Are these 2 top ASX growth shares buys?

Are two of the ASX’s best growth shares buys?

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Key points

  • Many leading ASX growth shares have seen price declines in recent weeks
  • The REA Group share price has dropped 10% in 2022, but it’s seeing strong property listings
  • The TechnologyOne share price has fallen around 15% in 2022, though its margins and cloud business continues to grow

Some of Australia’s leading ASX growth shares have seen their share prices fall in recent weeks. Could that make them opportunities?

The operational performance of a business can be very different to how its share price performs year to year. Sometimes, investors can go from overly optimistic to being too pessimistic. The entire value of a company’s cashflows normally doesn’t change that abruptly in a short amount of time.

But volatility can open up opportunities for great businesses.

This is how analysts currently see the situation with these ASX growth shares:

REA Group Limited (ASX: REA)

The REA Group share price has fallen by around 10% since the start of the year.

REA Group is the owner of several digital real estate platforms in Australia including realestate.com.au, realcommercial.com.au and flatmates.com.au. It’s also invested in other areas other of the real estate world including mortgage broking with Smartline and property data with PropTrack.

It also has invested in property sites in other regions such as North America, South East Asia and India.

Citi currently rates the ASX growth share as a hold/’neutral’ with the volume of property listings returning. The broker’s price target is $175, which offers a potential rise of more than 10% over the next year. There is a concern that listings could fall back in the medium-term as interest rates rise.

However, there are other brokers that are a bit more positive on the business. For example, Macquarie rates REA Group as a buy with a price target of $192. That suggests a possible upside of more than 20%.

Based on Macquarie’s numbers, the REA Group share price is valued at 42x FY23’s estimated earnings.

TechnologyOne Ltd (ASX: TNE)

TechnologyOne is Australia’s largest enterprise software company with a global software as a service (SaaS) enterprise resource planning (ERP) offering. It has over 1,200 large corporations, government agencies, local councils and universities as clients.

Since the start of the year, the TechnologyOne share price has fallen by around 15%.

However, the business continues to see earnings growth and in November reported its FY21 result. It showed profit before tax increased by 19% to $97.8 million.

Total annual recurring revenue (ARR) rose 16% to $257.5 million, whilst SaaS ARR surged 43% to $192.3 million. In the UK, its SaaS ARR grew 20% to $9 million and it delivered a profit before tax of $1.6 million compared to a breakeven result last year. It sees “significant opportunities in the coming years.”

The ASX growth share says that it’s on track to reach $500 million of ARR by FY26.

The profit before tax margin increased to 31% during the year, with expectations that margins can rise to at least 35% in the coming years driven by the “economies of scale” of its ERP solution. TechnologyOne says that it’s on track to double the size of the business in the next five years.

TechnologyOne continues to invest in research and development. It invested $77 million in FY21, which was up 13%, as it invests in “new and exciting areas”.

Opinions are mixed on this technology company. Morgans rates it as a buy, with a price target of $13.73 – that’s a potential rise of more than 20%. The broker puts the current valuation at 40x FY23’s estimated earnings.

However, Macquarie thinks that TechnologyOne looks/looked expensive compared to others in the industry. That’s why it has a sell rating on the business with a price target of $11.

Should you invest $1,000 in REA Group right now?

Before you consider REA Group, you'll want to hear this.

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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. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. 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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