Goldman Sachs initiates on Life360 with a Buy

Embattled Life360 (ASX: 360) was up around 5% this morning after Goldman Sachs initiated coverage with a Buy rating and a target price of $7.50, which represents a 25% upside to the current price.

Having defied some of the downward pressure inflicted on the [IT] sector, courtesy of rising interest rates, Life360’s share price has virtually doubled from a low of around $2.43 mid-June on the back of renewed expectations that the lossmaking tech stock may have a clear pathway profitability.

In a favourable note to investors three weeks ago, Bell Potter, which has a Buy rating and target price of $8.23, claimed the company is on the road to consistently positive adjusted earnings (EBITDA) and operating cash flow by late 2023.

Equally encouraging, management expects losses to continue narrowing before finally becoming profitable in 2024.

Management expects to end 2022 with cash of US$65m after making a loss of -US$35m to -US$38m for the year.

Volume/pricing inflection point

While execution risk remains, from a technological and go-to-market standpoint, Goldmans’ sees scope for a re-rating as Life360 demonstrates pricing leverage, improving unit economics and progress to cash flow breakeven in FY23.

The broker sees Life360 as reaching a volume/pricing inflection point, with potential structural profitability tailwinds on the horizon from a reduction in effective app store fees.

Based on an estimated US$12bn global total addressable market (TAM), the broker also highlight’s Life360’s large opportunity to expand its product suite, grow average revenue per paying circle (ARPPC), increase payer conversion, and lift penetration rates outside the US.

Value appeal

Reflective of its smaller scale and pre-profit status, despite a stronger growth outlook, Goldmans’ notes that Life360’s subscription business currently trades on an implied FY24 EV/GP multiple of 3.5x versus a range of 3.8x-7.6x for subscription app peers.

The broker values the subscription business at 5.5x FY24 EV/GP (90% of EV) in line with freemium app peers.

Other key pillars

Overall, Goldmans’ base-case on Life360 is also underpinned by these key drivers:

• Expanding the product suite and TAM globally: Life360 is early along a compelling long-term growth runway with growth in penetration rates towards US levels potentially seeing international monthly active users (MAUs) 4x by FY30E.

The broker estimates population penetration rates doubling from FY21-25, driven by the US, plus international segments, driving MAUs to more than double from 36m in FY21 to 85m in FY25- 24% compound annual growth rate (CAGR).

• Attractive Tile synergies, focus now on execution: Greatest value from Tile coming from Life360’s ability to bundle hardware to:

1. Incentivise subscription up-sell

2. Drive pricing power

3. Improve retention

• Life360 well placed to manage competitive threats: The company is the clear category leader in its core location app and is top 10 in terms of app store rankings across Apple and Google.

• Long-term profitability tailwinds as app store commissions fall: The broker sees long-term downwards pressure on the In-App Payment (IAP) fees charged by Apple and Google plus the possibility for anti-steering provisions to be eased.

Life360 share price over 12 months.