2023-05-11 12:14:33 ET
Summary
- Amplitude reported its Q1 2023 financial results on May 9.
- The firm provides digital audience analytics and management software worldwide.
- AMPL has substantially reduced its 2023 growth estimate and operating losses remain heavy.
- I'm Neutral [Hold] on AMPL until management can restart significant growth and materially reduce operating losses.
A Quick Take On Amplitude
Amplitude (AMPL) reported its Q1 2023 financial results on May 9, 2023, beating both revenue and EPS consensus estimates.
The firm provides digital marketing optimization and audience management software for enterprises worldwide.
AMPL's recent headcount reduction is a good first step, but until management can reignite faster growth while reducing heavy operating losses, I'm Neutral [Hold] on AMPL.
Amplitude Overview
San Francisco, California-based Amplitude was founded to develop a SaaS platform to enable organizations to learn how customers and prospects interact with their online systems and to analyze and suggest improvements to those systems.
Management is headed by co-founder and CEO Spenser Skates, who has been with the firm since its inception and was previously an algorithmic trader at DRW Trading Group.
The company's primary offerings include:
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Analytics
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Recommend
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Experiment
The firm pursues enterprise clients of medium to large size via direct sales and marketing efforts as well as through a robust partner program with solutions, technology and referral partner categories.
Amplitude's Market & Competition
According to a 2021 market research report by Grand View Research, the global marketing analysis software market size is forecast to reach $7.4 billion by 2027.
This represents a forecast CAGR of 14.8% from 2020 to 2027.
The main drivers for this expected growth are the adoption and integration of machine learning capabilities to assist customers in more precise insights and recommendations on how best to improve results.
Also, the SME segment is expected to produce the highest growth rate and the BFSI industry vertical will grow the fastest due to 'rapid digitization of banking practices and the emergence of digital-only banks.'
Major competitive or other industry participants include:
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Pendo
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Mixpanel
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Heap
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Adobe
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Google Analytics
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Looker
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Tableau
Amplitude's Recent Financial Trends
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Total revenue by quarter has risen according to the following trajectory:
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Gross profit margin by quarter has trended slightly higher in recent quarters:
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Selling, G&A expenses as a percentage of total revenue by quarter have trended slightly lower recently:
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Operating losses by quarter have worsened in recent quarters:
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Operating leverage by quarter has also deteriorated recently:
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Earnings per share (Diluted) have remained substantially negative:
(All data in the above charts is GAAP)
In the past 12 months, AMPL's stock price has fallen 31% vs. that of the iShares Expanded Technology-Software ETF's ( IGV ) rise of 12.3%, as the chart indicates below:
52-Week Stock Price Comparison (Seeking Alpha)
For the balance sheet, the firm ended the quarter with $267.3 million in cash, equivalents and short-term investments and no debt.
Over the trailing twelve months, free cash used was $5.4 million, of which capital expenditures accounted for $3.2 million. The company paid a hefty $73.7 million in stock-based compensation in the last four quarters, the highest figure in the last eleven quarters.
Valuation And Other Metrics For Amplitude
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 4.4 |
Enterprise Value / EBITDA | NM |
Price / Sales | 5.4 |
Revenue Growth Rate | 42.3% |
Net Income Margin | -39.2% |
EBITDA % | -38.6% |
Market Capitalization | $1,340,000,000 |
Enterprise Value | $1,050,000,000 |
Operating Cash Flow | -$5,380,000 |
Earnings Per Share (Fully Diluted) | -$0.86 |
(Source - Seeking Alpha)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
Amplitude's most recent Rule of 40 calculation was only 3.7% as of Q1 2023's results, so the firm is in need of significant improvement in this regard, per the table below:
Rule of 40 Performance | Calculation |
Recent Rev. Growth % | 42.3% |
EBITDA % | -38.6% |
Total | 3.7% |
(Source - Seeking Alpha)
Commentary On Amplitude
In its last earnings call (Source - Seeking Alpha), covering Q1 2023's results, management highlighted a number of customer wins, although most of the customers cited were not from the technology vertical.
The firm is seeing challenges from technology customers and prospects as venture capital firm investment has dropped materially, reducing its prospect base and propensity to spend.
Management sees recent developments in AI capabilities as being complementary to its technology stack.
However, the company implemented a headcount reduction of 13% in early April as it needed to better align its operating cost structure with expected revenue.
Total revenue for Q1 2023 rose 25.2% year-over-year while gross profit margin increased 1.4 percentage points.
The company's dollar-based net retention rate was 106%, indicating reasonably good product/market fit and sales & marketing efficiency.
SG&A as a percentage of revenue fell 0.6 percentage points while operating losses increased by 32.7% year-over-year.
Looking ahead, management reduced its full-year 2023 revenue guidance, from 21.5% to 12.5% at the midpoint of the range, a substantial reduction.
With revenue growth in 2023 expected to be half of 2022's, the stock has predictably sold off.
The company's financial position is otherwise solid, with ample liquidity, no debt and a small free cash burn.
Regarding valuation, the market is valuing AMPL at an EV/Sales multiple of around 4.4x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 5.5x on April 27, 2023, as the chart shows here:
EV/Next 12 Months Revenue Multiple Index (Meritech Capital)
So, by comparison, AMPL is currently valued by the market at a discount to the broader Meritech Capital SaaS Index, at least as of April 27, 2023.
The primary risk to the company's outlook is a macroeconomic slowdown that appears to be already underway and tightening credit and venture capital investment conditions which may affect customer spending plans.
From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:
Earnings Transcript Key Term Frequency (Seeking Alpha)
I'm most interested in the frequency of potentially negative terms, so management cited 'Challeng[es][ing]' ten times, 'Macro' six times and 'Drop' four times in various contexts.
The negative terms refer to the deteriorating market environment the firm is encountering as customers and prospects delay, reduce or avoid spending on its products.
In the past twelve months, the firm's EV/Sales valuation multiple has dropped by 48%, as the chart from Seeking Alpha shows below:
EV/Sales Multiple History (Seeking Alpha)
A potential upside catalyst to the stock could include a pause in U.S. Federal Reserve interest rate hikes, reducing downward pressure on its valuation multiple.
While the Federal Reserve's tightening period may be coming to a close, tech-focused companies like Amplitude are unfortunately in for a period of retrenchment and right-sizing.
The firm's recent headcount reduction is a good first step, but until management can reignite faster growth while reducing heavy operating losses, I'm Neutral [Hold] on AMPL.
For further details see:
Amplitude Reduces Guidance As Tech Firms Retrench