Why I’d buy Zip and DroneShield shares today

I’m always interested in companies with the potential to become much bigger businesses over time.

And right now, there are two ASX shares that I think have particularly exciting growth prospects.

Here’s why I would be happy buying them today.

Zip Co Ltd (ASX: ZIP)

Zip is a share I think has plenty of growth ahead of it, especially in the United States.

The buy now, pay later provider has established a growing presence in the American payments market, giving it access to an enormous pool of potential customers and merchants.

What I like is how much more business Zip could generate through its existing platform. As it attracts new merchants and increases transaction volumes, there is an opportunity to generate additional revenue without costs increasing at the same rate.

That could support considerable earnings growth over the next few years. And I think the current valuation makes that opportunity worth considering.

With Zip shares around $2.15, they are trading on a PE ratio of 14 times consensus FY27 earnings, falling to less than 10 times FY29 earnings. I think that could prove very cheap if the company delivers on market expectations.

Of course, there are challenges. Higher interest rates could make funding more expensive and put pressure on Zip’s margins. They could also place additional strain on customers, potentially leading to higher bad debts.

That makes disciplined lending particularly important as the company expands. But if Zip can keep growing its share of the enormous US market while maintaining credit quality, I think shareholders could be rewarded handsomely.

DroneShield Ltd (ASX: DRO)

DroneShield is another ASX share I would buy, although I think it requires considerable patience. The counter-drone technology company’s shares are trading around $1.48 on Tuesday, having fallen sharply from their previous highs.

That weakness comes despite what I believe is an increasingly important long-term market opportunity. Drones have become a major part of modern warfare, and governments are investing in technology capable of detecting and defeating them.

DroneShield has developed a range of systems designed to address these threats, and its growing presence in international defence markets could support substantial sales growth.

The opportunity now is to turn its expanding sales pipeline and procurement agreements into meaningful contracts.

Valuation is a challenge, with DroneShield trading on a very high forward PE ratio. But I don’t think that is the best way to assess the company at this stage.

In some ways, DroneShield reminds me of Zip shares during its earlier rapid-growth phase, when building the business and expanding its market presence were major priorities.

What I want to see is DroneShield developing the scale to convert growing demand into substantial, sustainable profits.

That is far from guaranteed. Defence orders can be unpredictable, competition is increasing, and the company still has execution and regulatory uncertainties to resolve. Nevertheless, I think the potential rewards justify considering the shares as a higher-risk investment.

Foolish takeaway

I would be happy buying both Zip and DroneShield shares today.

There is plenty that could go wrong, but I think both companies have opportunities to become much larger businesses over the coming years.

For investors comfortable with volatility and prepared to take a long-term view, I believe they could deliver excellent returns.

The post Why I'd buy Zip and DroneShield shares today appeared first on The Motley Fool Australia.

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