2023-06-05 05:08:16 ET
Summary
- Amplitude's Q1 results showed evaporated growth, with shares tumbling almost 20% since, but a comeback is still possible.
- The company recorded a surprising 9.1% QoQ customer growth, and management has taken steps to improve profitability.
- Risk-tolerant investors may consider starting a small position or adding Amplitude to their watchlist for potential opportunities.
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Last month, Amplitude ( AMPL ) reported a dismayed Q1 quarter. The earning shows that growth has evaporated, and the company shares have taken a tumble of almost 20% since. Despite the current headwinds, it is too early to write off Amplitude's possibility of a comeback.
Evaporated growth
In their latest financial results, Amplitude recorded a QoQ Revenue growth for Q1 at 1.87%, which annualized to a single-digit growth for the 2023 fiscal year. This is a drastic deceleration from the over 40% and 60% annual growth the company enjoyed in 2022 and 2021. The revenue number, combined with a bleak ending NRR of 106% (vs 120% in previous quarters), shows that customers are reducing their spends, presumably through being more selective in the events they are sending, or cutting back on additional SKUs.
Silver linings
Is this a terrible result? Yes. Is it unredeemable? Depends on where you look.
Behind the growth number is a surprising bright spot - QoQ customer growth is at 9.1%, the highest quarterly growth in the past year. Now with a paying customer count of 2175 , this is just telling that while customers are cutting cloud spend (as impacted by the broader economics), they are still seeing value in the platform. My optimism, is that as digital analytics remains a growing segment in the long term, customers are still seeing Amplitude as a leader of the pack.
Mar 31, 2023 | Dec 31, 2022 | Sept 30, 2022 | June 30, 2022 | Mar 31, 2022 | |
Paying customers count | 2175 | 1994 | 1913 | 1836 | 1701 |
QoQ customer growth | 9.1% | 4.2% | 4.2% | 7.9% | 6.5% |
Long-term Opportunities
Digital transformation is a long term trend. Fortune Business Insights estimate that the Digital Transformation market will continue to grow at 20.9% CAGR till 2029 . Amplitude, a Digital Analytics Platform that helps companies capture users' behaviors in their web products and makes sense of these behavioral data, should benefit from it. I think of its products as the digital eyes of the companies, essential if you ask yourself - which modern companies would rather fly blind in their pursuit of user satisfaction and product development?
Among the Digital Analytics players, Amplitude has garnered considerable brand power. It has 26 of the Fortune 100 as customers and is ranked highly in G2 . If you have worked at SaaS companies, you will have heard of Amplitude as a potential event tracking provider. A heuristic that I like to use is to look at the number of integrations a SaaS company has. The more adoption or brand recognition your product has, the more other companies will prioritize building an integration with you. As of this writing, there are 114 integrations in Amplitude's listing, compared to 50 in Pendo and "50-ish" in Posthog, some of Amplitude's competitors.
Amplitude's integrations listing, with 114 integrations (amplitude.com) Integration listings of Posthog, one of Amplitude's competitors, with 50-ish integrations (posthog.com)
As such, my faith remains in Amplitude's necessity and long-term potential. The current situation reminds me of Fastly ( FSLY ), which was sent to the penalty box late last fall when internet traffic slowed down as the world began crawling out from pandemic lockdown. Its share price has since doubled as CDN remains an essential component of our web experience.
Fastly's YTD share price performance (Google Finance)
Path to Profitability
While we will need to wait for growth to return, management has taken steps on improving profitability to navigate these uncertain times. The quarter's adjusted loss is -$0.04, an $0.03 improvement from a year ago. The full year guidance is also positive, at $0.02-0.04 in adjusted earnings . If we take up the low end of the guidance, it would mean an improvement of operating margin from -40% to -30% for 2023.
So while Amplitude is rightfully punished for its performance, I don't think the market has priced in the possibility of its comeback and the positive earnings forecast.
Valuation
Below, I will detail my DCF calculations, along with various revenue and profitability scenarios:
Author's DCF calculations, assuming when both revenue and profitability are at the neutral scenario (Google Sheets)
Cost of Equity
Cost of Equity is calculated using the CAPM, i.e. Risk-free rate + Beta x Equity risk premium.
- Risk-free rate = 3.66%, the rate of 10-year T-bill as of the date of writing
- Beta = unlevered beta of software industry x [1 + (1- marginal tax rate) x (Debt/Equity)] = 1.37 x [1 + (1-25%) x (121M/ 291M)] = 1.8, where unlevered beta and marginal tax rate come from Prof. Aswath Damodaran's website.
- Equity risk premium = 6%, the equity risk premiums again from Prof. Damaodaran's estimations .
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This gives us a cost of equity of 15%.
Year 0 Numbers
Summing the numbers from the most recent 4 quarters:
- Starting revenue is $251M and net loss is -$97M, resulting a starting net margin of -40%
- Adjustment of Depreciation & Amortization, Net Borrowing, CapEx and Change in Working Capital gives us -$77M of FCFE (8% of Revenue). Estimation in subsequent years uses this same 8% adjustment. Note that I do not add back Stock-based compensation since I believe this is a real ongoing expense.
Terminal Assumptions
- Revenue growth = 4%
- Net Margin = 40%, similar to that of mature SaaS company
Revenue Growth & Net Margin
Since Amplitude still has negative earnings, I estimated 10-year cash flows to adjust the revenue growth and net margin each year to arrive at the terminal assumptions.
Revenue Growth Scenarios:
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Good : Revenue growth returns to 35% in 2025. This is possible if we have >120% NRR and >20% new customer growth, assuming new customer size is around half of the existing customers.
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Neutral : Revenue growth returns to 25% in 2025. This is possible if we have >110% NRR and >20% new customer growth, assuming new customer size is around half of the existing customers.
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Bad : Revenue growth returns tepid at 15% in 2025. This is possible if we have ~110% NRR and ~10% new customer growth, assuming new customer size is around half of the existing customers.
Author's projections (Google Sheets)
Profitability Scenarios:
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Good : Net margin is -20% for the full year 2023. It is possible if we achieve the positive adjusted earnings in guidance, and reduce SBC to 20% of revenue.
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Neutral : Net margin is -30% for the full year 2023. It is possible if we achieve the positive adjusted earnings in guidance, and SBC remains at 30% of revenue.
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Bad : Net margin remains -40% for the full year 2023. Net margin from the last four quarters are between -42% and -37%, so this indicates no improvement.
Author's projections (Google Sheet)
Denominator of the number of shares
- Current total shares outstanding = 116,045,000
- Number of unvested RSUs = 10,635,635
- Number of options outstanding = 16,169,545 at weighted average exercise price of $4.34
Number of shares used as denominator = 116M + 10M + 16M * (9.33-4.34)/9.33 = 135M
Results
Discounting back the FCFEs from Year 1-10 and the terminal value, and then divide by the number of shares, results in the following numbers for each given scenario:
Author's estimated price per share based on the assumed scenarios (Google Sheets)
The neutral cases for both revenue growth and profitability would translate to a 40% upside from today's price of $9.3.
Risks
Of course, investment always comes with risks. There are a few that stands out to me:
My thesis centers on customers staying with the platform despite temporarily lowering their spends. Prominent churns might simply have not happened yet because of contract end dates, or the spend contraction may again exacerbate. It may also be harder for customers to expand again once they are accustomed to their optimized spend.
Another risk is that the management's promise of positive adjusted earnings may not materialize. And even if it materializes, the adjusted profitability may not meaningfully improve the GAAP earnings, which is what I care about ultimately. For example, as mentioned before, Amplitude has a high SBC spend, which accounts for 30% of revenue in the latest quarter. This percentage has been increasing through the years.
Lastly, rates might continue to increase, given inflation hasn't exactly abated. This impacts the cost of equity, which will bring valuation down.
The bottom line
Amplitude has come down to a realistic price. Make no mistakes - uncertainties abound for the next few quarters. But I think risk-tolerant investors can consider starting a small position to accumulate at the current level. I would, however, switch to a sell recommendation should the share price ever gets beyond $12 from market volatility without new updates on the path back to growth.
For further details see:
Amplitude: Too Early To Write Off