Goldman Sachs' new high-conviction stock pick

There's no denying that Life360 (ASX: 360) has emerged as one of the most incredible growth stories on the ASX in the past couple of years.

Life360 is a location-sharing app that allows family members and friends to see each other's real-time locations on a map and communicate within the app. It provides peace of mind and safety through features such as location history, driving reports and emergency assistance.

Since listing in 2019, the company has grown its top-line by more than fourfold from US$58.9 million to US$305 million in 2023. During this time, its share price is up 260%, with a notable 155% gain this year alone.

Goldman Sachs has added Life360 to its APC Conviction List, with the view that the company "remains in the early stages of its multi-year revenue growth opportunity, with subscription growth momentum continuing at scale."

The bullish thesis

Life360 operates a 'freemium' business model, where approximately 75% of revenue is derived from subscribers, 15% from hardware sales and 10% from indirect revenue streams such as advertising.

Goldman Sachs analyst Chris Gawler says the company remains early in its monetisation journey, with revenue per monthly active user well below other mature freemium app peers.

To add some perspective, Life360 was generating approximately $5 in total revenue per monthly active user for the twelve months to June 2024. The monetisation of peers varies widely, including:

• Pinterest, Duolingo and Snapchat generated $7.7-6.5 total revenue per monthly active user over the same period

• Spotify, Facebook-parent Meta and Bumble reported $26.6, $28.1 and $41.2 respectively

"Life360 possesses multiple levers to drive higher monetisation including conversion of the user base to paid, international membership roll-out, advertising and indirect data sales, and M&A," says Gawler. The report rated Life360 as a Buy with a $21.85 target price.

Key growth areas

Advertising ramp-up: Gawler says there's a "compelling opportunity" to grow advertising revenue given the platform's rich user data. He says monetisation will likely be lower than app peers, given the low time spent in the app but even "relatively modest near-term Ad revenue provides a tailwind to group earnings."

Subscription growth in key markets: "Despite Life360’s meaningful scale in the US (40.5 million MAUs), user growth has continued at ~20% year-on-year, validating the size of Life360’s total addressable market," says Gawler. He attributes this growth to the company's word-of-mouth user acquisition model and healthy free-to-paid conversion rates. Outside of the US, Life360 is in the early stages of growth, having launched in the UK and Australia in the past twelve months.

Earnings growth vs. reinvestment: Gawler believes the market underappreciates the operating leverage in Life360's business model. He says the company is well-positioned to achieve its mid-term margin target of 25% EBITDA margin and sees the potential for a better-than-expected 2024 EBITDA result.

Latest results

Life360 has consistently demonstrated its ability to surpass both its own guidance and analyst expectations. Its share price reaction to the latest three results (the company's reporting period is the calendar year):

• 1 March (2023 full-year result): +38.4%

• 10 May (Q1 2024 result): -2.7%

• 9 Aug (Q2 2024 result): +18.0%

The latest Q2 result reported 20% revenue growth to US$84.9 million, in line with market expectations of US$84.6 million. However, an adjusted EBITDA of $11 million - almost double consensus expectations of $5.7 million, showcased the sheer amount of operating leverage built into the business.