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The Australian equity market is home to a good number of stocks that have the potential to grow strongly in the future. But does it house 20 baggers?
A 20-bagger is a stock that offers a return 20 times greater than your initial investment.
This means that if you could find one of these stocks and invest $5,000 in it, you would turn that investment into a whopping $100,000.
Although quite rare, there are many examples of 20 baggers trading on the ASX today.
Chalice Mining Ltd (ASX:CHN), Race Oncology Ltd (ASX:RAC)and Vulcan Energy Resources Ltd (ASX: VUL) are three ASX stocks that have generated returns of over 2,000% over the past three years, to the delight of their shareholders.
But that was then, and this is now. So which ASX stocks could be the next 20 sacks? While I think three years might be way too early for that level of return, I think the two ASX stocks listed below have the potential to turn a $5,000 investment into $100,000 in the long run. Here’s why:
What he does: Life360 operates in the consumer digital subscription services market with a focus on products and services for digital native families. Its key offering is the Life360 app, which provides location-based services including sharing and notifications.
How this could become a 20-bagger: Life360 currently has a market capitalisation just under $500 million. This means that its market capitalization would reach $10 billion if Life360’s stock price increased by 2,000%.
Although that sounds like a lot, I think it’s possible in the long run because of its leading position in a huge market. For example, management recently reiterated its belief that its usable addressable market is 55 billion dollars in the world. This includes location sharing, collision and roadside assistance, identity theft protection, and pet and child location sharing verticals. This does not include the item tracking market the company recently entered with the acquisition of Tile.
Goldman Sachs currently values Xero Limited (ASX:XRO) at 16 times EBITDA. If we were to assign the same multiple to Life360, it would have to reach EBITDA $625 million to reach a market capitalization of $10 billion. It’s a big ask, but with around 38 million monthly active users (and growing) and such a market opportunity, I think it’s a long-term possibility.
What he does: Nitro Software is a software company focused on driving digital transformation in organizations worldwide. Its key solution is the Nitro Productivity Suite, which provides integrated PDF productivity and electronic signature tools to customers in a market benefiting from structural tailwinds such as remote work and digitization.
How this could become a 20-bagger: Nitro Software currently has a market capitalization of approximately $300 million. If its shares were to grow 20 times, that would bring its market capitalization to $6 billion.
Unlike Life360, Nitro does not have a leading position in its market. However, it is a worthy challenger to industry giant Docusign. Nitro has over 3 million licensed users and over 13,000 business customers in 157 countries. This includes over 67% of the Fortune 500 and three of the Fortune 10, which I think speaks to the quality of its offering.
Goldman Sachs estimates that the company has a “MAD of $34 billion [total addressable market] on PDFs, electronic signature and workflows. Furthermore, he points out that “Nitro can increase its TAM penetration from 0.15% to 1.4% by FY40, implying a 9x increase in Nitro’s current revenue base.” I believe it is doable. And combined with the benefits of scale, I think Nitro’s revenue has the potential to grow even faster.
Nine times current revenue would be around US$500 million or AU$720 million. From that revenue, I believe a profit margin of at least 28% is possible, which would underpin a net profit of A$200 million and could justify a market capitalization of $6 billion based on of one P/E ratio 30 times earnings.
If these predictions turn out to be correct, only time will tell. However, I think the risk/reward ratio is currently favorable for long-term investors. Especially after the 2022 weakness in the technology sector.
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