The Australian share market is home to a good number of shares that have the potential to grow strongly in the future. But is it home to any 20-baggers?
A 20-bagger is a share that provides a return 20 times greater than your original investment.
This means that if you were able to find one of these shares and invest $5,000 into it, you would turn that investment into a massive $100,000.
Whilst they are quite rare, there are plenty of examples of 20-baggers trading on the ASX today.
Chalice Mining Ltd (ASX: CHN), Race Oncology Ltd (ASX: RAC), and Vulcan Energy Resources Ltd (ASX: VUL) are three ASX shares that have generated returns of more than 2,000% over the last three years, much to the delight of their shareholders.
But that was then, and this is now. So, which ASX shares could be the next 20-baggers? While I think three years might be far too soon for this level of return, I believe the two ASX shares listed below have the potential to turn a $5,000 investment into $100,000 over the long term. Here's why:
Life360 Inc (ASX: 360)
What it does: Life360 operates in the digital consumer subscription services market with a focus on products and services for digitally native families. Its key offering is the Life360 app, which provides location-based services, including sharing and notifications.
How it could become a 20-bagger: Life360 currently has a market capitalisation of just under $500 million. This means that its market capitalisation would grow to be $10 billion if the Life360 share price were to rise 2,000%.
While this sounds like a lot, I believe this is possible over the long term based on its leadership position in an enormous market. For example, management recently reiterated its belief that its serviceable addressable market is $55 billion globally. This comprises location sharing, crash and roadside assistance, identity theft protection, and pets and children location sharing verticals. It doesn't include the item tracking market which the company recently entered with the acquisition of Tile.
Goldman Sachs currently values Xero Limited (ASX: XRO) at 16 times EBITDA. If we were to ascribe the same multiple to Life360, it would need to achieve EBITDA of $625 million to command a market capitalisation of $10 billion. This is a big ask but with ~38 million monthly active users (and growing) and such a huge market opportunity, I believe it is a possibility over the long term.
Nitro Software Ltd (ASX: NTO)
What it does: Nitro Software is a software company aiming to drive digital transformation in organisations around the world. Its key solution is the Nitro Productivity Suite, which provides integrated PDF productivity and electronic signature tools to customers in a market benefiting from structural tailwinds such as remote work and digitisation.
How it could become a 20-bagger: Nitro Software currently has a market capitalisation of approximately $300 million. If its shares were to rise 20 times over, this would take its market capitalisation to $6 billion.
Unlike Life360, Nitro doesn't have a leadership position in its market. However, it is a worthy challenger to industry giant Docusign. Nitro has over 3 million licensed users and 13,000+ business customers across 157 countries. This includes over 67% of the Fortune 500 and three of the Fortune 10, which I believe is a testament to the quality of its offering.
Goldman Sachs estimates that the company has a "US$34bn TAM [total addressable market] across PDF, e-signing and workflows." Furthermore, it highlights that "Nitro can increase its TAM penetration from 0.15% to 1.4% by FY40 implying 9 times uplift to Nitro's current revenue base." I believe this is achievable. And combined with the benefits of scale, I feel Nitro's earnings have the potential to grow even quicker.
Nine times current revenue would be ~US$500 million or A$720 million. From this revenue, I believe a profit margin of at least 28% is possible, which would underpin a net profit of A$200 million and could justify a market capitalisation of $6 billion based on a P/E ratio of 30 times earnings.
Whether these forecasts prove accurate, only time will tell. However, I believe the risk/reward is favourable for long-term investors right now. Especially after 2022's weakness in the tech sector.
