Why I think this ASX 200 share is high-risk, but also high-reward

When it comes to investing, it’s important to invest in ASX shares that meet your risk profile.

As well as making sure you sleep soundly each night, doing so means that you’re not putting your financial well-being at risk.

Generally speaking, your risk profile lowers as you age. When you first start out investing, you might be able to put some of your funds in high-risk shares because if you get burned, you’ve got plenty of time to try to recover your losses. However, when you’re nearing retirement, I don’t believe it is wise to risk your nest egg in a meme stock like Brainchip Holdings Ltd (ASX: BRN) for example.

But that doesn’t necessarily mean you should just only buy high-risk ASX shares when you’re young.

I would suggest you build a balanced portfolio filled with high-quality, blue chip shares and dedicate a smaller portion of it to higher-risk options.

How do you decide which high-risk ASX share to buy?

Investors should look to identify high-risk shares that have high-reward potential.

After all, there’s no point investing in an ASX share if you stand to gain 10% but risk losing 50%. You might find better odds at a casino!

With that in mind, I would avoid companies that have unproven business models and limited revenue, such as the aforementioned Brainchip. Particularly if they operate in industries dominated by multinational giants. This puts the odds firmly against them succeeding and you could end up losing most, or even all, of your investment.

Instead, I would look for companies that are generating meaningful revenue and growing it each year.

My high risk/high reward pick

One high-risk ASX share that ticks the box for me is Megaport Ltd (ASX: MP1). It is a leading provider of cloud connectivity and networking solutions across data centres globally.

Megaport’s software layer provides users with an easy way to create and manage network connections. Through its network, businesses can then deploy private point-to-point connectivity between any of the locations on Megaport’s global network infrastructure.

Thanks to the cloud computing boom, this is proving to be very popular with end users and has underpinned solid revenue growth in recent years. For example, during the first quarter of FY 2023, Megaport reported revenue of US$23 million. This was up 5% from the fourth quarter and annualises to US$93 million.

But the good news is that this revenue is nothing in comparison to its total addressable market (TAM).

Goldman Sachs has previously stated that Megaport’s “opportunity for further growth is immense (GSe A$129bn p.a. spent on fixed enterprise networking across MP1 geographies)”. This is being driven by “two structural tailwinds that accelerated through COVID-19, including: (1) The adoption of public cloud & multi-cloud usage; and (2) The growth in Networking as a Service (NaaS)”.

And thanks to its first-mover advantage in the industry, Goldman believes it is well-placed to capture a big slice of this huge market. In the near term, its analysts are forecasting the following:

[Goldman Sachs estimates]

Major upside potential

In light of this, it will come as no surprise to learn that its analysts currently rate Megaport’s shares as a buy with a $9.50 price target.

Based on the current Megaport share price of $6.70, this implies a potential upside of approximately 42% for investors over the next 12 months.

I think this makes it a top high-risk/high-reward share for investors to consider today if their risk profile allows it.

The post Why I think this ASX 200 share is high-risk, but also high-reward appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Megaport. The Motley Fool Australia has recommended Megaport. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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