Life360, Inc.'s (ASX:360) 26% Price Boost Is Out Of Tune With Revenues

Explore Life360's Fair Values from the Community and select yours

Life360, Inc. (ASX:360) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 135% in the last year.

After such a large jump in price, you could be forgiven for thinking Life360 is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 14.4x, considering almost half the companies in Australia's Software industry have P/S ratios below 3x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Life360

How Life360 Has Been Performing

With revenue growth that's superior to most other companies of late, Life360 has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Life360 will help you uncover what's on the horizon.

How Is Life360's Revenue Growth Trending?

Life360's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 30% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 160% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 20% per annum as estimated by the analysts watching the company. That's shaping up to be materially lower than the 46% per year growth forecast for the broader industry.

In light of this, it's alarming that Life360's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Life360's P/S Mean For Investors?

The strong share price surge has lead to Life360's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Life360, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Life360 has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.