Investing in the small side of the share market carries significantly more risk than other areas. However, if your risk tolerance allows for it, having a bit of exposure to this side of the market could be a good thing for a balanced portfolio.
This is due to the potential returns on offer if you can unearth a future mid or large cap whilst it is still in its infancy. With that in mind, I have picked out three exciting small cap shares that have a lot of potential. They are as follows:
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Adore Beauty Group Limited (ASX: ABY)
The first small cap to watch is Adore Beauty. It is Australia's leading online beauty retailer. It has been growing strongly during FY 2021 and recently revealed that it expects to report full year revenue growth of 43% to 47%. And while its growth is likely to moderate in FY 2022 as its cycles significantly strong sales growth during the pandemic, its future remains very positive. This is thanks to its leadership position and the structural shift online for beauty sales. In light of this, the recent weakness in the Adore Beauty share price could be a buying opportunity for investors. Analysts at UBS certainly believe this to be the case. They recently put a buy rating and $5.60 price target on its shares.
Over The Wire Holdings Ltd (ASX: OTW)
Another small cap to watch is Over The Wire. It is a telecommunications, cloud, and IT solutions provider which has been growing at a solid rate in recent years. The good news is that this has continued in FY 2021, with the company delivering a very strong half year update in February. For the six months ended 31 December, Over The Wire reported a 17% increase in revenue to $50.3 million and a 28% jump in EBITDA to $10.5 million. Positively, almost all of its revenue is now recurring, with recurring revenue growing 25% to $45.9 million. Canaccord Genuity is a fan of the company. It currently has a buy rating and $4.85 price target on its shares.
Serko Ltd (ASX: SKO)
Serko is an online travel booking and expense management provider. Times have been hard because of the pandemic, but demand is starting to pick up. For example, this morning the company released its full year results for FY 2021 and revealed significant improvements in its performance. And while it isn't anticipating a full recovery for another year, management believes it is well-placed to benefit when it does. This is thanks to its game-changing Booking.com deal and favourable industry trends brought about by the pandemic. It notes that risk and cost management will be the key priorities for organisations as they return to travel. Its Zeno product has a number of product capabilities to address the challenges of post-pandemic business travel. Macquarie is positive on Serko. It currently has an outperform rating and NZ$7.25 (A$6.72) price target on its shares.
