Top 10 ASX growth stocks to watch in May 2024
A brief description of growth stocks, and a rundown of the 10 best ASX growth stocks to consider next month. These shares have been picked for their recent market news and are ordered by market capitalisation.
ASX growth stocks took a hit in 2023. Financially, the twin ghouls of inflation and increased interest rates are both making it much harder to achieve economic growth. Australian inflation may have fallen, but the RBA cash rate target has risen to 4.35%.
Much of the financial stress can be attributed to the impact of global geopolitical events. The Ukraine War, rolling Chinese pandemic lockdowns, and now potential global recession, 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 that 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 that 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, US$560 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 that 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 that 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.
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 marketplace than those found down under.
However, the recessionary environment could be changing the investing calculation. The Reserve Bank of Australia has imposed lower interest rates than its counterparts in the UK, US and EU, and in theory this makes growth in Australia easier to achieve.
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.
Of course, no investment 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 2023. But there is an undeniable advantage going forward into 2024.
Accordingly, here is a list of ten of the most promising ASX growth stocks for investors to consider.
Remember, past performance is not an indicator of future returns.
Top 10 ASX growth stocks to watch
These shares have been selected for recent market news. They may not necessarily be the best growth investments, but have attracted elevated investor interest.
WiseTech Global
Wisetech Global is a well-known logistics solutions company, which controls the CargoWise One platform — an essential component of the global logistics industry. Rising demand for the platform’ tech means WiseTech has been able to grow very fast over the past few years.
The company posted arguably strong earnings recently, having acquired Blume and Envase. Its also won three major new customers over within Asia, including shipping company Sinotrans.
Market Cap: $31.1 billion
Xero
Xero Ltd is one of the better-known ASX growth stories. The cloud-based accounting platform has caught the attention of Goldman Sachs analysts, who are now ‘positive on the company's outlook given accelerating product pipeline and strong management team to capture overseas market share while balancing profitability.’
Goldman has a ‘buy’ rating with a $152 price target on the share. Xero now have over 4,000 employees, with offices across Australia, the US and UK.
Market capitalisation: $20.3 billion
Treasury Wine Estates
Treasury Wine Estates is a global winemaking business, which used to be the wine division of the Foster’s group. Analysts at Morgans think that the ASX growth stock is a ‘buy’ given its recent acquisition of DAOU Vineyards for $1.4 billion.
With a price target of $14.03 on the shares, Morgans thinks that ‘while not without risk given the size of this transaction, if TWE delivers on its investment case, there is material upside to our valuation. The key near-term share price catalyst is if China removes the tariffs on Australian wine imports.’
Market capitalisation: $9.9 billion
NextDC
NextDC Ltd remains Australia’s largest data centre operators, with 13 centres throughout Australia, Japan, Malaysia and New Zealand, and nine more planned to open.
In early H1, it announced that it is partnering with Microsoft, alongside a team of recognisable ASX companies, to bring a cutting-edge data centre to Pilbara. And in November, it started building its $80 million data centre in Darwin.
There’s also the partnership with La Trobe Business School’s Research Centre for Data Analytics and Cognition, to explore AI advances, to consider.
Market cap: $9.1 billion
Arcadium Lithium
Arcadium Lithium is a lithium chemicals company which has arguably been driven down the wider rout in the lithium market. For perspective, lithium prices sunk sharply in 2023, though there are some glimmers of a recovery.
Bell Potter has a ‘buy’ rating on the stock with a $10.40 price target — arguing that ‘it ‘provides the largest, most diversified exposure to lithium in terms of mode of upstream production, asset locations, downstream processing and customer markets. It is a key large-cap leverage to lithium prices and sentiment, which we expect to improve over the medium term.’
Market cap: $7.3 billion
TechnologyOne
TechnologyOne is an enterprise software provider, with a focus on the research and development of new and emerging technologies, including cloud-based technology, artificial intelligence and machine learning. Its Australian-owned R&D centre is the largest of its kind and has facilities in Malaysia, Indonesia and Vietnam.
Goldman Sachs believes that it will ‘meet its A$500mn FY26 ARR target through a combination of SaaS flip uplift, net expansion and new customer growth. We see margin expansion resuming from FY24E onwards, which in combination with robust revenue growth should drive a mid-high teens EPS CAGR to FY26E, providing strong earnings visibility.’
The investment bank has a ‘buy’ rating and an $18.05 price target on the stock.
Market cap: $5.5 billion
Lovisa
Jeweler Lovisa has been on a stellar run, with revenue rising by 18.2% year-over-year to $373 million in H1 2024. Operationally, the company opened in both the Chinese and Vietnamese markets during the period, while opening 74 new stores and bringing its total estate to 854.
Morgans remains impressed by the company, with an ‘add’ rating and a $35 price target on the stock. It’s also forecasting a fully franked dividend of just over $0.83 per share in FY24 and $0.85 per share in FY25.
Market cap: $3.6 billion
Life360
Life360's key product is a family communication, location and alert app for smartphones that allows users to share their locations with each other.
Goldman Sachs has a ‘buy’ rating and a $12.20 price target on the stock. Analysts note that the company has been delivering ‘solid subscription and EBITDA growth from the core business while opening up significant upside optionality via advertising monetisation.
FY24E EBITDA guidance appears conservative relative to the operating leverage demonstrated in FY23A and provides visibility to >50% growth in both FY24/25E.’
Market cap: $2.7 billion
Megaport
Megaport's recent quarterly update saw the connectivity and network services provider’s total revenue rise to $48.6 million with an EBITDA of $30 million, significantly ahead of analyst expectations. Goldman Sachs noted that the company reported ‘1H24 revenue of A$95mn (+35% yoy, +1% vs. GSe prior) and EBITDA of $30mn (+20% vs. GSe prior).’
The company’s shares have now more than doubled over the past year.
Market cap: $2.4 billion
Regis Resources
Regis Resources is one of the largest ASX gold miners — gold remains close to a record high, and Regis shares are experiencing some weakness.
Because of this, Bell Potter analysts are ‘attracted to its all- Australian asset portfolio and organic growth options which are unique at this scale. Furthermore, we see key opportunities in the fundamental, medium-term outlook and, in our view, these may also make RRL an appealing corporate target in the current conducive M&A environment.’
They maintain a ‘buy rating’ with a $2.60 price target on the stock.
Market cap: $1.5 billion
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