Small Caps | Mar 20 2024
Brokers welcome Life360’s new advertising initiative unveiled at the same time as FY23 results and FY24 guidance which both exceeded expectations.
-Life360 introduces a new advertising initiative
-FY23 earnings and FY24 guidance exceeded market forecasts
-Advertising will monetise users from the moment of sign-up
-Morgan Stanley expresses high conviction on the outlook
By Mark Woodruff
Global family safety service Life360’s ((360)) average target price in the FNArena database increased by 30% to $13.63 at the beginning of March as FY23 earnings beat analysts' forecasts with a better-than-expected FY24 guidance on top.
In addition, management announced plans to launch a new advertising business model.
Several weeks later, the company has joined Morgan Stanley's list of key small/mid cap ideas where the broker has high conviction for both earnings and the outlook. This inclusion is based on Life360’s strong subscriber growth and upside potential from the new advertising initiative.
The existing subscription business aims to protect people, pets and "things", via features on the Life360 mobile app which range from communications to driving safety, as well as location sharing.
Over the last five years the company has been monetising its user base by providing premium subscription options, as well as introducing a membership program. The current broker excitement relates to the “freemium” business model where the basic app is available to users at no charge.
Morgan Stanley has long argued Life360 is a differentiated asset in the Australian market due to the scale of the user base and level of engagement, and notes the non-paying user base comprises more than 50 million monthly active users (MAU), of which around 67% reside in the US.
Unlike subscriptions, the broker points out advertising monetises users from the moment of sign-up, with revenue generation for all new users straight away, as opposed to just those who choose to subscribe.
The analysts suggest it may be difficult for consensus to neatly insert into forecasts the advertising opportunity, which should deliver a new growth vector and act as a tailwind to existing unit economics. The Life360 app not only has high frequency usage (five times per day), but those users are also generally affluent, highlights Morgan Stanley.
The company accumulates data on key personal details, real-time location, and historical behaviour, which the broker suggests can assist with highly relevant, targeted advertising.
At the time of FY23 results, Ord Minnett felt looking at advertising in isolation would be a mistake for investors, given the real story for Life360 is the ongoing build-out of a family safety platform, with multiple revenue streams and improved unit economics.
It’s anticipated the untapped value of this network will continue being unlocked gradually over the coming years as new verticals (and thus revenue streams) are offered to a rapidly growing network of 61 million users.
Advertising will add a new, high margin (around 70%), low investment revenue stream, and this broker forecasts an earnings contribution of around $40m by FY28.
Assuming relatively modest advertising revenue of US$1 per user per year, Goldman Sachs forecasts Life360 could add around US$60m of revenue and more than US$30m of earnings. By comparison, this broker’s total Life360 earnings forecast for FY24 is in the range of US$30-35m.
FY23 results
Prior to the release of FY23 results, investors held serious concerns management at Life360 may reverse the past two years of prudence by shifting to a ‘growth-at-all-costs’ mindset, according to Ord Minnett.
Management rebutted this notion by issuing finely balanced FY24 guidance for revenue growth of of around 22% at incremental earnings margins of 18%, noted the broker.
Adjusted earnings of US$20.6m for FY23 beat Bell Potter’s forecast by 49% and proved well above the guidance range of US$12-16m. Average revenue per paying circle (ARPPC) and annualised monthly revenue (AMR) also beat the broker’s forecasts, though paying circle growth of 54,000 in the fourth quarter missed the expected 82,000.
Management provided 2024 guidance for revenue and adjusted earnings in the ranges of US$365-375m and US$30-35m, respectively, compared to Bell Potter’s forecasts for US$357m and US$24m.
After allowing for the new advertising vertical significant potential, this broker increased the valuation multiple for Life360 and reduced the weighted average cost of capital (WACC) applied to discounted cash flows.
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