2 top small cap ASX shares that might be buys

Adore Beauty and Volpara are two small cap ASX shares that could be worth looking at for growth potential.

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Some small cap ASX shares could be worth looking at for the long-term.

Smaller businesses may have a bigger and longer growth runway because of the smaller size of the company compared to their larger counterparts.

However, just because a business is small doesn’t mean that a company is worth owning.

Here are two small cap ASX shares to consider:

Adore Beauty Group Ltd (ASX: ABY)

Adore Beauty is an e-commerce beauty business with a portfolio of over 260 brands and 10,800 products. It operates in both Australia and New Zealand.

The company is seeing a structural shift in consumer behaviour towards online retail, based on continued strong retention of customers acquired during the COVID-19 lockdown.

Adore Beauty is seeing an acceleration of growth during these COVID affected times. In FY19, revenue increased 38.6%. Management are expecting revenue growth of between 43% to 47% in FY21.

Indeed, the company announced its FY21 third quarter saw revenue growth of 47% on the prior corresponding period. Active customers were up 69% over the prior corresponding period to 687,000.

Adore Beauty is planning to continue to invest with discipline to drive revenue growth and further drive its online market share. Its investments include marketing, advertising, people, its mobile app, the loyalty program, content capabilities, range, adjacency expansion and private label development.

According to Frost & Sullivan, the beauty and personal care market in Australia is worth $11.2 billion and is expected to grow at a compound annual growth rate of 26% to 2024.

The small cap ASX share said that given the predominately fixed nature of the business’ cost base, it’s expecting scale benefits to increase operating leverage and deliver earnings before interest, tax, depreciation and amortisation (EBITDA) margin expansion in the longer-term as the company continues to grow revenue.

UBS currently rates Adore Beauty as a buy, with a price target of $5.60. The broker thinks the beauty business can benefit from the e-commerce growth and it’s a good time to buy after the share price has dropped quite a lot from its listing price.

Volpara Health Technologies Ltd (ASX: VHT)

Volpara is health technology software business that has a breast health platform which assists in the delivery of personalised patient care.

The company is seeing operating leverage. In its recent FY21 result, total revenue increased 57% whilst subscription revenue grew 99%. Gross profit went up 67% to NZ$18.1 million, reflecting a gross profit margin of over 91%. Operating costs only increased 8% year on year, or 4% excluding the CRA Health acquisition.

Volpara has outlined a number of areas where the business is expecting growth.

It’s targeting increased average revenue per user (ARPU) by selling a platform, not just a product. Its platform includes all of its products with multiple integrations that aims to make the suite even more compelling. Most new sales are now for two or three products, representing significantly increased ARPU. Its relationship with genetics companies is expected to increase that ARPU further.

The small cap ASX share says that it has a pipeline of new deals lined up thanks its networks, customer referrals and digital marketing.

Volpara also believes it can achieve growth through upselling by upgrading MRS users to its patient hub and Volpara products. Management suggested a 200% to 300% increase in recurring revenue for those that upgraded.

It’s still seeing a very high retention rate and there are further acquisition opportunities that can increase its market share and/or improve its skills and products to help increase ARPU and provide technology for the future.

Volpara is expecting revenue in FY22 of approximately NZ$25 million to NZ$26 million, which would growth of at least 27%.

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Motley Fool contributor 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 and has recommended VOLPARA FPO NZ. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Adore Beauty Group Limited. The Motley Fool Australia owns shares of and has recommended VOLPARA FPO NZ. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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