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The Australian stock market is home to a large number of stocks that have the potential to grow strongly in the future. But is it anyone’s home? 20 dredgers†
A 20 dredge is a stock that produces a return 20 times greater than your original 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 massive $100,000.
While they are quite rare, there are plenty of 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: FILL) are three ASX stocks that have returned over 2,000% in the past three years, much to the delight of their shareholders.
But that was then, and this is now. So, which ASX stock could be the next 20 baggers? While I think three years is way too early for this level of return, I believe the two ASX stocks listed below have the potential to turn a $5,000 investment into $100,000 in the long run. This is why:
What it does: Life360 operates in the consumer digital subscription services market, with a focus on products and services for digitally born families. The main offering is the Life360 app, which provides location-based services including sharing and notifications.
How it could turn into a 20 bagger: Life360 currently has a Market capitalization of just under $500 million. This means that the market cap of the Life360 share would grow to $10 billion if the price of the Life360 share increased by 2,000%.
While this sounds like a lot, I believe it is possible in the long run based on its leadership position in a huge market. For example, management recently reiterated its belief that its actionable addressable market is $55 billion worldwide† This includes location sharing, accident and roadside assistance, identity theft protection, and vertical location sharing areas for pets and children. It does not include the article tracking market that the company recently entered with its acquisition of Tile.
Goldman Sachs is currently valuing Xero Limited (ASX: XRO) at 16 times EBITDA. If we were to attribute the same multiplicity to Life360, it should achieve EBITDA of $625 million to enforce a $10 billion market cap. This is a big question, but with some 38 million monthly active users (and growing) and such a huge market opportunity, I think this is a possibility in the long run.
What it does: Nitro Software is a software company that aims to drive digital transformation in organizations around the world. The lead solution is the Nitro Productivity Suite, which provides integrated PDF productivity and electronic signature tools to customers in a market that is benefiting from structural tailwinds such as remote working and digitization.
How it could turn into a 20 bagger: Nitro Software currently has a market cap of approximately $300 million. If its stock rose 20 times, it would bring its market cap to $6 billion.
Unlike Life360, Nitro does not have a leading position in its market. However, it is a worthy challenger for industry giant Docusign. Nitro has more than 3 million licensed users and 13,000+ business customers in 157 countries. This includes over 67% of the Fortune 500 and three of the Fortune 10, which I think is a testament to the quality of the offerings.
Goldman Sachs estimates the company has a “US $34bn TAM” [total addressable market] about PDF, e-signing and workflows.” In addition, it highlights that “Nitro can increase its TAM penetration from 0.15% to 1.4% in FY40, representing 9 times higher revenue than Nitro’s current revenue base.” I believe this is feasible. And coupled with the benefits of scale, I think Nitro’s revenues have the potential to grow even faster.
Nine times current sales would be ~US$500 million or A$720 million. On this revenue, I think a profit margin of at least 28% is possible, which would support a net profit of A$200 million and justify a market cap of $6 billion based on a P/E ratio of 30 times the profit.
Time will tell whether these predictions are correct. However, I believe that the risk/reward is favorable for long-term investors at the moment. Especially after the weakness of 2022 in the technology sector.
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