Why Life360 might be one of the best growth stories on the ASX

Life360 (ASX: 360) shares opened 14% higher on Friday after reporting Q2 earnings well-above analyst expectations and guided to even more growth for the rest of the year.

Life360 is a family safety app that lets members track each other's locations. Its paid services include features such as roadside assistance, emergency services and stolen phone protection.

Q2 2024 Earnings Highlights

Here are the key numbers for the June quarter (all figures in US dollars).

• Revenue up 20% to $84.9 million – This was in-line with consensus expectations of $84.6 million

• Global MAU net additions of 4.3 million to 70.6 million – This was 1.7% ahead of consensus expectations of 70.6 million

• Net loss of $11 million which was driven by one-off costs such as US IPO-related transaction costs of $5.8 million

• Positive adjusted EBITDA of $11 million – This almost doubled consensus expectations of $5.7 million

• Quarter end cash position of $162 million

Life360 also upgraded its full-year adjusted EBITDA guidance to $36-41 million from its prior guidance of $30-35 million. At the mid-point, this represents an upgrade of 18.5%.

What do analysts think

"We expect investors to respond positively to Life360's second quarter result, with a material upgrade to adjusted EBITDA driven by continued operating leverage as well as an upgrade to core subscription revenue growth," Goldman Sachs analysts said in a note this morning.

The data points that stood out the most from the quarterly update include:

• Subscription net adds grew at a record 132,000 to 2.03 million, up 25% year-on-year and ahead of Goldman's forecast of 2.01 million. The growth was underpinned by both US and International segments, up 19% and 42% respectively

• Revenue was marginally behind Goldman expectations but adjusted EBITDA smashed their forecasts of $6.5 million as "Life360 continues to demonstrate impressive operating leverage."

• The EBITDA guidance upgrade (now $36-41 million) was ahead of their $34 million estimates

What makes Life360 a fascinating growth story

Everyone's raving about Nvidia – But we have a comparable growth story right in our backyard. There are a few factors that make Life360 a rather compelling growth story.

#1 Earnings track record: Life360 has a pretty solid track record of meeting or beating earnings expectations. As a US-based company, it reports earnings on a quarterly basis. Here's how the stock reacted to recent quarterlies:

#2 Introduction of ads: Life360 recently announced the introduction of advertising into its offer, paving the way to monetise its +70 million user base.

Morgan Stanley says Life360 could generate approximately $45.5 million in ad revenue by 2027. The forecast implies 32.5 cents in revenue per global user and 65.5 cents per US user.

"We continue to expect a noticeable revenue contribution from ads in the second half of 2024 as we build our ad sales measurement and tech capabilities and further enable our platform through service integrations like those in place at the Trade Desk, LiveRamp, PubMatic and Google Ad Manager," CEO Chris Hull said in this morning's earnings call.

#3 Operating leverage: Life360's second quarter result was marginally behind Goldman's expectations from a revenue perspective. So for EBITDA to almost double consensus expectations was a big flex for their operating leverage.

Where could things go wrong?

Life360 falls into the basket of a richly valued, risk-on kind of stock. There are a few risks that come to mind.

#1 The broader market: The ASX 200 experienced its largest two day declines earlier this week, down 5.7% between Friday 2 August and Monday 5 August. The selloff was driven by a combination of weaker-than-expected US economic data and a Japanese market/currency crash. Over the same time period, Life360 shares fell 12.5%. So the stock remains sensitive to factors that influence risk appetite.

#2 No room for error: As a richly valued tech stock, Life360 cannot afford to miss earnings expectations. Audinate is a prime example of what happens when a growth stock downgrades its earnings guidance. Earlier this week, the company said the drivers of revenue during FY24 are not expected to continue into FY25. The stock opened the session down 51%.

#3 The stock is up massively: The stock is up more than 15% at the time of writing and trading at all-time highs. It's a little extended and the market is already trying to price in today's upgrade.