Small Caps | Jun 30 2021
This story features LIFE360, INC. For more info SHARE ANALYSIS: 360
While Life360 continues to differentiate from and extend leadership over competitors, investors must weigh any existential risk from ‘Big Tech”.
-Life360 offers investors both peer to peer and two-sided network effects
-A fast growing user base has nearly 30m monthly active users
-Co-founders are highly-aligned with long-term success
-Analysts note the risk of devices being sold with pre-installed competitor apps
-The company generates more driver data than any other company in the US
By Mark Woodruff
Life360 ((360)) may best be described as a family-focused app concentrated in communication, location sharing, safety and driving. The app aims to be the point of connection for families in the way LinkedIn is for professionals, and Facebook is for friends.
It is becoming a dominant brand at the centre of family life in both the US and internationally.
Life360 operates a “freemium” model under which the app is available to users at no charge, but over the past five years the company has been monetising its user base by providing premium subscription options, as well as recently introducing a membership program. Indirect monetisation occurs via data insights and targeted lead generation.
In the beginning, the company only utilised location tracking and has now expanded to a wide range of services including roadside assistance, ID theft protection and phone insurance.
Morgan Stanley is attracted to the fast-growing user base, which is approaching 30m monthly active users (MAU), subscription revenue with attractive economics in terms of payback period and improving lifetime value.
The company offers investors both peer to peer and two-sided network effects. These self-reinforcing advantages drive consistent user growth and consistent product expansion and ultimately greater consumer surplus and a wider "moat", explains the broker.
Additionally, the covid experience demonstrated resilience against an economic downturn. The growth trajectory moderated during the pandemic with the core features of its product not so relevant in a lower mobility environment. As a result, management has created expectations of a material re-acceleration around the northern hemisphere "back-to-school" period in August/September.
Finally, management is highly aligned with long-term success. The company was founded in 2007 by Chris Hulls who is still the CEO today and one of the largest shareholders in the company. The company was also co-founded by Alex Haro who is a non-executive director and also one of the largest shareholders.
Where is the opportunity?
At present, the user base and product set are each heavily skewed to the US.
The company has a global growth runway and a large under-penetrated total addressable market (TAM). This under-penetration holds for the US, but is particularly evident in the company's International segment. That business has scaled organically via word of mouth, with no marketing spend and an inferior product (versus the US), explains Morgan Stanley.
There is also scope for Life360 to add to the service offering at each tier of paid membership, to drive adoption and up-sell from lower tiers and further scope to make additional services available outside the existing tiers. The broker considers the company is a high quality subscription business and doesn’t think historical trading multiples properly value the growth prospects.
There’s also an opportunity in leveraging a position of trust to enable users to access deals from a growing supplier network. This may be achieved, for example, via targeted insurance (auto based on driving data, travel when at the airport etc), children's debit cards (load cards and monitor spend), and large purchase finance for those visiting open homes or car dealerships.
The company is only beginning to explore higher average revenue per user (ARPU) and revenue sources in the Indirect segment. This may be achieved by continuing to invest and add new functionality and products for users while adding customised data for suppliers.
Why are two-sided network effects important?
A two-sided marketplace business model facilitates direct interaction between suppliers and customers, creating value through an intermediary platform. Value is given and received by both the consumer and the service provider. Uber, in the transportation sector, is just one example.
For Uber, the customer’s need is for safe and affordable transport. The driver acts as the service provider, but can’t reach the customer. Thanks to the network effects of the Uber platform, the customer has many drivers to choose from, while the service provider has many customers he or she can service to build their business.
A network effect is when another user makes the service more valuable for every other user. Hence, it is vital that a company such as Life360 establishes a lead in app users over competitors, as users won’t find as much value in competitors’ smaller networks.
Has Life360 established a lead over competitors?
In terms of downloads, Life360 enjoys a clear leadership position against competitors large (Apple and Microsoft) and small (niche providers). Then when consumers have to actually hand over cash for premium features, the company is even more dominant, points out Morgan Stanley.
The company continues to differentiate and extend their lead versus competitors on value and this is translating to user adoption.
Strong and under-appreciated unit economics
The gross profit payback is less than 24 months, with continued investment in value and monetisation and Morgan Stanley sees a path for improvement in unit economics.
The broker points out Life360's gross margin of greater than 80% is ahead of the peer average of 48-49%. This is the case even after adjusting for app store commissions, which bring the contribution margin down to the mid-50% range.
Current and prospective verticals
Following Life360's acquisition of Jiobit earlier in the year, Bell Potter expects another acquisition is likely, and points to a US-based digital insurance agent as the most logical acquisition for the company.
The broker feels this is consistent with where the insurance market is heading (online sales) and is in the technology space. It is also compelling given the large and very engaged user base of Life360 in the US, which serves to significantly lower the typically high customer-acquisition cost for an insurance agent.
In the bigger picture, acquiring a digital insurance agent positions the company for the potential or likely shift of the auto insurance market to using a driver score for determining the appropriate policy and premium.
This would be similar to homeowner and rental insurance and other markets such as mortgages and credit cards, where the customers’ credit score is the key in determining the appropriate product and premium or interest rate.
If the auto insurance market did move to using a driver score as the key determinant of the policy and premium, then the data used in determining the driver score becomes key, explains Bell Potter. Life360 generates more driver data than any other company in the US, so it would become a key player in the determination of a consumer’s driver score. The broker, not one of the seven stockbrokers monitored daily on the FNArena database has a Buy rating and a 12 month target price of $7.00.
After the first quarter update last April, Credit Suisse also concluded the opportunity to further monetise the user base is becoming increasingly real. The broker raised the target to $8.30 from $5.40 at the time.
The analyst felt the recent Jiobit acquisition, expected to close in the next 30 days, is an important first step with near-term cross-sell benefits. Additionally, a further positive was the disclosure of a test for a teen debt card, projected to have over 100k customers on the waiting list. There are multiple examples of privately held businesses in the youth/teen debit card space with valuations greater than US$1bn.
Given the number of Life360’s MAU in the US, even modest ARPU and penetration assumptions would enable such verticals to have a material impact on valuation and revenue, explains Credit Suisse.
Morgan Stanley sees an existential threat to Life360, via the risk of exclusion from app stores, or even pre-installation of a competitor Apple or Google family location app.
However, the broker takes comfort that the risk of this threat is very limited due to the fact that operating system (OS) neutrality matters, and Life360 is platform agnostic. Additionally, Google and Amazon have chosen the company to be their default family location setting for voice activated devices Google Home and Alexa, and Google shut its own family tracking app in December 2020.
In contemplating competition from ‘Big Tech’, the analysts note there is significant existing regulatory pressure on the monopolistic pricing and practices in Apple and Google's app store terms. The near-term risk of encroaching on the economics of a family safety app appears to outstrip the potential rewards for these companies.
However, the analysts do see structural threats to specific aspects of Life360's offer. Software enabled vehicles and even driverless capability could impact the value proposition of specific use cases, such as driver monitoring and crash protection. Reliance will be upon Life360's ability to innovate and expand the product offer to mitigate this risk of specific feature obsolescence.
Finally, in late news, the company announced (on June 29, 2021) annualised monthly revenue is tracking to the upper end of the US$110-120m guidance range, partly due to stronger social media engagement.
The database has two Buy ratings. The consensus target is $8.45, signalling 27.3% upside to the last share price.
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For more info SHARE ANALYSIS: 360 - LIFE360, INC