While a large part of my portfolio is focused on high-quality businesses with dependable earnings, I also think there can be a place for higher-risk companies that offer significant upside potential.
These types of shares can be volatile and may not suit every investor. But if the underlying businesses execute well, the potential rewards can sometimes be substantial.
Here are three ASX shares that I think fit the high-risk, high-reward category.
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Zip Co Ltd (ASX: ZIP)
Zip has been on a rollercoaster ride over the past few years.
The buy now, pay later (BNPL) industry went through an enormous boom during the pandemic before sentiment turned sharply as interest rates rose and investors began focusing more on profitability.
That shift sent many BNPL shares sharply lower, including Zip.
However, the company has spent the past couple of years reshaping its business. Management has focused heavily on improving margins, reducing costs, and strengthening the balance sheet.
At the same time, demand for flexible payment solutions continues to grow globally, particularly in large markets such as the United States.
If Zip can continue improving profitability while expanding its customer and merchant networks, the upside from current levels could be significant. But like many fintech businesses, it remains a higher-risk investment.
DroneShield Ltd (ASX: DRO)
DroneShield operates in a rapidly emerging segment of the defence technology industry.
The company develops counter-drone technologies designed to detect and neutralise unmanned aerial systems. As drones become increasingly common in both military and security environments, demand for this type of technology is growing quickly.
Recent geopolitical tensions have also increased global defence spending, which could create additional opportunities for companies operating in this space.
DroneShield has secured a number of contracts in recent years and continues to develop new products for defence and security agencies around the world.
However, the company is still relatively small compared to large defence contractors, which means earnings can be volatile. That makes it a higher-risk investment, but one with potentially large upside if demand continues to grow.
Megaport Ltd (ASX: MP1)
Megaport is a network-as-a-service provider that allows businesses to connect to cloud services and data centres through a flexible, software-defined network.
The company's platform enables organisations to quickly establish and manage connections between their infrastructure and major cloud providers such as Amazon Web Services and Microsoft Azure.
As more companies shift their operations to the cloud and leverage artificial intelligence tools, the need for flexible and scalable connectivity solutions continues to increase.
Megaport has been expanding its global network footprint and recently moved into the compute-as-a-service market following its acquisition of Latitude.sh.
That move could significantly expand its addressable market and create new growth opportunities.
However, Megaport has also experienced periods of volatility as it balances growth investment with the push toward profitability, which is why it remains a higher-risk stock.
Foolish takeaway
Higher-risk shares can experience significant volatility, and they are not always suitable for conservative investors.
However, companies such as Zip, DroneShield, and Megaport operate in industries with meaningful growth potential. If their strategies continue to gain traction, the long-term rewards could outweigh the risks for investors who are comfortable with a bit more uncertainty.
