The current investment environment has been painful for investors. Volatility is tricky when the value of one's portfolio sinks. But, it means that people scouting for opportunities may be able to find some juicy ASX growth share pickings after the declines we've seen.
It's important to remember that just because something has fallen in price doesn't necessarily it's better value. Something could go up in value and be cheap, and something else could fall in value and be expensive.
Keep in mind that if something falls by 50%, then clawing back to its former price would be a return of 100%.
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How I'd find ASX growth shares to buy
There is a lot of financial pain at the moment, with inflation hurting the expense side of businesses. It also hurts the valuation of companies because it's driving central banks to increase interest rates to try to reduce demand in the economy.
Higher interest rates do put pressure on valuations, in theory at least.
I'm looking for companies where the valuation has been punished, yet the revenue for the business still looks promising for the long term (and perhaps even in the short term).
I think that ASX growth shares that are already market leaders in their sector — or have a compelling chance to be — are exciting ideas.
Businesses that are growing globally are particularly interesting to me because their addressable market is a lot larger. The world is a bigger market than just Australia alone.
I believe that companies with good profit margins, and the potential to grow their various profit margins further, are particularly compelling.
What opportunities could tick those boxes?
For me, the pool of opportunities has significantly grown this year. It's hard to choose.
While the three I'm going to name may not necessarily be first, second and third on my top buys list, I think all three of them are very compelling. Here's why.
Xero Limited (ASX: XRO)
This ASX tech share provides cloud accounting software to small and medium businesses worldwide. It had a global subscriber base of 3.3 million at the end of FY22, which was a year-over-year increase of 19%. Its main markets are Australia, the United Kingdom and New Zealand. But Singapore, South Africa and Canada are also growing markets.
The Xero share price has fallen by almost 50% since the beginning of 2022. I think it's much better value considering the company continues to grow. In FY22, its revenue grew by 29%, and the gross profit margin went up again by 1.3 percentage points to 87.3%.
It's not making a net profit after tax (NPAT) yet, instead, it's investing all of its excess money into more growth. I think this is a good use of the company's cash flow for long-term returns.
REA Group Limited (ASX: REA)
REA Group is the parent business of several real estate-related digital assets.
The key segment is its ownership of realestate.com.au, which is the market leader in Australia. Sellers want to use the property portal that gets the most potential buyers, potential buyers want to go to the property portfolio with the most houses to view (and useful property-viewing features). It's a useful, positive cycle for demand for realestate.com.au and allows it to implement regular price increases with little impact to demand.
The ASX growth share also owns several Australian-focused property sites such as realcommerical.com.au and flatmates.com.au.
Profitability continues to improve. In FY22, it reported that net profit grew by 25% to $408 million.
I also like that the company gives access to other markets, it has investments in property sites in India, south-east Asian countries and the United States. All of these markets have much bigger populations than Australia, which means they could generate good profits in future years.
Airtasker Ltd (ASX: ART)
Airtasker claims to be Australia's leading online marketplace for local services, connecting people and businesses who need work done with people who want to work.
It's another ASX growth share that has suffered a big sell-off in 2022, the Airtasker share price is down 60% in 2022 even though it continues to grow.
In the first quarter of FY23, revenue was up 80% to $10.5 million, or 36% to $8 million, excluding the Oneflare contribution, which is another marketplace that Airtasker recently acquired. The Oneflare marketplace performance is "tracking well ahead of expectations".
But it's also growing internationally at a fast pace. It has a small but growing presence in both the UK and US. UK gross marketplace volume (GMV) grew 68% year over to £4.2 million, annualised. The number of US-posted tasks grew by 4.7x year over year to 13,000.
