The ASX small cap space could include some of the market’s next blue chip stocks.
It is much easier for a company to double in size from $500 million to $1 billion than for a company to grow from $50 billion to $100 billion.
I think smaller ASX stocks can generate greater returns over time because they have a longer runway for growth.
But I only want to consider ideas that are already making good returns. I don’t think about risky biotech names or other similar types of categories. Here are four of my favorite ideas for
Airtasker is a small ASX tech stock that provides a platform to advertise services people want for free. Tasker can then offer the job and outline the fees. The types of tasks involved can be pretty much anything, including delivery services, photography, furniture assembly, removal, and various handyman jobs.
In Australia, the business is already profitable before interest, tax, depreciation and amortization (EBITDA). We are also growing rapidly in our two largest markets, the US and the UK.
Airtasker has very high gross margins, which means that much of the new revenue can be invested in growth spending such as marketing.
Indeed, the company already wants to expand geographically. So I think we have a long growth runway with other countries where we can expand, like Canada and New Zealand.
Volpara Health Technologies Ltd (ASX: VHT)
I think Volpara is one of the most exciting small caps on the ASX Healthcare stocks. AI-powered image analysis that enables advanced breast screening, helps healthcare professionals better understand a patient’s cancer risk, and enables healthcare professionals to streamline their work and improve performance is equipped with
The company recently announced that it achieved positive operating cash flow after growing cash income by 42% on a constant currency basis in the three months to December 2022.
We continue to grow our annual recurring revenue (ARR) while reducing our cost base and increasing profitability.
If we can continue to sell more services to our existing (and growing) customer base, our average revenue per user (ARPU) should continue to improve, which should further boost our profit margins.
I think small-cap ASX stocks have a very promising future, especially if they can gain a foothold in Europe.
Healthya is a related healthcare business. We are involved in many areas including optometry, podiatry and a network of physical therapy clinics.
I think it’s a pretty defensive sector, so that return could work well going forward.
Healthya’s stock has fallen 40% over the past year, and has significantly improved in value. With Australia’s growing and aging population, we believe there will be a beneficial tailwind for business.
If we can win clinic after clinic and improve the performance of our existing network, I think we are doing well in business.
According to Commsec, it’s trading at 12x its estimated earnings in FY23, and we think it looks very affordable.
Temple & Webster Group Ltd (ASX: TPW)
Temple & Webster is also an ASX small cap and I believe it has plenty of potential.
Online retailer of home goods and furniture with over 200,000 products for sale.
Many of the products sold are from third party suppliers that ship directly to customers. This shortens shipping times, reduces the need for Temple & Webster to hold inventory, and makes that part of the business much less capital.
However, the company is also expanding its selection of private label products.
According to Temple & Webster, if Australia follows UK e-commerce trends, the company’s online share of the market could rise to mid-teens to late twenties in Australia over the next few years. .
The business has invested heavily in technologies such as AI interior design services and augmented reality (AR) services that allow people to visualize products in their home spaces.
I believe the high level of reinvestment will allow the company to benefit from scale and achieve attractive margins in time.
Expansion into home improvement categories (painting, plumbing, flooring, etc.) also gives small-cap ASX shares a very large addressable market to target.
