Investors that are on the lookout for options in the tech sector might want to consider Life360 Inc (ASX: 360) shares.
Although the ASX 200 tech share is up 125% over the past 12 months, analysts at Goldman Sachs don't believe it is too late to invest.
Why is Life360 an ASX 200 tech share to buy?
According to a note released this morning, Goldman Sachs has lifted its estimates and valuation ahead of the release of Life360's third quarter update later this month. This has been driven by strong momentum in the ASX tech share's core Subscription business, growth in high-margin indirect revenue streams, and operating leverage thanks to cost discipline.
Goldman has reaffirmed its buy rating on Life360's shares with an improved price target of $21.85. Based on its current share price, this implies potential upside of over 15% for investors over the next 12 months.
Reasons to be bullish
Goldman highlights that Life360's user base monetisation is still in its early days and has significant long term potential. It said:
We believe Life360's user base monetisation is in its relatively early stages, with revenue per MAU well below other scaled freemium or ad-supported app peers. This is despite above average engagement (e.g. DAU-to-MAU) and continued strong top-of-funnel growth (as demonstrated by most recent app data), suggesting strong user engagement with the app.
The broker points out four key ways that the ASX 200 tech share can drive higher monetisation from its large and growing user base and drive strong revenue growth through to at least FY 2026. It explains:
We see Life360's large, global and growing user base as providing the platform for multiple levers to drive higher monetisation including: (1) Conversion of the free user base to paid subscribers. Free-to-paid conversion has remained broadly flat over the past couple of years following price increases in the US (conversion sits at ~13% post price increases, vs up to ~15% historically), with higher conversion a key medium term opportunity to grow paid subs;
(2) Roll-out of International Membership as Life360 initially expands into regions with material existing user bases, high GDP per capita and cultural similarities to the US (e.g. Europe); (3) Indirect data sales and Life360's new Advertising strategy, which we expect to initially be an incremental revenue driver (see here), though may also support paid user conversion over time; and (4) Other product step-outs such as pet care (as flagged in recent meetings). These factors underpin our confidence in Life360 delivering a >20% revenue CAGR across FY23-26E.
In light of the above, the broker believes that the ASX 200 tech share deserves to re-rate to the higher multiples that its peers trade on. It concludes:
In the context of earnings and cash flow growing >5x across FY23-26E, we see valuation at ~33x EV/FCF (vs ~47x AU peers) as attractive and believe Life360 can continue to re-rate towards best in class tech peers. Reiterate Buy.
