Here’s why I think these 2 ASX growth stocks are the best buys in May
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I think ASX growth stocks are looking really attractive in May 2022. Recent declines and volatility means prices are lower and values are looking better.
The ASX stock market can sometimes look like a supermarket. There are times when particular products are on sale and may seem cheap enough to buy. However, so close everything is on sale at the supermarket, I would like to choose my favorite meal ideas at the best price.
Translating that into ASX stocks, many ASX growth stocks are much cheaper than they were at the start of the year. There are a lot of investments that now look like good deals to me. Below are two of my favorites.
Temple & Webster Group Ltd. (ASX:TPW)
Temple & Webster is like the Amazon Australian homewares and furniture. She sells hundreds of thousands of products. Many of these products are shipped direct from suppliers, reducing shipping times and reducing the need for Temple & Webster to hold so much inventory.
How much cheaper is the Temple & Webster stock price? That’s down about 60% in 2022. Ouch. But, I think now is a very good long-term opportunity.
There is a long-term trend towards more online shopping, which I think will benefit the business over time. It already claims to be one of the leading e-commerce retailers.
I think the cumulative growth of the company is compelling. In the four months to April 30, 2022, the company saw revenue growth of 23% year over year. This is a growth of 116% compared to 2020.
Increased revenue and scale will help increase operating leverage, allowing the business to reinvest for growth in areas such as marketing, technology development, product line and customer experience overall. The increased scale will also help ASX’s growth share achieve better unit economies, including cost advantages in product sourcing, logistics and marketing.
At this lower Temple & Webster share price, I think the company has a bright future ahead of it.
The cloud accounting software sector is my other pick for May 2022 (and long term).
There aren’t a lot of big, high-quality tech shares on the ASX. But I think Xero is one of those big names.
It has a very gross profit margin of 87.3% – this is increasing every year. A high gross profit margin means that most revenue turns into gross profit. This gross profit can be spent on areas that help Xero grow and improve, such as product development, marketing, salaries, etc.
Ultimately, I believe that a high gross profit margin will allow Xero to generate a large net profit after tax (NPAT) when it is no longer investing as much in growth.
There are two other things I really like about this ASX growth share.
It has a global subscriber base, which is growing rapidly. By the end of FY22, it had 3.3 million subscribers (up 19% year-on-year). This is spread across places like Australia, UK, North America, and South Africa. There is a very large addressable market for Xero to target.
The other thing I like about Xero is its software-as-a-service (SaaS) nature. It receives monthly revenue from subscribers, making it easy for investors (and management) to see what revenue for the next 12 months could be.
Xero’s annualized monthly recurring revenue (AMRR) increased 28% to NZ$1.2 billion in FY22. Actual operating revenue for FY22 was 1.1 billion New Zealand dollars. So there is already some revenue growth for the next 12 months.
But these two ASX growth stocks are not the only two i would be happy to go shopping for. We’ll look at some of my other favorites another time.