What is the next a2 Milk Company Ltd (ASX:A2M) going to be?

a2 Milk Company Ltd (ASX:A2M) has been great, what will the next top performer be?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There have been a number of amazing performances on the ASX over the past few years. a2 Milk Company Ltd (ASX: A2M) has been amazing with share price growth of around 480% over the past two years.

The next two years isn't going to be as good, but a2 could still be a good one to own compared to an ASX index product.

But, what will the next a2 be?

I don't think it's going to be its competitor Bellamy's Australia Ltd (ASX: BAL) because it too has already made significant gains.

There are three main things to consider:

Addressable market

A key part of a business' potential growth is how big its potential addressable market is. Bellamy's and a2 have performed so well because although Australia's population is small there is a huge amount more of Asian parents wanting to provide safe nutrition for their children.

A business that is able to tap into the huge Asian middle class or the rise in usage of technology could be ones to watch. For example, Costa Group Holdings Ltd (ASX: CGC) and Appen Ltd (ASX: APX) are already benefiting from those respective trends and could continue to do well.

Perhaps Freedom Foods Group Ltd (ASX: FNP) will be the next one to grow from Asian demand.

How will that business win the market?

If a business is going to revolutionise an industry it usually needs to be the best, the cheapest or offer something entirely different.

Think of Xero Limited (ASX: XRO), it is widely viewed as the best accounting software for small businesses and offers a large selection of tools to make the job easier. It was completely different to what already was in the market.

A2 products are supposedly easier to digest for consumers, making it seem higher quality. Bellamy's is organic, which also is often seen as higher quality.

Various other businesses are capturing market share by offering the best service – like Google with Search, Maps and YouTube.

The key here is to find a smaller business that has a great offering that has a lot of room to grow in size. Altium Limited (ASX: ALU) supposedly has the best and the cheapest electronic PCB software in the industry.

Is it capable of increasing profit margins?

A business that will truly deliver great profit growth and therefore returns is one that is able to increase its profit margins as it grows. This will result in the profit growing faster than revenue over time.

A2 and Altium are doing this wonderfully as each report comes in. Businesses like Woolworths Group Ltd (ASX: WOW) are seeing their margins being slowly eroded.

Foolish takeaway

For the real market-beating opportunities I think you need to find shares that are expanding overseas. That gives the business the best chance for fulfilling its addressable market and increasing its economies of scale.

Motley Fool contributor Tristan Harrison owns shares of COSTA GRP FPO. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia owns shares of A2 Milk, Appen Ltd, and Xero. The Motley Fool Australia has recommended Freedom Foods Group Limited. 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »