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Top 10 ASX growth stocks to watch in October 2022

A rundown of ten of the best ASX growth stocks to watch in October 2022, and their varied advantages and drawbacks.

australia Source: Bloomberg

ASX growth stocks have taken a hit in 2022. Financially, the twin ghouls of rising inflation and increasing interest rates are both making it much harder to achieve economic growth. Australian CPI inflation now stands at 6.8%, while the RBA cash rate target has risen to 2.35%.

However, it’s worth noting these figures are some way off the far worse scenarios playing out across Europe, the US, and the UK.

Much of the financial stress can be attributed to global geopolitical events. The Ukraine War, rolling Chinese pandemic lockdowns, and now the expected global slowdown, are contributing to sizeable share price falls among many of even the best ASX growth stocks.

However, this could also make them excellent buying opportunities on the dip, despite the attached risk.

What is an ASX growth stock?

Growth stocks are shares in companies which are expected to grow much faster than either the average growth of a company within the wider market, or within its specific sector.

Instead of paying out dividends, any profits generated are ploughed back into the business to help accelerate growth. Accordingly, investors are usually hoping to make a profit on capital gains in the short term, with dividend income a potential outcome once major growth has been established.

Some of the best growth stocks, especially those occupying a specialist niche, trade at a high price-to-earnings ratio. Therefore, would-be investors usually end up paying a premium in hope of future growth. This means that growth stocks can see rapid declines if the company underperforms, even in just one quarter.

Common traits of the most popular ASX growth stocks often include holding patents or technologies that grant the company a unique marketplace advantage. Therefore, many have a loyal customer base and disproportionately high market share.

One key misunderstanding is that all growth stocks are small caps which might have weaker financials, or be confined to domestic business. While many are, larger companies can also qualify as growth stocks depending on how much market share remains realistically available.

As an extreme example, £830 billion market titan Tesla is by all accounts still a growth stock, delivering less than one million of the 66.7 million automobiles sold in 2021.

High risk, high reward?

One of the best-known rules of investing is the risk-reward ratio, whereby investors balance an equilibrium which sees higher risk companies deliver either negative capital growth or far better rewards than comes from value or income investing.

For context, penny stock investing is generally regarded as being very high risk, but with the potential for exceptional returns. Conversely, income stock investing through blue chip companies for dividends is relatively low risk, but returns can take years to become meaningful.

ASX growth stocks take their place somewhere in the middle. Of course, many investors choose to invest in a diversified portfolio which includes multiple different growth stocks to account for the risk of an individual failure. And in this recessionary environment, it can make sense to buy the dip slowly through dollar-cost averaging to further mitigate the chances of losing capital.

But fundamentally, all investing comes with risk. For example, Tesla proponents believe the EV trailblazer could one day become the automobile production market leader; but any threat to this goal through competition or similar could see a sharp correction in the future. Conversely, if Tesla succeeds, its future market cap may make the current valuation look small, even at nearly $1 trillion.

Another common growth stock example is biotech companies, some of which have their valuations underpinned by one drug or treatment. If the drug fails in the trial stages, their share price can collapse, as happened to Synairgen, BridgeBio Pharma, Sensorion, and Rafael, alongside countless others.

What makes ASX growth stocks special right now?

Australian investors often have their pick of stocks from across the world, and many may look to the US for historically higher returns from companies enjoying a far larger market place than those found down under.

However, the recessionary environment could be changing the investing calculation. The Reserve Bank of Australia is fighting lower inflation than its counterparts in the UK, US and EU, and in theory this could keep interest rates proportionately lower for longer.

This could be beneficial for ASX growth stocks, given the positive relationship between their performance and low interest rates. Investors expect growth stocks’ share prices and financial performance to accelerate faster than the market average. To achieve this, they are usually reliant on cheap borrowing, fuelled by looser monetary policy.

And as a toxic combination of rocketing inflation and interest rate rises continue to hit the more popular equity markets harder than Australia’s, there could be a marked capital flight to the country’s comparatively looser financial policies.

Of course, no investing is risk-free, and there is no guarantee that ASX growth stocks will outperform their international peers. Many of the best ASX growth stocks have nevertheless suffered a poor 2022 thus far. But there is an undeniable advantage going forward.

NB: All numbers below are in Australian dollars unless otherwise specified. This is not advice, simply a list of some of the most popular ASX growth stocks on the market right now.

asx Source: Bloomberg

Best ASX growth stocks

1) Airtasker (ASX: ART)

Airtasker shares are down 61% year-to-date to $0.33, as a casualty of the wider recessionary environment. Australia’s market leader for online marketplace local services, and answer to Freelancer, Upwork, and Fiverr, has a vast $600 billion total addressable market across Australia, the US, and UK.

Encouragingly, there is substantial room for growth, as it saw a gross marketplace volume of just $189.6 million in FY22, up 23.8% on FY21. And happily, Morgans analysts have an ‘add’ rating in place, with a $1.05 long term price target on the growth stock.

2) Domino’s Pizza Enterprises (ASX: DMP)

Domino's shares are also down significantly, to just $51 apiece. But the pizza chain operator has a strong brand presence, is investing in new technology for future growth, and is planning to more than double its store network in existing markets by the end of FY23.

Further, it has the capital to fund discounted acquisitions if the opportunity arises. Citi analysts have a 'buy' ratig on the stock with a price target of $92.95.

3) Webjet (ASX: WEB)

Worth just half their pre-pandemic value, Webjet shares have fallen to under $5 apiece, as the online travel agent has been battered by pandemic era lockdowns followed by the rising cost-of-living crisis.

However, management expects the company will return to profitability in the near future. Further, the pandemic has forced it to pare down any excesses. While the process has been painful, it now leaves the ASX growth stock with margins in a healthier position for the recovery.

Goldman Sachs analysts therefore have a ‘buy’ rating for Webjet, with a price target of $6.90.

4) GQG Partners (ASX: GQG)

GQG Partners shares comprised the largest ever Initial Public Offering launch on the ASX back in 2021, raising $1.2 billion on an initial $5.9 billion market cap. However, while the company launched at $2 a share, it’s now down to just $1.45.

But with over $86 billion of assets under management, Chairman and CIO Rajiv Jain argues that ‘the reasons people entrust us with their money is that at some point in the future, they expect to get more money back.

The CIO has developed an investment approach coded ‘Forward Looking Value,’ which ignores traditional constraints in favour of investments which could prosper over longer timeframes.

5) Judo Capital Holdings (ASX: JDO)

Judo Capital shares are down 51% year-to-date to just $1.06 as Australia’s challenger bank is battered by the damaging recessionary environment. However, its IPO in November last year made it the first bank to list publicly in Australia since Macquarie in the 1990s, and it fills a niche position as ‘Australia’s only challenger bank purpose-built for small and medium businesses.’

Rising interest rates could eventually create significant profitability, though concerns over a severe recession could outweigh the hoped-for benefits.

6) Altium (ASX: ALU)

Altium shares are down 25% over the past year to $33. The software company provides PC-based electronics design software to engineers who design printed circuit boards (PCBs). Management is so confident of its growth prospects that Altium rejected a $38.50 per share buyout bid from Autodesk in June 2021 as ‘significantly undervalued.’

And it may have a point, as it counts Tesla, Microsoft, Amazon, Alphabet, Apple, SpaceX, and even NASA among its client list. Accordingly, in FY22, the company saw revenue rise by 23% to US$220.8 million, while net profit after tax soared by 57% to US$55.5 million.

Bell Potter has a $40 price target on the ASX growth stock.

7) NextGen Energy (ASX: NXG)

NextGen Energy shares could be a decent addition to an investor’s growth stock portfolio. The uranium miner, which is listed on multiple stock exchanges worldwide, could soon benefit from the rising desire for energy security, green solutions, and the on-off political chaos in major uranium-producing country Kazakhstan.

While the uranium spot price is off its March high, it still fetches a very respectable $51, with further rises likely as demand for nuclear energy grows.

8) Block (ASX: SQ2)

Block shares are down 52% year-to-date to just $84. However, according to ASX group executive Max Cunninghan, Block CEO Jack Dorsey’s decision to list on the ASX in addition to the NYSE ‘could be the most important listing on the ASX since BHP in 1885.’ He enthused that ‘they could have found other ways to fund this, so for them to consciously list here is really, really significant.’

The payments company is still a minnow compared to the likes of Mastercard and Visa, but its acquisition of Afterpay for US$29 billion demonstrates its growth potential in the face of titanic competitors.

9) Nitro Software (ASX: NTO)

Nitro Software shares are down 33% year-to-date to $1.61 apiece. The ASX growth stock provides e-signature tools and integrated PDF support to customers through its Nitro Productivity Suite. It has a total addressable market of US$34 billion, with e-signatures generally viewed as a growth area worldwide.

Investment firm Potentia recently made an offer of $1.58 per share to buyout the company, but management rejected the offer as ‘highly opportunistic’ given the market environment. Nitro saw revenue rise by 36% year-over-year to US$32.7 million in H1, has no debt, and could arguably be oversold.

10) Clarity Pharmaceuticals (ASX: CU6)

Clarity Pharmaceuticals shares made headlines in 2021 as largest biotech IPO in Australia in the year. But as mentioned above, pharmaceutical growth stocks can be risky ventures, and Clarity has been no exception, down 49% over the past year to $0.64.

The company’s fortunes hinge on clinical trials using its ‘proprietary SAR Technology platform that enables highly targeted theranostic radiopharmaceuticals for both the diagnosis (using copper-64) and treatment (using copper-67) of serious diseases,’ including multiple cancer types.

Success could make it a strong ASX growth stock to buy, but as smaller pharmaceutical stocks are notoriously high-risk, high-reward investments, investors should be careful with their research.

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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