There’s no denying that REA Group Limited (ASX: REA) is a fantastic company and one of the better investments on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). But due to its size I feel it is reasonably unlikely that we will see its share price double or triple in value again over the next few years.
Whereas those lucky investors that bought shares 10 years ago when the company was just a small cap share have seen it grow at an extraordinary rate. In fact, it has grown to such a size that a $60,000 investment 10 years ago would be worth just a touch under $1 million today thanks to its 10-year average annual total shareholder return of 32.3%.
In my opinion this shows how successful investors can be if they can identify a future blue chip share whilst it is still a small cap.
In the hope of identifying another REA Group, I’ve picked out three small cap shares which I feel have strong growth prospects. Time will tell whether they become the blue chips of tomorrow, but they certainly are exciting companies today.
Appen Ltd (ASX: APX)
This exciting Australian technology company is a provider of language technology data and services in more than 180 languages. Its high quality data is critical for automatic speech recognition and is used by some of the world’s leading technology companies and even government security agencies. I believe its market-leading position in a growing language technology and machine learning market could help it grow at a strong rate for years to come. Unlike some tech companies which pile on debt, Appen has no debt and a very strong balance sheet.
Freelancer Ltd (ASX: FLN)
Freelancer owns and operates the largest outsourcing marketplace in the world. With 18 million users across 250 countries, Freelancer connects businesses of all sizes with freelance talent for a range of jobs including everything from accounting to web development. In a recent presentation released to the market, Freelancer’s management demonstrated the company’s phenomenal growth potential. The presentation singled out just the global web design market as being an opportunity worth up to $2.7 billion per year for Freelancer.
Xenith IP Group Ltd (ASX: XIP)
Xenith IP provides a range of intellectual property services for its thousands of clients across the world. In its most recent half year results the company reported strong growth in net profit to the tune of 76%. With a market cap of just $125 million it is almost one-tenth of the size of its industry rival IPH Ltd (ASX: IPH). But with both shares changing hands at 22x trailing earnings I believe Xenith IP is the better investment today. With strong industry tailwinds and a growing client list, I expect Xenith will grow at a faster pace than IPH.