outperforming, but have valuations got too rich?

Tech small caps were once again in the spotlight for investors as their stocks rose against the backdrop of the Fed easing. The Russell 2000 index has gained 40.6% over the last six months and is now trading near record highs. At the same time, the rally has made small-cap valuations less attractive, prompting investors to question whether these stocks have become too rich.

On the one hand, the upside of tech small caps remains immense: this is where innovation and future industry leaders are born. On the other, many small companies now look almost as “frothy” as their large-cap peers, challenging the conventional view that years of underperformance have made this segment especially appealing for growth-focused investors, MarketWatch noted.

Oninvest analyst Aldiyar Anuarbekov has analyzed 182 small-cap tech stocks. On his numbers, these stocks currently trade at an average price-to-earnings ratio of 19, even when only for free-float shares are counted. By comparison, companies in the broader Russell 2000 index have an average P/E of around 18, already above their historical range of 13-17.

Large-cap tech names remain significantly more expensive: the Nasdaq 100 index trades at roughly 34 times earnings, while the IT segment within the S&P 500 stands at 38.

At the same time, fewer than half of the 182 analyzed names are profitable, meaning their valuations are supported more by expectations than by current results. Among profitable firms, the median P/E is markedly higher, at about 28. Sector concentration is also low: the 10 largest companies, combined, account for only 12% of the total market value, which suggests that growth is concentrated in a narrow group of leaders rather than broad based across the sector. A similar pattern, to some extent, is also visible in the Big Tech universe, where just a few companies drive most of the gains.

Anuarbekov identifies three stocks that have posted the strongest gains over the last six months – each soaring more than 300%.

LightPath Technologies manufactures precision optics, molded lenses, infrared components, and custom optical products for 5G networks, thermal imaging, aerospace, and defense. The stock has surged about 300% in the last six months, driven by major contract announcements. In September, the company disclosed an $18.2 million order for infrared cameras scheduled for delivery in 2026 and a follow-up $22.1 million purchase order for 2027.

For the fourth quarter of fiscal 2025, revenue rose 41% year over year to $12.2 million, while the bottom line grew 6.6%, both supporting the share price. Earlier, analysts at Craig-Hallum highlighted LightPath’s reliance on a limited number of large contracts and its capacity expansion needs as key risk factors that investors should monitor. According to MarketWatch data, four analysts now track the stock, all of whom rate it a “buy."

SuperX AI Technology is a Singapore-based provider of AI infrastructure solutions. Over the last six months, the company’s shares have jumped 490%, with investor interest accelerating after several expansion announcements. In late July, SuperX revealed plans to establish its first regional supply center in Japan, with an annual capacity of up to 10,000 high-performance AI servers. In September, the company incorporated a U.S. subsidiary headquartered in Silicon Valley, which will serve as a hub for joint R&D, integrated design, and North American market growth.

Wolfspeed develops silicon carbide and gallium nitride power semiconductors for EVs and charging systems. The stock's performance cannot be measured over six months because the company canceled its old shares and is issuing new ones as part of a bankruptcy restructuring, but quotes have jumped. The court-approved plan will cut Wolfspeed’s debt by 70% to $2 billion and reduce interest payments by 60%, enabling it to emerge from bankruptcy protection. The announcement sparked a surge of speculative trading: on September 29, the stock soared 1,726% in a single day. Investors are betting that with a lighter balance sheet, Wolfspeed’s silicon carbide business for EVs, renewables, and data centers could relaunch successfully. Zacks Research has highlighted the company’s new generation of silicon carbide wafers, revenue growth prospects, and deleveraging as the main long-term drivers. According to MarketWatch, two analysts now cover the stock: one rates it a “hold,” the other a “sell.”

When analyzing small-cap tech stocks, investors should look beyond P/Es to examine revenue trends, product quality, costs, and margin sustainability. Even among profitable companies, it is critical to assess how earnings are generated and whether they can be maintained.

Despite the risks, high volatility, and potential overvaluation, the segment continues to attract attention. Smaller innovators often develop technologies that later power entire industries, and even at current valuations, their shares remain cheaper than those of Big Tech leaders included in the Nasdaq 100 and S&P 500. Some risk is already priced in, and if conditions improve – such as further Fed rate cuts or a broader economic recovery – small caps could benefit disproportionately. Lower borrowing costs typically support these companies, which have a harder time raising capital than their larger peers.

While looser monetary policy could continue to support small- and mid-cap stocks, JPMorgan analysts emphasize that interest rates are only one of many drivers behind the group’s potential to deliver above-market returns.

The analysts estimate small- and mid-cap DM stocks could outperform large caps by 30-60% over the next three years. “We are just in the second half of the first inning,” JPMorgan wrote.

This material does not constitute an investment recommendation.

The AI translation of this story was reviewed by a human editor.