ASX growth stock on the cusp of profitability: My multibagger pick

I'm hoping to buy this small-cap stock and turn $5,000 into $20,000.

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Rarely will an ASX growth stock look 'cheap' if it is close to printing money for its shareholders. No one wants to sell an ordinary goose as it evolves into a golden one. As such, it's often extremely difficult to locate a company with multibagger potential before it skyrockets.

Patience and perseverance can go a long way in this lifelong endeavour. If you turn over enough stones, you'll eventually find those rare companies — the misunderstood, underappreciated, or simply ignored businesses primed for success.

This month, I've uncovered a little ASX growth stock that is now high on my buy list.

Profits could send this soaring

Companies that are not yet profitable can be difficult to value. As onlookers haphazardly speculate on the future, this can lead to wildly exuberant or sunken share prices. Fortunately, this wayward estimation can also give rise to undervalued opportunities.

Sometimes, the mood among a company's shareholders falls into a rut. Good news becomes bad news, and bad news becomes terrible news. The despair stage can narrow investors' vision, clouding genuine positive signs.

Enter Eroad Ltd (ASX: ERD): A fleet management technology company attempting to traverse the gap between cash burner and cash earner. If successful, sentiment can quickly shift. A recent example is Xero Ltd (ASX: XRO), with shares now up 19% year-to-date after achieving profitability in FY24.

High revenue growth and profitability are powerful combinations. The New Zealand-based vehicle telematics company Eroad is already reaping revenue growth. In the last three years, its revenue has increased 98.7% to NZ$182 million — a compounding annual growth rate (CAGR) of 25.7% per annum.

On 23 May 2024, this ASX growth stock announced it had achieved a positive free cash flow of $1.3 million in FY24.

Furthermore, according to analyst forecasts, FY26 net profit after tax (NPAT) could be around NZ$10.6 million. Those estimates then expand to NZ$24.4 million in FY27.

If Eroad were to trade on a 30 times price-to-earnings (P/E) ratio, the company's market capitalisation could be A$676.6 million. Right now, Eroad is valued at $162.3 million — leading me to believe this ASX growth stock could be a four-bagger in three years.

Why is this ASX growth stock being ignored?

I'm guessing you're already asking: "Mitchell, why hasn't the share price rallied if the future is so bright?"

It's a good question. Eroad is not without its risks.

My biggest worry is the company's rate of share dilution. Since 2020, the number of shares outstanding has more than doubled (shown below), effectively more than halving the value of each slice of ownership a shareholder owns.

Data by Trading View

I'll be keeping a close eye on it, although I'm optimistic, given Eroad is now free cash flow positive.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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