A 360 degree look at Life 360's Q3 results

True story, last week my wife said "I want to get this thing called Life 360". "360?", I said, "That's a stock I follow!". Such is the habit of a stock market addict to relate everything back to the market!

Given we have a 14 year old and a 12 year old, I guess we're officially entering the target demographic for Life 360's products. It's not just us looking for solutions to keeping tabs on loved ones, Life 360 (ASX: 360) appears to be making a very good business out of it.

The Life 360 app allows users to share their location with members of their family, or "circle" as they call it, and includes features not found in Apple's Find My app such as driving safety and crash detection, and access to all-important roadside assistance.

There are a few other bits and pieces it offers, but this article is supposed to be more about the fundamentals and technicals of the stock rather than a discussion of the app's features and competitors. I'll leave that to your own research, but suffice it to say, the wife and I decided that until the kids are driving, Find My is adequate for now.

My favourite investing technique

It is true I've been following Life 360 very closely. Each day I scan the ASX and tweet a list of stocks whose charts I feel are exhibiting strong signs of excess demand. 360 has been a regular in my shortlists since May.

For me, charts simply explain the balance or imbalance between demand and supply for a company's shares. I assume all the smarty pants at the big brokers and fund managers have learned everything they need to know about a company, and then they've decided to either buy, sell, or abstain (i.e., there's something better out there for their dollar!).

I believe that ultimately, it is the actions of these very informed investors which shape the price action and volume traded for each stock on the market.

So, when I see a classic "bottom-left-top-right" chart, I know there's probably plenty of demand, and not too much supply around for a stock. When you think about it, both scenarios at the same time typically only occur if a stock is actually pretty good!

My experience suggests this is usually when it's a good time to own a stock. It's not fool proof, and this is where one's risk management comes in, but "trend following" as it's commonly known in technical analysis circles, has worked well for me for a long time.

360 has done well for shareholders, but there are a few issues with its chart

Looking at Life 360's chart, the first thing which pops out are my short-and-long-term trend ribbons. These are a carefully selected combination of moving averages which I feel best describe the behaviour of shorter term traders and longer term investors.

Short term traders tend to focus more on the light green zone (in an uptrend), frequently buying dips into this zone, and selling when the price moves too far away from it. Similarly, the dark green zone is where long term investors tend to find value and buy the dip.

In the chart above, these concepts are clearly evident, with 360 showing a strong and sustainable ST uptrend between May and September, and a long term uptrend since June. Note how the trends ebb, flow and change, and importantly, how the September-October correction dutifully ended in the dark green zone.

I feel there's plenty to like about 360's chart. The short term trend appears to be swinging back to up, and the long term trend appears very much intact. There's an alignment between the two styles of traders.

The only concern I have is the price action near the August-September highs (i.e., $9.48 on 15 Aug, $9.39 on 31 Aug, and $9.29 on 15 Sep). Clearly there's some pesky excess supply around $9.30 to $9.50 which needs to be dealt with before 360 can break to higher levels. Yesterday's price action following the release of 360's third quarter results, with a rejection of the resistance zone, confirms my concerns over the significance of the supply around recent highs.

Recent white candles in the range between $7.75 and $8.46 suggests this could be an area of excess demand from which 360 can regroup and potentially stage a rebound to finally challenge new highs.

A look at Life 360's Q3 results

Again looking at the chart, we can see the initial response to yesterday's third quarter results was positive. 360 reported a 38% increase in total revenue and a 41% increase in annualised monthly revenue (AMR) (AMR can be a better indication of revenue run rate for rapidly growing companies).

360's bottom line is still in the red, however, the third quarter loss of $6.5 million was an improvement on the $21.1 million loss reported in the corresponding quarter of FY22. There was a similar improvement when you back out interest, tax, depreciation and amortisation (i.e., EBITDA) which swung to a $5.5 million gain compared to a $9.4 million loss in 2022

The all-important guidance suggests 360 can grow EBITDA to between $12 million to $16 million for the full financial year to December 31. This is a substantial jump from the previously advised $9 million to $14 million. That's a nice 21% upgrade at the midpoint.

This explains the jump in 360 shares, and possibly the trends seen in its chart prior to the news. The market knew there was some solid growth within this business, but there was a modest surprise to the upside.

Also impressive in 360's third quarter results was data on paying users which grew 17% compared to 2022, a record rate for the third quarter, and very near all-time record quarterly growth rates. They're also getting more out of each user, also, with average revenue per paying circle (ARPPC) rising 40% over 2022 levels, reflecting the benefits of higher pricing.

The final, takeaway point I'll lob in, is 360 achieved its second positive operating cash flow quarter in a row, and the trajectory here looks good. This is the first step towards consistent profitability for companies making the transition from cash burning to cash generating, and ultimately, towards net profitability.  

What do the big brokers think about Life 360?

We've seen the chart, we've seen the results data, let's now bring it all together with a look at what the big brokers think about Life 360 and its third quarter results. After all these are the very opinions which will dictate 360's share price, and therefore shape its chart.

Goldman Sachs | Rating: Buy, Price Target: $10.50

• Third quarter results "ahead of expectations", particularly on "most important metric" of subscriber net adds which returned to near-record levels

• The impact of price increases is waning in US, and strong growth in other regions at higher prices provides a welcome combination of volume and price growth, margins intact

• Sees scope for 360 to beat raised EBITDA guidance (GS estimate $16 million)

• Even after yesterday's gain, 360 still represents good value compared to other tech stocks/peers

Morgan Stanley | Rating: Overweight, Price Target: $11.50

• Positives: strong AMR, ARPPC growth in the US, revenue and EBITDA upgrades

• Notes value add Tile business provides to 360, "compelling ROI"

• Appreciates 360's cost discipline, expects continued margin expansion

• Notes update results in only minor revisions for forecasts

Bell Potter | Rating: Buy, Price Target: $11.25 (raised from $11.00)

• A "good" third quarter result driven by better than expected growth in total paying circles, particularly ex-USA

• ARPPC was below forecast, AMR close to in-line

• Negligible impact on FY23, FY24 forecasts, but raises price target to reflect changes and currency impacts

• Next catalyst likely in March when full year result is announced