Hot Money Monday: Life360 rockets 25pc in a week, but is the market dreaming too big?

Life360’s up 25% on record quarter, but this analyst says the market’s frothing a bit too hard over its ad business.

Is the market dreaming too big about Life360? Pic: Getty Images

• Life360 pops 25% on record results

• Ad biz gets love, but maybe too much

• Morningstar analyst says hype might be running too hot

It’s been a bonza week for Life360 (ASX:360) investors.

The San Francisco-based family safety tech company shot up more than 25% last week, riding a wave of bullish sentiment after posting record-breaking March quarter results.

For a business once known as a simple family locator app born out of the post-Hurricane Katrina chaos, this is quite the victory lap.

The company, now trading on both the NASDAQ and ASX and capped at $4.5bn, has morphed into a global digital concierge for family life.

It does location tracking, crash alerts, pet monitoring, teen driver stats, and more.

In the last quarter just reported, it added 4.1 million new users, bringing total monthly active users to a whopping 83.7 million across 170 countries.

Not bad for a business that started with the humble goal of helping families stay connected during emergencies.

Quarterly revenue surged 32% to US$103.6 million, with subscription income up 37%.

But what really turned heads was the near doubling of “Other Revenue,” which includes its budding advertising business.

It came in at $12.8 million for the quarter, up from $6.5 million in the same period a year ago.

That’s what really sparked the rally, but not everyone's convinced it will last.

Getting carried away?

Morningstar analyst Roy Van Keulen, who’s been keeping a close eye on Life360’s numbers, welcomed the strong start but poured a bit of cold water on the hype.

That ad growth is exciting, sure, but Van Keulen sees warning lights flickering beneath the surface.

His team had already penciled in a long-term drop in App Store commission fees after recent US rulings against Apple’s stranglehold on payment systems.

And that's a big win for app developers like Life360, whose Apple-related fees have been a major cost line.

Still, Van Keulen thinks the Street’s getting a little carried away.

"Life360 screens as materially overvalued now, as the market appears to be overestimating the advertising growth opportunity," he said.

Put simply, the ad dream might not match reality.

Ads not quite hitting the mark

Yes, Life360’s pitch is that it can serve up super-relevant, location-based ads.

Imagine landing at LAX airport and instantly seeing a pop-up offer for an Uber ride. That’s useful. But how often does that happen?

“We believe the market is overly excited by advertising revenue growth,” Van Keulen said.

“The company’s pitch to investors and advertisers is it is uniquely capable of providing contextually relevant advertising inventory in its app, especially for location-relevant ads.

"However, we see few relevant use cases for this type of data.”

Van Keulen reckons that while some travel-related ads might stick, most of the time, they’ll just be white noise.

A café promo popping up on your kid’s safety app? Not exactly a sure-fire conversion.

More critically, he adds, “We are yet to see growth from targeted ads show up in revenue."

"While year-on-year ‘other revenue’ grew impressively, there was a sequential decline, despite targeted ads being ramped up.”

So why the investor euphoria?

Part of it comes down to confidence from the top.

CEO Chris Hulls is talking up Life360 as an everyday essential in uncertain times.

“In a more cautious consumer spending environment, our performance reflects both the resilience of our business model and the growing demand for our services that keep families safe, connected, and provide peace of mind,” Hulls said in the company’s earnings release.

Still, Van Keulen has his feet planted on the ground.

Even with upgraded forecasts, Morningstar doesn’t see Life360’s advertising business becoming a reliable money spinner anytime soon.

“Our forecasts assume Life360’s average advertising revenue per monthly active user, or MAU, will remain near the bottom end of the range compared with a peer group of consumer apps.”

What’s the takeaway?

Life360’s core business – subscriptions that help keep families connected and safe – is in top shape.

It’s proving resilient, sticky, and nicely profitable.

But don’t get too starry-eyed about the advertising side just yet.

"These use cases are niche and not everyday use cases where targeted ads can deliver a lot of revenue," Van Keulen said.

The stock may have sprinted ahead of itself, he added.

The views, information, or opinions expressed in this article are solely those of the analyst and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.

Originally published as Hot Money Monday: Life360 rockets 25pc in a week, but is the market dreaming too big?