2 growing small cap ASX shares for your watchlist

Here are a couple of growing small caps to watch…

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Are you interested in small cap shares? If you are, then you may want to look at the ones listed below.

Both these small cap ASX shares have been given buy ratings and are tipped for big things in the future. Here’s why they should be on your watchlist:

Adore Beauty Group Limited (ASX: ABY)

The first small cap for your watchlist is Adore Beauty. It operates a beauty-focused integrated content, marketing, and ecommerce platform that partners with a broad and diverse portfolio of approximately 260 brands and 10,800 products.

This strategy has worked wonders and led to Adore Beauty’s active customers growing 39% year on year in FY 2021 to 818,000. This and a 7% increase in average revenue per customer helped underpin a 48% jump in full year revenue to $179.3 million.

While this is a large number, it is still only a small slice of a beauty market worth $11 billion at present. This gives Adore Beauty a long runway for growth over the next decade.

Morgan Stanley is a fan of the company. It currently has an overweight rating and $6.00 price target on its shares. This compares to the latest Adore Beauty share price of $4.87.

ELMO Software Ltd (ASX: ELO)

Another small cap to watch is ELMO. It is a cloud-based human resources and payroll software company that provides a unified platform to streamline range of processes.

ELMO has been a strong performer in recent years and this continued in FY 2021. For the 12 months ended 30 June, the company reported a 38.1% increase in revenue to $69.1 million. Positively, 96% of this revenue is subscription based, which helped lift its annualised recurring revenue (ARR) by 52.1% year on year to $83.8 million.

Management advised that this was driven by growth at both the small and mid-end of the market. ELMO’s mid-market business reported an 85.1% increase in customers to 3,114, whereas its small business offering grew its customer base to 9,069.

Looking ahead, management provided guidance for ARR of $105 million to $111 million in FY 2022. This represents year on year growth of 25% to 32%.

Morgan Stanley was pleased with this guidance and remains positive on its long term outlook. It has an overweight rating and $7.80 price target on its shares. This compares to the latest ELMO share price of $4.63.

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Motley Fool contributor James Mickleboro 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 Elmo Software. 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 Elmo Software. 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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