Crunch! ASX tech darling Life360 meets perfect storm (storm wins)

The result had very strong top-line growth with annualised monthly revenue up 50% during the year. This growth is driven by improvements essentially across all metrics. Over 30% growth in monthly active users, improved conversion rate, and a 40% increase in paying members. The reported ver 20% growth in price per paying member and the gross margin remains high at 80%. On the revenue front, everything looks strong.

The OPEX (operating expenses) grew sharply because they stepped up the sales and marketing spend. As Life360 come out of the COVID lockdown they have to put on salespeople to sell the product. It is worth noting that revenues were still growing strongly without the significant step-up in cost.

Do you think the selloff was an overreaction and under reaction? Or do you think it was appropriate?

It's an overreaction. The price move has little to do with operating metrics, and little has changed concerning the information we have today compared to yesterday.

What has changed?

A few things spooked the market, which is becoming increasingly cautious with highly valued growth companies. Particularly companies yet to reach profitability. 

It is worth noting that Life360 was profitable before they increased their marketing expenditure. 

But because their addressable market is growing so fast, and all the operating metrics show that they're getting a really good return out of the investment, they are yet to reach cash profitability. So it's getting sold down with that basket of stocks.

Secondly, the company talked to a US listing, and I think the investors do question why they are pursuing this. Previously there was a reason for US listing because comparable companies were trading on bigger valuations. So, a US listing can give a company more visibility and the potential for a higher valuation. And because it's going to be a global company, it makes sense to have that US footprint. But now the US tech companies have been sold off enormously. So there's questions about why they are pursuing the US listing.

My view is that if the valuation thesis doesn't work out, I don't see the reason for a company to list in the US. They don't need the cash, they raised it four months ago. They have $100 million sitting on the balance sheet, and there is plenty of liquidity.

Based on today's result, do you think the stock is a buy, hold, or a sell?

Well, I think this stock is a buy. However, I will put a caveat on the side. Is that for the past three months we have seen significant selloffs across unprofitable tech companies, and we think Life360 is one of the best out of that whole bracket. There are a lot of unprofitable tech companies with business models that won't exist with rising costs of capital. However, this company has an incredible business model, and it's the largest player in a fast-growing segment.

The business has demonstrated that it can monetise its active user base and that monetisation is gaining momentum. So this business will become cashflow breakeven quickly, even without investment like the other businesses. So, to us, this company represents a very good long-term growth outlook. Yes, there will be some volatility, but I think it's an incredible buying opportunity.

What are your expectations and outlook for Life360?

Life360 has grown its business between 50 and 60% over the last few years. It's actually been listed for 10 years, and we expect the company will continue to grow its users at a very strong rate.

I think evidence has shown that their conversion of free active users to paid users is accelerating. The commercialisation of Life360's product will drive significant attention into this category and this business.

Location sharing as an industry vertical is going to get increased attention in this space. It is still in the incredibly early stage of its development.