To The Moon

Summary

• Amplitude increased its revenues by 64% YoY and also scored highly on other metrics such as NDR and RPOs.
• The company's losses have steepened, and it's expected to lose $45M this year.
• Amplitude's share price is heavily discounted due to the sell-off in tech stocks, but it is still a risky investment.

Tom Werner/DigitalVision via Getty Images

$AmplitudeE, Inc.(AMPL)$ is in an interesting spot right now. It doesn't present a clear buy or sell case, as its fundamentals and the heavy discounting of tech stocks in the market could convincingly pull theinvestor in either direction. It's more to do with one's risk tolerance and acceptance of uncertainty about whether this pick is a buy for you or not.

Company Overview

Amplitude is a customer analytics and marketing platform that helps companies to understand their customers.

The Amplitude platform provides the opportunity to measure, analyze, and act on customer feedback in real-time. It allows businesses to gain deep insights into their customers, identify opportunities for growth, and create personalized experiences.

Amplitude's easy-to-use interface enables marketers to quickly conduct A/B tests on their website or landing page. The software also offers data visualization tools that enable marketers to explore the data in a variety of ways: by channel, by segmentation variable (e.g., age), and by date range. And it can be used with any CRM system or other data sources like Google Analytics or Salesforce Marketing Cloud.

Financials

Amplitude reported top-line growth of 64% YoY to $49.4M in the fourth quarter. The company guided for Q4'21 revenues of $53.1M in revenues, so the company beat its guidance by $2.26M. Another win for the business was that its remaining performance obligations (RPO), which foreshadow revenues, increased from $95.60M to $170.1M in FY 2021, representing a 78% YoY growth.

On a quarterly basis, the company's RPOs grew by 12.50%.

Amplitude Q1 SEC Filing

By subtracting deferred revenue on the balance sheet from the RPO we can calculate the backlog for RPOs that have yet to be invoiced, and thus get a feel for sales strengths or weaknesses for Q4 last year. In this case, the backlog is $119.29M, which suggests strong sales growth.

This is reassuring news as the company only has $307.45M of cash on its balance sheet, which by the company's own estimations is enough liquidity to last it for at least 12 months.

Confirming the company's strong sales growth, its number of paying customers increased 49% YoY, and its net dollar retention rate (NDR) ended at 126%. It should be noted that the company's NDR increased from 119% ending FY 2020, which is a positive for its topline.

Amplitude also put a number of new marquee clients on its books as well as penetrated the accounts of existing customers. As part of the recently concluded earnings call, Amplitude co-founder and CEO Spenser Skates said that blue-chip brands look to be turning to the company to deepen user behavior across their platforms. When combined with Amplitude analytics, this lets them generate customer insights and maximize engagement and conversion opportunities.

For Q1'22 and the rest of the year, the company gave the following guidance. It expects revenue to be between $226 on the low end of its guidance to $234 million on the high end. The business does not expect any material improvement in its operating margin, as well as a widening net loss per share. Not adjusting for the change in weighted average shares outstanding, this means the company expects to lose around $45M for FY 2022 or burn through approximately 15% of its cash. Since the company has a large amount of backlogged revenue from RPOs, this is not concerning. What should be more concerning to investors is its margins, which have blown up.

While Amplitudes revenues climbed higher, so did the company's operating expenses, but at a much faster rate. Operating expenses soared 103% in a single quarter, with the largest increases seen in general and administrative and research and development. The main cause of the increase in the company's expenses was attributed to stock-based compensation (SBC). $4.5 million was attributed to general and administrative alone, which was a side effect of adding more personnel to the company's payroll.

As a rapidly growing young company, these expenses are not out of line. But it should be noted that the company issuing shares in order to incentivize productivity dilutes the value they have to investors. The total number of shares outstanding has increased by 8.86%, which is significant considering that the company expects to lose $45 million this year alone and has experienced a 103% increase in operating expenses.

With these factors considered, it's then logical to ask the question if the company is fairly valued at its current price. It currently trades for 6.3x its sales with $314.41M in revenue for next year. Before the sector rotation and steep sell-off in tech and value stocks, this was as high as 18x. 6.3x is a bargain by comparison, but I believe it's still too early to know if the company can deliver on healthy FCF in the future given its current financial situation. It could be a great buy, but it's essentially a gamble. The dilution in shares also does nothing to help its case.

The most obvious risk of this stock is that it has limited operating history and has grown very quickly over the last several years. This makes estimating future growth and profitability difficult and riskier.

The company's margins have blown up perhaps unexpectedly, with the majority of losses incurred from stock-based compensation. If the company keeps diluting its shares then it may present an unattractive risk to reward trade-off for investors.

Finally, the company will succeed or fail based on metrics such as its NDR. A decline in its customer retention rate will be a leading indicator that will foreshadow contracting revenues, which is perhaps the only barometer we have to assess the company's fundamental likelihood for success in the future.

Conclusion

I believe caution should be given before investing in Amplitude. Although it's increasing its revenues and other important metrics like its NDR and RPOs, it will be at least a few years or longer before investors see if it's able to generate a single dollar of free cash flow. But for the more risk-inclined, a small position may be attractive due to its heavily discounted P/S ratio. I believe the final decision of whether to invest rests on the investor's risk appetite as either decision would be sound given the company's fundamentals and the broader technicals happening in the market at present. Best of luck!