Buy this high-flying ASX 200 tech stock for a big return

Goldman Sachs is feeling very bullish about this tech stock. But why?

| More on:
A smiling businessman in the city looks at his phone and punches the air in celebration of good news.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

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.

Motley Fool contributor James Mickleboro has positions in Life360. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Life360. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Technology Shares

Sports fans looking at smart phone representing surging pointsbet share price
Share Gainers

Guess which ASX All Ords share just rocketed 25% on an earnings upgrade

Investors are bidding up the ASX All Ords share following an improved FY 2024 earnings outlook.

Read more »

A man looking at his laptop and thinking.
Technology Shares

ASX 300 fallen star down 62% in a year hits new 52-week low: Time to buy?

Here's my take on Weebit Nano shares today.

Read more »

A man and woman watch their device screens, making investing decisions at home.
Technology Shares

Own Xero shares? Here's what to expect from next week's results

Strong earnings growth is expected from this market darling next week.

Read more »

A young man talks tech on his phone while looking at a laptop. A financial graph is superimposed across the image.
Technology Shares

Brokers name 2 rapidly growing ASX 200 tech stocks to buy

These tech stocks could be quality options for growth investors. Let's see why.

Read more »

a man weraing a suit sits nervously at his laptop computer biting into his clenched hand with nerves, and perhaps fear.
Technology Shares

What are 3 of the safest ASX 200 tech shares in Australia right now?

Here's how these tech companies stand out in a turbulent market.

Read more »

A young man pointing up looking amazed, indicating a surging share price movement for an ASX company
Technology Shares

Buy this ASX 200 tech stock now before it's too late: Goldman Sachs

The broker sees potential for some big returns from this tech leader.

Read more »

A man holds his head in his hands, despairing at the bad result he's reading on his computer.
Technology Shares

Why is the Life360 share price sinking 9% today?

This high-flying tech stock has handed in its report card. How did it do?

Read more »

Smiling man working on his laptop.
Technology Shares

ASX tech stock up 54% on positive trading update

Integrated Research had some impressive news for its shareholders today.

Read more »