ASX growth shares that can grow revenue and net profit for a long time to come may be able to deliver strong returns for investors.
The market typically bases a company's valuation on how much profit it makes and how much it could make in the future. If the business can keep delivering profit growth, the market can justify sending the share prices higher.
Amid the share market sell-off at the end of October and the start of November, I decided to invest in these two ASX growth shares. I was — and still am — very excited by their potential. They have both risen substantially, so the buy-in price is not as attractive now, but I think they can still outperform in the long term.
Lovisa Holdings Ltd (ASX: LOV)
Lovisa is an ASX retail share that sells affordable jewellery to younger shoppers in numerous countries.
Australia may be where it became a sizeable business, but it's growing rapidly in the United States where the population is more than 10 times the size of Australia, so there's potential to add significantly to its global store network.
In the last five years, Lovisa has roughly doubled its global store network size and doubled its profit. I think it can double again in another five years because it has only recently entered countries like China, Vietnam, Mexico and Canada, which have much larger populations than Australia.
Expanding into other countries comes with set-up costs for the ASX growth share, but I think profit margins will benefit materially in the coming years. In the first 20 weeks of FY24, total sales were up 17% year over year, thanks to the expansion of the store network.
According to Commsec, it's trading at 20x FY26's estimated earnings with a possible partially franked dividend yield of 4%.
Temple & Webster Group Ltd (ASX: TPW)
Temple & Webster is an online retailer of hundreds of thousands of products across homewares, furniture and home improvement.
The company has invested a lot in its customer service tools, including augmented reality (AR) which allows the shoppers to 'see' the product in their space.
In FY23, it generated $396 million in revenue, and it's aiming for at least $1 billion in sales in three to five years. Revenue could grow thanks to a growing population, increasing adoption of online shopping and a bigger market share. The company also benefits from the growth of its trade and commercial revenue, as well as home improvement products.
Increased scale is expected to lead to a significant increase in the earnings before interest, tax, depreciation and amortisation (EBITDA) margin, going from 3.7% in FY23 to potentially at least 15% in the long term.
Temple & Webster expects artificial intelligence (AI) will be able to help reduce its costs significantly as the ASX growth share utilises more technology across the company.
In the years ahead, I think its business model can help its profit significantly increase.
