Life360 Inc (ASX: 360) shares certainly have been on fire this year.
Despite recent weakness in the tech sector, the ASX 200 tech stock is up over 60% year to date.
But if you thought you were too late to the party, think again.
Goldman Sachs has been looking at the location technology company and still sees major upside ahead for its shares.
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What is the broker saying about this ASX 200 tech stock?
While the key driver of Life360's outperformance this year has been its financial performance, its launch of an advertising business has also got investors excited. With 60 million monthly active users, the company has a huge network for advertisers to target.
Goldman believes that initial revenues from advertising will be incremental rather than game-changing based on its experience with peer Duolingo Inc (NASDAQ: DUO). It commented:
The company's recently announced strategy to further monetise its sizeable user base via the introduction of advertising appears strategically sound and in line with its global app-based internet peers. To frame the potential opportunity and provide basis for our advertising estimates, we have conducted a detailed peer and industry benchmarking, concluding that Life360's ad revenue strategy is likely to initially be an incremental, rather than game-changing, driver of earnings and valuation upside.
The broker expects revenue in the region of US$6 million from advertising in FY 2024, growing to US$18 million in FY 2026. It adds:
Our analysis of app-based internet peers (incl. Duolingo, Life360's closest comp) suggests that initial advertising revenue is likely to index toward the lower end of user monetisation given low banner ad yields, relatively low time spent in app, and less purchasing intent from users. As Life360's advertising strategy is nascent with many unknowns, we factor a relatively small amount of incremental ad revenue into our base-case assumptions (US$6/$16/$18mn FY24/25/26E revenue) but see potential upside as the ad strategy develops (e.g., higher ad load, different ad formats).
The good news is that this revenue is expected to be high-margin, which means it should be a nice boost to earnings. The broker said:
In addition, ad revenue can provide a helpful boost to group earnings with likely high incremental margins (>50% EBITDA). In our view little value is being imputed for ads given that the core subscription business remains undervalued, therefore we see valuation upside on successful execution.
Big gains ahead
The note reveals that Goldman has reiterated its buy rating and $14.20 price target on the location technology company's shares.
Based on where the ASX 200 tech stock currently trades, this implies potential upside of 17% for investors over the next 12 months. It concludes:
With potential for EBITDA upgrades through FY24E, and incremental monetisation from advertising, we believe Life360 can continue to re-rate towards local and global tech peers.
