ASX small caps have the potential to deliver the biggest returns for investors because of how much profit growth can create.
It’s much easier doubling $10 million profit into $20 million than it is to turn $1 billion of profit into $2 billion.
The most important thing we’re trying to achieve with our portfolio is investment returns. It’s best to invest for the long-term, but it’s useful if we can find the shares that are going to give us good returns sooner rather than later.
Small caps that are turning the corner from burning cash to creating net profit could be attractive as the market realises how quickly profit could grow in the next few years.
These are two ASX small cap shares I think could be strong performers over the next two years:
Pushpay Holdings Ltd (ASX: PPH)
Pushpay is a religious donation payments business which predominately services large and medium churches in the US.
Today the company announced its interim FY20 result which included revenue growth of 30% to US$57.4 million and net profit growth of 247% to US$6.5 million as well as operating cash flow growth of 274% to US$8.9 million.
If costs continue to grow far slower than revenue we could see the profit grow at a much quicker pace than revenue for the foreseeable future.
With the Pushpay share price lower than it has been over the past two years, I think today could be a good time to buy shares with net profit likely to significantly jump over the next two to three years.
Redbubble Ltd (ASX: RBL)
Redbubble owns two online marketplace businesses for independent artists to sell products like clothing, wall art and so on.
The company has also seemingly hit a tipping point. In the first quarter of FY20 the online business generated marketplace revenue growth of 43% to $70 million and gross profit growth of 48% to $27 million.
Perhaps most importantly, Redbubble generated an earnings before interest, tax, depreciation and amortisation (EBITDA) profit of $2.2 million (an improvement of $4 million from the $1.8 million loss in the prior year) and it also created free cash flow of $7.8 million.
The company’s share price is only just back to the 2018 highs and could keep going higher as more revenue falls to the bottom line.
Both businesses look like they could be strong performers into 2020. I’d probably choose Pushpay because it appears to have less competition, less reliance on marketing and good repeat business compared to Redbubble.
The post 2 hot ASX growth small caps hitting exciting profit inflection points appeared first on Motley Fool Australia.
I’d definitely think about adding Pushpay and these other leading ASX growth shares to my portfolio this week.
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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of PUSHPAY FPO NZX. The Motley Fool Australia has recommended PUSHPAY FPO NZX and REDBUBBLE FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019