I think ASX growth shares have the potential to deliver the biggest investment returns over the long term. If businesses execute their plans successfully, it can help us turn a $5,000 investment into a much larger figure.
There is no specific definition of what makes a business a growth stock. For me, the revenue needs to be growing at a strong pace, ideally at least approximately 10% per annum.
If I had $5,000 to invest for growth, I'd want to pick stocks where the profit could significantly rise from where it is today.
The below three are a few of my favourites.
Lovisa Holdings Ltd (ASX: LOV)
Lovisa sells affordable jewellery with its global store network. Some of the countries where it has a large number of stores include the US, Australia, the UK, France, Germany and South Africa.
I'm excited by the potential of this ASX growth share because it can significantly increase its revenue simply by adding more stores to its global network.
In FY24, the business added 99 net new stores, taking its global store count to 900. Europe and the USA were the two biggest growth engines. Total FY24 revenue grew 17% to $698.7 million, and net profit jumped 21% to $82.4 million.
Broker UBS estimates that by FY29, Lovisa could generate $1.37 billion in revenue and $189 million in net profit.
Increasing scale could help the business grow its profit margins, which could push up the underlying value of Lovisa and help fund larger dividend payments.
Airtasker Ltd (ASX: ART)
Airtasker provides a platform that enables people who need work to connect with individuals and businesses who want to do that work.
Numerous possible tasks can be advertised on the Airtasker platform, including pest control, removalists, furniture assembly, photography, accounting, delivery, and many more. There is a huge potential market for these services.
One of the most attractive elements of Airtasker's business is the incredibly high gross profit margin – it was above 95% in FY24. Unlike physical product businesses with lower margins, software companies like Airtasker don't need to incur much in costs to generate revenue.
Making strong gross profit means the business can allocate that money towards other types of useful expenditure, including advertising and product development, which can help drive growth.
In FY24, Airtasker marketplace revenue rose by 9.8% to $38.1 million. Excitingly, the company is growing internationally at a rapid rate. For example, in the UK in FY24, gross marketplace volume (GMV) grew by 20% to $8.6 million, and revenue increased by 41.1% to $1.3 million. In the fourth quarter, UK revenue jumped 76.3% to $0.5 million, partly due to the Channel 4 television campaign.
In my opinion, the ASX growth share has reached an important milestone, with positive free cash flow of $1.2 million in FY24 – this was an improvement of $8.9 million year over year. The company can use this cash flow for more growth, a stronger balance sheet, or shareholder returns.
REA Group Ltd (ASX: REA)
This company operates realestate.com.au, the market-leading digital business in Australia. It also owns several other Australian property-related businesses, including realcommercial.com.au, flatmates.com.au, property.com.au, Mortgage Choice, PropTrack, Campaign Agent, Simpology, Arealytics, and Realtair.
It also owns a controlling interest in REA India, which operates the brands of Housing.com and PropTiger. The company also has a significant minority holding in Move Inc, which operates Realtor.com in the US.
REA Group has a very strong market position in Australia, causing the most property sellers to want to list their properties on the platform, which then attracts the most prospective buyers. This is a very helpful, self-fulfilling cycle, in my view.
A strong market position allows the business to regularly implement price increases, with little detrimental effect, helping boost the profitability of the company because of its digital operations nature.
India has a population of well over 1 billion people, so there is huge potential for REA India over the long-term as the country digitalises and uses online tools more often to buy and sell property.
Excitingly, the business demonstrated all of these factors in the FY24 result. Total revenue increased 23% to $1.45 billion and net profit increased 24% to $461 million. Within that, REA India's revenue increased 31% to $103 million.
The company disclosed that the residential buy yield (revenue) in FY25 will be primarily driven by an average 10% price increase in its highest penetrated product called Premiere+. This can help the company's overall financials significantly.
I think this ASX growth share still has a very exciting future.
