I'd invest $1,000 right now into ASX share Bubs Australia Ltd (ASX: BUB).
Many ASX shares have been performing strongly recently with a strong run over the past month by many of my preferred picks like Pushpay Holdings Ltd (ASX: PPH), Citadel Group Ltd (ASX: CGL), WAM Microcap Limited (ASX: WMI), Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and Brickworks Limited (ASX: BKW).
The share market seems to be a bit jubilant at the moment. I'm not sure we're out of the COVID-19 woods yet, particularly when it comes to the US election.
There are still a couple of places which I think look like really nicely priced long-term opportunities such as infant formula. However, there's a bit of volatility in that sector right now.
About Bubs
Bubs is a fast-growing infant formula ASX share with a specialisation in goat milk products. Indeed, it has exclusive milk supply from Australia's largest milking goat herd.
But the company actually sells a variety of products. Not only does it sell a range of goat milk formula, it sells organic grass-fed cow's milk infant formula, organic baby food, cereals, toddler snacks.
It recently launched Vita Bubs, which is for infant and children's vitamin and mineral supplements. It is hoped that this segment will be able to achieve relatively high profit margins.
The company has a rapidly growing distribution network. It's sold across major retailers including Woolworths Group Ltd (ASX: WOW), Coles Group Limited (ASX: COL) and Baby Bunting Group Ltd (ASX: BBN) in Australia. It's also exported to China, Vietnam, South East Asia and the Middle East.
Why I think the Bubs share price is an ASX share opportunity today
The Bubs share price has been on a bit of a losing run over the past few months. Over the past month it's down 8.5% and since 11 May 2020 it has dropped 36%.
Some investors may have been a bit bemused by the launch of Vita Bubs and the decision to hire Jennifer Hawkins as global brand ambassador. The choice to move to local manufacturing in China may also be concerning investors – why the change in strategy?
The company's fourth quarter may have disappointed too, with revenue not being as much as hoped.
No ASX share is perfect. There will be bumps along the way, particularly as we're going through one of the worst global pandemics in human history with COVID-19.
The quarter to 31 March 2020 saw a lot of pantry stocking sales. But the last few months has seen disruption to sales channels and a de-stocking effect. I believe good growth will return, as early as the quarter to 31 December 2020.
A business shouldn't be judged on a quarter (or two) of sales in my opinion. Investors need to think about the long-term growth. FY20 saw full year revenue growth of 32% to $62 million with 32% growth of direct sales to China. FY20 infant formula sales – a product with a higher gross margin – went up by 58% to $30 million. It's largely why the normalised gross margin was able to improve by 3 percentage points to 24%.
What I'm focused on most is the ex-China export market. There are undoubtedly risks when it comes to selling products in China, but the rest of Asia is a very promising market for the ASX share. Outside of Chin, export sales saw five-fold growth and represented 10% of group revenue. The successful launch in Vietnam was very helpful. That country alone is a big potential market for Bubs.
Foolish takeaway
With a market capitalisation of under $500 million, I think that Bubs has plenty of growth potential. The shift to more sales being infant formula will help margins and profit growth of the overall business. The rapid sales growth in Asia, barring any short-term COVID-19 impacts, looks very promising.
I think this ASX share could be a strong performer over the next five years, particularly if its cow milk infant formula takes off.
I'm looking at other share opportunities at the moment too.
