By Wasim Omar
8:51 AM UTC
My stance on Amplitude, Inc. (AMPL) is a buy, given the stock’s growth trajectory many in the market anticipate. In the short time since trading publicly, stock performance has been remarkable in terms of revenue growth, as well as the number of high-profile clients earned. Given the present economic uncertainties, investors would be wise to enhance their portfolio’s exposure to industries that are clearly adding value to the global business systems.
Amplitude Inc. is a young company that has been trading publicly since 2021 and is an emerging player in the digital realm. The company offers digital optimization tools that enable client firms to gain useful insight in relation to end-user behavior. These insights are thus employed to deliver optimized digital campaigns and other products which can be efficiently marketed through these digital portals.
Despite being a relatively new player in the industry, the company has managed to achieve some impressive milestones which are claimed as significant markers for its progress. The company was ranked number 1 in terms of product analytics, classifying it as a pioneer in digital optimization. Similarly, in less than a year of operation, its clientele consists of 26% of Fortune 100 companies.
Despite these achievements, the company largely remained relatively unknown in the wider market circles until recently. The first time it garnered attention at a significant level was in mid-February 2022, when the stock saw a plunge of almost 60%. This happened after Amplitude brought down revenue growth expectations for the following year to 35%-40% in 2022, from 63% in 2021. Price plummets for early phase companies are not typically a red flag, as it is the market correcting the price as more clarity about its projections is attained.
In many ways, behavioral analytics is an emerging industry, which essentially makes Amplitude a pioneer. As the world continues to push on toward digital transformation, the demand for optimization-driven services, such as those offered by Amplitude is only likely to rise. Digital Analytics, which covers a significant portion of what Amplitude offers, was projected to grow by a whopping 22% CAGR to $17 billion in 2024.
Ever since the outbreak of Covid-19 accelerated the global push toward digitization. Increased web traffic has incentivized firms to study and subsequently capitalize on the behavioral patterns of users. This can be achieved through the implementation of the right set of software-based tools and similar digital technologies. Many industry analysts claim that the shift of brands to interact with consumers toward digital platforms is unlikely to see a reversal, even after pre-Covid normalcy is achieved. This is due to the convenience and efficiencies identified with digital over traditional systems.
The industry, despite the promise of stellar growth, is defined by serious competition, especially in the early phases of companies, where firms are focused on developing innovative technologies and systems that are capable of adding value to the businesses of its client. It is also difficult for new players in the analytics and digital optimization realm to compete against industry giants such as Google, IBM, or Adobe, each of which has made great strides in digital analytical services. However, an advantage that Amplitude holds is its narrowly focused nature of service provided, and an analytical software enterprise that it claims is unlike any of its rivals within the digital analytical domain. A major reason for this differentiation is the innovative ‘Behavioral Graph’ the company has developed, which assesses customer behavioral trends and recommends the best digital action to take. The tool allows firms to enhance customer engagement, loyalty, and growth.
The earnings release for Q1’2022 was highly expected by those that had been watching AMPL movements, especially considering the freefall dive the stock had taken with its prior quarterly release. However, in the first quarter of 2022, its most recent reporting period, Amplitude seems to be faring well. Firstly, the company’s revenues had climbed by a staggering 60% on a year-on-year basis, standing at a total of $53 million. As a result, gross profit had risen from $22.9 million to $37.0 million within this period.
Revenue growth is a critically useful metric by which young companies are judged, as it shows their strategy is soundly aligned. This seems to be the case with Amplitude, which during this quarter, saw its paying customers climb by 49% to 1701, on a year-on-year basis. The company’s customer expansion and acquisition strategy was bearing fruit, with the dollar-based net retention rate jumping up from 118% to 126%. Moreover, the company emphasizes that it is focused on delivering long-term relationships with its clients, to whom it would continue to deliver value. Based on the progress observed within its performance, there is a clear indication that the present strategy is leading to results.
Despite Amplitude Inc. not yet delivering positive EPS, as you would expect from such an early-stage tech company, it has succeeded in consistently beating analyst expectations by stellar margins. This is likely to fast-pace the company’s path towards breaking even and delivering value to its shareholders through a positive EPS:
The following table showcases a list of digital analytic firms of a similar nature to Amplitude Inc, highlighting how this young player shows stellar valuation metrics, in comparison to the bigger fishes in the sea:
The table shows that AMPL, given its present market price, delivers revenue that is seriously underpriced in comparison to its peer competitors. Similarly, the company also holds the lowest P/Cash ratio, showing the relatively higher liquidity it has, given its share price, in comparison to its much larger peers. This is an indication of the company’s ability to grow, and the ability to support its ongoing operations. Its high current ratio of 3.5 further alludes to this notion and seriously reduces its probability of being tied down by short-term payment obligations.
The company’s quarterly sales growth trend is a good sign for an early growth company, which is far from maturity, indicating a great time for investors to cash in on the oncoming growth. Although it is nowhere near the growth trend brought about by some of its much larger peers, it does seem to be heading towards a value-adding stage. However, this does indicate the level of competition and market risk that AMPL faces in its battle to make a mark in the digital analytics market.
As the company begins to scale up, it would be in a far better position to capitalize upon large economies, and hence accelerate its sales growth trend. The company’s status makes it attractive, given it presently holds no debt. For an emerging growth company, this is a positive sign, as it increases the likelihood of the company to continue on its growth path uninterrupted by debt pressures. However, as the company decides to strategically gain the size, it could potentially turn to debt financing in the future.
As is typical of early-stage high-growth companies, there remains little certainty as to the future growth projections and stability of AMPL. This is because it is too soon for analysts to maintain a confident position in a young company that still has major market threats to overcome.
Factoring in the present economic climate to this discussion, the uncertainties grow, with no sure idea of how rising inflation, interest rate spikes, and possible unemployment would impact the demand for the services that AMPL offers. The macroeconomic conditions are also likely to make it far more costly for firms like Amplitude to raise capital through debt financing.
To add to the concerns, the digital analytics industry is highly dynamic and constantly evolving. Although Amplitude claims to be a pioneer in the sector with its innovative approach to analytics, whilst employing behavioral psychology, it would need to constantly innovate and transform, to safeguard itself from disruptive innovation.
Amplitude Inc.’s small scale of operations and little market share leave it particularly vulnerable to market changes. Were it at a more mature stage with a diversified set of offerings, the threat would have been less critical. As of now, the company has few differentiating factors to keep its edge above the market, which it is capitalizing upon. Its early years hold a high growth potential, but simultaneously bring in uncertainties about its growth projections, and leave it threatened by innovative initiatives by larger players within the market.
I believe AMPL is a great choice for opportunistic market participants that are looking to ride the growth wave of a promising, digital analytics company. The lucrative industry the stock is positioned in, as well as its rapid growth delivered, are major reasons that make me the stock is a buy. The unique nature of its offering is sure to give the company a boost and lead to value enhancement for its shareholders. AMPL will achieve this in the form of greater-than-expected growth, as what it offers to the market is indeed valuable, and hence it is likely that market share will be taken rapidly. The high-profile customers it has captured would further accelerate this growth trend.