AMPL - Amplitude: Wait For More Insights On FY24 Outlook Before Sizing Up

2023-08-18 10:44:44 ET

Summary

• AMPL's 2Q23 earnings report showed in-line results and beat FCF estimates, with revenue growing 16.6%.
• The company's new GTM strategy and focus on marketing and experience analytics are driving growth and positioning AMPL for consolidation in the industry.
• The incorporation of AI in AMPL's analytics abilities has improved its value proposition and prospects for growth.

Summary

Readers may find my previous coverage via this link . My previous rating was a buy as I believed in Amplitude's ( AMPL ) recovery potential, but cautioned on the near-term growth prospects. I am reiterating my buy rating and that investors should wait for further insights into how FY24 is going to perform before sizing up. While the outlook is now better than 1Q (guidance raised), AMPL's core customer base is still digitally native, which is significantly impacted by the macroeconomic environment today.

Financials/Valuation

AMPL reported rather in-line results across all metrics, except for FCF, which was the consensus. Revenue grew 16.6% to $67.8 million, $0.9 million above consensus, EBIT of -$0.8 million, and EPS of $0.02. FCF came in at $19.3 million, which beat the consensus estimate of $2.1 million.

Based on my view of the business, AMPL should meet FY23 guidance as 2Q23 results showed ongoing momentum and management is confident enough to raise guidance. However, I expect growth to continue slowing down in FY24 (similar to consensus expectations), as it might take a while before the macroeconomy turns for the better. As mentioned above, the slowdown is likely to be macro-driven; hence, growth should recover. I expect growth to recover back to the mid-20s (AMPL LTM revenue growth) in FY26. I continue to see AMPL's valuation being traded at the current level, a discount to peers (such as DoubleVerify ( DV ) and Trade Desk ( TTD ), which trade at 8x and 15x forward revenue), as it is growing at half the speed and generates no profits. All in all, I have a similar price target as my previous update, but I would still caution investors not to size up at this point, even though it appears to be cheap. My worry is the slowdown in FY24 might impact sentiment badly, thereby pushing down valuation in the near term.

Comments

My overall impression of AMPL's 2Q23 earnings report was favorable. AMPL increased its revenue by 16.6% despite its heavy reliance on digital native companies and the persistence of macroeconomic headwinds. Surprisingly, large customers drove 18% of the ARR growth for the company, given that budget scrutiny and implementation delays at large enterprises are common headwinds for software companies. This makes me think that AMPL's new GTM strategy is working.

Results aside, I also felt more positive about AMPL's long-term outlook after hearing management comments. AMPL is increasing its prowess in two areas in particular: marketing and experience analytics. This is a smart move, as it positions AMPL to benefit as these categories consolidate. As the world becomes more connected (e.g., social media) and sophisticated in comparing products, the user experience aspect of marketing can no longer be ignored. The positive impact on AMPL is that it enables AMPL to better "land" customers, as having a strong marketing product is essential to winning enterprises, as this department typically controls the budget.

We've created, I think what we're seeing is the convergence of marketing product and experience analytics. And so, we're going to continue to drive on improving our capabilities in both marketing experience analytics, so that we're set up to drive full consolidation in the category.

I think marketing is also essential to win the enterprise. I think what we've seen is that particularly in these traditional enterprises, marketing tends to control the budget. And so it's not just a question of just getting in with product. Source: 2Q23 earnings

The prospects for growth in AMPL have also improved thanks to AI. AMPL has one of the largest digital behavioral analytics datasets, which allows for the use of AI to enhance its analytics abilities by allowing for the extraction of deeper insights from a larger pool of data. In my opinion, AMPL's value proposition would benefit from the incorporation of AI because it would speed up the time to value for customers, which in turn would increase engagement and retention.

I already mentioned the ask Amplitude, I mentioned the data taxonomy tools. I mentioned the formula suggestions and the chart name suggestions. And so I'm like -- I think that's a first step but there's going to be a lot more behind that. I think long-term, it's all about how can you operationalize this data in different places across the business. And I think AI is going to accelerate our ability to do that across all the different fronts. And so I think, there's an order of magnitude more value that can be generated versus the manual stuff that people go through today. Source: 2Q23 earnings

Disappointingly, AMPL's core digitally native customer base continued to optimize spending and experience churn in 2Q23, resulting in a decline in net revenue retention of 500bps to 101%. The fact that churn rates have spiked to all-time highs is of greatest concern. The bad news is that management expects the challenging environment to persist through FY24, with NRR near 100% in the second half of the year. The good news, and I want to stress how important this is, is that customers are not migrating away from AMPL to other platforms. This suggests that the macro environment is to blame for the turnover and negative headwinds and that they will reverse as spending conditions improve.

Conclusion

I maintain a buy rating on AMPL but recommend investors wait for further insights into the FY24 performance before sizing up. While AMPL's outlook has improved and FY23 guidance has been raised, the company's reliance on a digitally native customer base remains susceptible to the current macroeconomic conditions. That said, I remain positive AMPL's long-term prospects, particularly in marketing and experience analytics, aided by AI capabilities.

For further details see: