I love investing in ASX growth shares. And I particularly love investing in ASX growth shares with scalable business models.
Scalability refers to how easy it is to expand a business and grow revenues at a much faster rate than costs.
How is this possible? Well, scalable businesses have a higher proportion of fixed costs compared to variable costs.
Take a software business, for example. Once the software has been created, there's typically very little cost involved in rolling it out to an extra customer.
This can lead to a wonderful thing called operating leverage, where more and more sales dollars fall to the bottom line.
With that in mind, let's take a look at three ASX 200 shares that benefit from scalable business models.
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REA Group Limited (ASX: REA)
To kick things off, REA is the ASX 200 share behind one of the most prominent brands in Australia.
Realestate.com.au is not only the nation's largest property portal. According to market research firm Nielsen, it's also the seventh-largest online brand in the country. It averages 124 million visits across nearly 13 million people each month, reaching 62% of Australia's adult population.
As a digital business, REA is highly scalable. It can attract new customers with ease, without having to invest significant amounts of capital to grow.
Take its core property portal, for example. REA generates listing revenue when a real estate agency advertises a property on its portal. But crucially, REA collects these fees without having to do much at all. The portal has already been built and it works seamlessly. There are hardly any costs involved in adding an extra property listing to the portal.
In other words, REA generates this listing revenue at high gross profit margins.
A fair chunk of this gross profit translates into earnings. In FY22, REA achieved an EBITDA margin of 57% across the group.
Deterra Royalties Ltd (ASX: DRR)
Next up, Deterra Royalties is a lesser-known ASX 200 share with a business model unique to the ASX.
Deterra was spun off from Iluka Resources Limited (ASX: ILU) in 2020 to separate the mineral sands and royalty businesses.
Deterra currently holds six royalty assets in its portfolio, with its cornerstone asset being the Mining Area C (MAC) Royalty.
Operated by BHP Group Ltd (ASX: BHP), Mining Area C is set to become the largest iron ore hub in the world. It's expected to produce 145 million tonnes of iron ore each year when the recently-completed South Flank expansion reaches full production.
The MAC royalty is revenue-based, with Deterra earning 1.232% of revenue from the MAC royalty area plus capacity payments. As a result, Deterra's business model captures the upside of expansions and extensions without any exposure to the mine's operating costs or capital contributions.
This simple and scalable model enabled Deterra to achieve an unbelievable underlying EBITDA margin of 97% in FY22. As an added benefit for shareholders, the company is committed to paying out 100% of its net profit after tax (NPAT) as dividends.
Pro Medicus Limited (ASX: PME)
Last but not least is a company that I believe is one of the highest-quality growth shares on the ASX.
I recently profiled Pro Medicus as an ASX 200 share with juicy gross profit margins, which goes hand in hand with scalability.
But I think the economics of the business are deserving of another shout.
Pro Medicus is one of the very first companies that spring to mind when I think of operating leverage. It has it in spades.
For those who are unfamiliar, Pro Medicus is a global leader in radiology imaging software through its Visage technology.
The company's scalability and operating leverage are best seen through its wide profit margins. In FY22, Pro Medicus achieved an EBIT margin of 67%. Put another way, Pro Medicus turned two-thirds of every sales dollar into profit before tax.
What's more, as the company's topline flourishes, these margins have only been heading higher over time.
