We increase our fair value estimate for no-moat Life360 (ASX: 360) by 15% to $14. The company plans to start advertising to free users, which we think will deliver a new, high-margin revenue stream. The shares rallied by more than a third on the day but remain materially undervalued.

We believe advertising can dramatically improve the unit economics of Life360. We estimate the company lost around USD 0.50 per monthly active user (“MAU”) in 2023. A main reason is only around 10% of its 61 million MAUs are paying subscribers, while the remainder do not contribute meaningful revenue. Other companies wielding a so-called “freemium” model show advertising can help monetize the remaining 90%.

Even freemium companies monetizing at the lower range generate more than USD 0.50 per monthly active user, which by itself could turn Life360 profitable. We assume Life360 will achieve around half of this level of monetization per active user due to lower levels of engagement per user. Life360 wants to roll out advertising in the United States in the second half of 2024.

The move to an advertising model comes on top of Life360 achieving USD 5 million of positive free cash flow in 2023, a vast improvement on a USD 58 million outflow in 2022.

Although hefty stock-based compensation means the business still produced a USD 28 million loss for the year, we believe becoming free cash flow positive reduces uncertainty about the long-term viability of the business model, as it gives the business more runway to figure out profitability.

The improvement was driven by strong operating leverage. Revenue increased 33% on the prior year, while operating expenses grew just 3%. The subscription segment, responsible for around 75% of revenue, stands out. Revenue grew 44%, driven in broadly equal measure by increases in the number of paying circles, such as family units, and increases in average price per paying circle. Combined with improving gross margins, subscription gross profit grew 55%.

Business strategy and outlook

We expect Life360 to primarily focus on continued investment in the improvement of user retention within its core Life360 product.

Life360 has achieved impressive user retention, especially in the U.S. on iOS, and we expect this to continue, especially beyond the U.S. and on Android.

First-month user retention in the U.S. has reached 70% since 2021 from around 60% during 2018. By comparison, its international first-month retention reached only 45% by 2023 from around 30% during 2018.

We believe international markets have a less safety-focused culture compared with the U.S., which could bring lower retention, but we expect further convergence of product features and offerings to result in more narrowing of the gap.

We also expect continued improvement in retention across all Life360 markets through the development of new features and offerings. We are especially optimistic about Life360's ability to improve paid-user acquisition and retention through bundled offerings with its Tile hardware, and we expect these trackers to be initially included in a subscription at cost or at a small loss to drive adoption. We also expect Life360 retention to improve through integration of its Jiobit wearables, which provide higher-quality tracking that will benefit from increased pet-humanization and helicopter-parenting trends.

Moat rating

Read more about how identifying a company with a moat impacts investment results.
We do not believe Life360 currently has an economic moat.

The economics of mobile apps are inherently highly challenging, in our view. Principally, apps struggle with poor user and customer retention due to a lack of switching costs. Apps also need to compete with millions of other apps for attention, which increases customer acquisition costs and provides users with a plethora of free options, which lowers propensity to pay. Finally, the app stores charge a steep commission on revenue, ranging from 15% to 30%, which inherently challenges the unit economics further.

Companies that manage to achieve positive unit economics in app stores have typically found ways to lower their customer acquisition costs, increase customer retention, or monetize services outside of the app store. The top grossing apps are therefore typically not purely digital app-based services, but instead allow users to buy or sell goods or services in the physical world (Amazon, Uber, DoorDash), stream digital content (YouTube, Netflix, Spotify) or connect with other people through social networks (Facebook, LinkedIn, Tinder), which best exemplify, respectively, monetizing outside of the app store, increasing customer retention, and lowering customer acquisition costs.

Although Life360 is a social-networking app for families, we don’t believe network effects will allow it to lower customer acquisition costs, as is the case for other social-network apps. The main reason is the difference in functional network size. Life360’s functional networks typically compose around 3.5 users per family. Although these family members will pull each other into the network, which lowers customer acquisition costs for these family members, they are disconnected beyond their limited family circle, meaning, the network does not lower customer acquisition costs beyond the family unit. By contrast, other social networks also have functional networks around families, schools, workplaces, and others, but members of these groups are typically also connected to others through other functional networks, which lowers customer acquisition costs across functional networks.

While we believe Life360 has a first-mover advantage in retention, we currently do not believe this is sufficient to underpin an economic moat. Nevertheless, we believe Life360’s industry-leading retention rates and engagement metrics provide strong evidence that Life360 has developed valuable intellectual property around user engagement and retention and could strengthen sufficiently over time to support a moat sourced from these intangible assets.

Life360 was founded in 2008 and was a winner of the first Android Developer Challenge, which awarded developers cash prizes for developing high-quality apps for the nascent Android platform. Life360 subsequently had the distinct honor of becoming the first Android App to receive venture capital funding. Since then, Life360 has continuously developed its app to make it more engaging for users, such as through adding driver safety features, check-in notifications for regularly visited places, SOS alerts, privacy bubbles, and by tying in pets and personal belongings.

We see this reflected in industry-leading user retention rates. First-month retention rates for mobile apps are generally under 10%. Except for apps in the news category, first-month retention rates in all other app categories are at or under 5%. By contrast, in 2022 Life360 reported first-month user retention rates of around 70% in the U.S. Interestingly, this was an improvement from an already impressive 55% in 2017, providing evidence that research and development investment into improvements and features continues to improve retention. Similarly for international markets, Life360 saw first month retention increase to 50% over the period, from 30%. We also see long-term retention continuing to improve. Two-year user retention, which is the point at which users largely stop churning, increased to around 40% in the U.S. for the 2021 cohort, from 30% for the 2019 cohort.

We also see industry-leading engagement metrics, such as the ratio of daily active users to monthly active users, or DAU/MAU, which is a key user engagement metric. When including push notifications for family members leaving or arriving at places, which is one of the most used features of the app, Life360 has a global DAU/MAU ratio of around two thirds, which is a shared number one position with YouTube. For comparison, the average DAU/MAU ratio among the most popular social-media companies (Facebook, Instagram, Snapchat, TikTok and Twitter) is around 60%. When excluding notifications, Life360’s DAU/MAU ratio is around 40%, which is lower than YouTube and other household name social-media companies but still ranks it among the most engaging apps and on par with other top social-network and streaming companies, such as Spotify and Roblox.

We expect little competition from direct app-based competitors, such as GeoZilla. These companies are an order of magnitude smaller in terms of app downloads and number of ratings, have lower ratings in the app stores, and have much poorer user retention. Although these companies seemingly offer similar features, we see users reporting poor performance across core functionalities such as location sharing. Also, whereas Life360 regularly ranks among the highest grossing apps in the social-networking category, we do not see direct app-based competitors appearing in these rankings, implying Life360 can attract more funds to develop its features and ensure it remains high-performing across all makes and models of devices.

We also don’t believe mobile operating system operators Apple or Google are currently effective competitors to Life360. Apple and Google clearly benefit from having lower customer acquisition costs than app-based providers as they can push their own apps to their billions of users. However, few families are on one mobile operating system, which provides a degree of counter positioning for Life360, and the functionality of these apps is also much more limited. For example, Google’s Find My Device app is currently limited to tracking devices.

While Google could technically incorporate family tracking, we believe Google would struggle to reconcile this with its brand of a privacy-respecting advertising company, thereby creating additional counter-positioning benefits for Life360. Apple’s Find My app does allow for tracking of family members and has introduced the Apple AirTag for item tracking. However, although this should mean that Apple would compete more effectively with Life360, the opposite is evident. We estimate Apple users are 3 times more likely than Android users to be Life360 users and customers. Rather than taking users from Life360, we believe Apple is normalizing tracking of family members and is therefore creating the market for Life360, rather than taking it from them.

It is possible other social networks could enter the family social-networking space over time. Like mobile operating system operators, these companies have significantly superior distribution capabilities as they can use their existing apps to advertise new apps or perhaps dedicate sections within existing apps to tighter circles of contacts. However, we don’t currently see social networks entering the niche family-focused social-networking space. Instead, they seem preoccupied with the mainstream social-networking market, which is large enough to be monetized through advertising and remains highly competitive. We also believe Meta’s previously unsuccessful attempt to launch a competitor to X, formerly Twitter, demonstrates the defensibility of having fully featured social-network apps, although X certainly also benefits from a network effect.