Investing in ASX growth shares

Investing in ASX growth shares

Growth stocks are popular with investors seeking capital gains because they are considered to have higher potential for share price increases than the broader market. 

In this article, we look at how to invest in ASX growth shares and why they may be worth considering for your share portfolio.

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What are ASX growth shares? 

A growth share is a company that is expected to grow at a faster rate than the broader market, which is typically measured using the S&P/ASX All Ordinaries Index (ASX: XAO) or S&P/ASX 200 Index (ASX: XJO). 

Growth shares are more likely to be smaller, up-and-coming businesses than larger, well-established companies. They tend to focus on growing their sales and market share, possibly delaying profitability to become leaders in their industries. As growth shares mature, the focus will shift to maximising profits. 

Companies tend to reinvest their earnings during the growth phase rather than paying them out as dividends. This means investors will not necessarily receive income for holding growth shares. But many choose to invest in growth shares due to their potential for share price growth, which translates into capital gains for investors. 

Why invest in ASX growth stocks? 

Investors expect growth shares to increase revenues or earnings faster than other companies, which means they may potentially outperform the market over time. Growth stocks tend to have high valuations on a price-to-earnings (P/E) basis but are usually also growing their incomes at a higher rate than their peers. 

5 top ASX growth share performers in FY22

(based on market capitalisation from high to low)

Company Market capitalisation Description
ResMed Inc (ASX: RMD) $44.43 billion Develops and manufactures medical devices and software to diagnose
and treat sleep-disordered breathing, chronic obstructive pulmonary
disease (COPD), and other chronic diseases
Xero Limited (ASX: XRO) $14.04 billion A cloud-based accounting solution provider
NextDC Ltd (ASX: NXT) $4.96 billion A leading data centre operator poised to benefit from the structural
shift to the cloud
Dicker Data Ltd (ASX: DDR) $2.26 billion Technology hardware, software, and cloud distributor with a partner
base of more than 6,000 resellers
Temple & Webster Group Ltd
(
ASX: TPW)
$738.75 million Online-only furniture and homewares retailer with more than 180,000
products available and a subscriber base of more than 1 million

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ResMed

With a focus on the diagnosis and treatment of sleep apnea, COPD, and other chronic respiratory diseases, ResMed manufactures continuous positive airway pressure (CPAP) masks and machines as well as life support ventilators. Ongoing high demand for sleep and respiratory care products and solid growth in the software-as-a-service (SaaS) business contributed to a 12% increase in revenue in the third quarter of FY22. Increased demand has been generated by the recall of a competitor’s device, although supply challenges have limited access to critical electronic components. 

ResMed’s long-term strategy is to help 250 million patients by 2025 through increased manufacturing of sleep and respiratory care devices and driving accelerated adoption of digital health solutions. Digital health solutions provide lower costs for providers, better clinical outcomes for patients, and sustainable growth for ResMed’s shareholders. 

Key metrics: 

  • Market cap: $44.43 billion (as of 28 April 2022)
  • Average daily volume: 1.04 million
  • Headquarters: San Diego, United States

Xero

Xero provides cloud-based accounting software to small and medium business customers. Founded in 2006, the company now has more than 3 million subscribers and leads the cloud accounting market in Australia, New Zealand, and the United Kingdom. Subscriber numbers increased by 23% in the first half of FY22, while annualised monthly recurring revenue grew by 29%. Its most recent earnings report showed growth across all geographic areas. 

Xero has been successful in expanding overseas and taking on incumbent software. The company now has its eye on the North American market. If it can repeat its success there, growth in customer numbers should continue for some time to come. In pursuit of this strategy, Xero acquired a US-based inventory management provider and a Canadian tax software company in late 2021. Currently, Xero prefers reinvesting cash generated to drive long-term shareholder value. 

Key metrics: 

  • Market cap: $14.04 billion (as of 28 April 2022)
  • Average daily volume: 487,540
  • Headquarters: Wellington, New Zealand

NextDC

NextDC provides data centre outsourcing solutions, connectivity services, and infrastructure management software. The company provides co-location services to local and international organisations with a nationwide network of data centres in Australia. 

Data centre services revenue increased 19% in the first half of FY22 to $22.9 million, with underlying earnings before interest, tax, depreciation, and amortisation (EBITDA)  up 29% to $85 million. The company has demonstrated solid revenue and EBITDA growth over the past few years, with underlying EBITDA growing at a compound annual growth rate (CAGR) of 36% since 2018. 

NextDC upgraded its FY22 guidance thanks to solid growth in recurring data centre services revenue underpinned by long-term customer contracts. Expansion is accelerating to accommodate customer demand as the company invests in growth platforms, new locations, and land expansion. Second generation facilities are continuing to drive scale and earnings growth.  

Key metrics: 

  • Market cap: $4.96 billion (as of 28 April 2022)
  • Average daily volume: 1.5 million
  • Headquarters: Brisbane, Queensland

Dicker Data

Dicker Data distributes a broad portfolio of products from leading technology providers, including Cisco, Citrix, Dell, HP, Lenovo, and Microsoft. Founded in 1978, Dicker Data grew revenues to almost $2.5 billion in 2021, increasing 24.2% for the year. This drove a 28.6% lift in net profit after tax (NPAT), which reached $73.6 million. 

Technology adoption has accelerated over the past two years as businesses embrace a changing work environment. Dicker Data is well-positioned to capitalise on this opportunity, forming a vital link in the technology value and supply chain. 

In early 2022, Dicker Data announced its intention to acquire the Hills Physical Security and IT Division. According to Dicker Data, the physical security market is converging with traditional IT channels. The acquisition offers the opportunity to leverage synergies between the two businesses to accelerate growth. The large existing base of Hills customers will gain access to new technologies provided by Dicker Data. 

Key metrics: 

  • Market cap: $2.26 billion (as of 28 April 2022)
  • Average daily volume: 108,995
  • Headquarters: Sydney, New South Wales 

Temple & Webster

Temple & Webster launched in Sydney in 2011 and listed on the ASX in 2015. One of the fastest-growing retailers in Australia, Temple & Webster delivered record revenue for the half-year ended December 2021. Revenue was up 46% on the year before and 218% on FY20, growing to $235.4 million. 

Despite significant disruptions to global supply chains caused by COVID-19, the company has tripled its business over the past two years. The second half of FY22 also started strongly. Temple & Webster is confident its strategy is resonating with shoppers and that it is well-placed to continue to take share in the markets it is operating in. 

Temple & Webster is accelerating investment into future growth horizons, including its trade and commercial division and home improvement offering. It also invests in its brand awareness, technology and data teams, logistics, and merchandising capabilities. This is paying off as existing customers are shopping more frequently with the company and spending more money. Temple & Webster intends to continue to reinvest operating leverage to build strategic moats around the core business while investing in new growth opportunities. 

Key metrics: 

  • Market cap: $738.75 million (as of 28 April 2022)
  • Average daily volume: 590,903
  • Headquarters: Sydney, NSW 

Are ASX growth stocks right for you?

Whether growth shares are right for you will depend on your individual financial circumstances and investing goals. Growth shares are more likely to appeal to investors with a long-term time horizon who seek capital growth. They may be less suitable for income investors, as they often do not pay dividends. 

The share prices of growth stocks can also be volatile, moving as the market mood shifts. This means investors in growth shares need to have a reasonable tolerance for large share price moves in the short term. Still, growth shares can prove lucrative over the long term, providing patient investors with big rewards in the form of share price increases. 

Last updated May 2022. Motley Fool contributor Katherine O'Brien 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 Dicker Data Limited, Temple & Webster Group Ltd, and Xero. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended ResMed. The Motley Fool Australia has positions in and has recommended Dicker Data Limited and Xero. The Motley Fool Australia has recommended ResMed Inc. and Temple & Webster Group Ltd. 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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