What Life360, Inc.'s (ASX:360) 26% Share Price Gain Is Not Telling You

Despite an already strong run, Life360, Inc. (ASX:360) shares have been powering on, with a gain of 26% in the last thirty days. The last month tops off a massive increase of 190% in the last year.

Following the firm bounce in price, Life360 may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 19.9x, when you consider almost half of the companies in the Software industry in Australia have P/S ratios under 3.8x and even P/S lower than 1.7x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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Check out our latest analysis for Life360

What Does Life360's Recent Performance Look Like?

Recent times have been advantageous for Life360 as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

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?

The only time you'd be truly comfortable seeing a P/S as steep as Life360's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 30% gain to the company's top line. Pleasingly, revenue has also lifted 160% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 20% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 50% each year, which is noticeably more attractive.

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?

Life360's P/S has grown nicely over the last month thanks to a handy boost in the share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Life360, and understanding should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.