KEY POINTS
- Amplitude’s solution makes it easier for businesses to innovate using data and analytics.
- The company is a leader in the industry, but competition is heating up.
- With the company's cash burn rate, this is not a screaming buy.
Data-driven product development is gaining popularity, and Amplitude is there to seize the moment.
Product innovation is beginning to lean even more heavily on first-party data from customers. Understanding and measuring consumer behavior are critical to the success of a product -- and when a business notices that consumers stop using their product at a certain point, it is probably a signal to refine that pain point. Without data, businesses would only see the end result, rather than the specific areas to fix.
Amplitude ( AMPL 2.77% ) is a leading analytics solution that helps drive this product-led innovation. Share prices of the company have fallen a staggering 67% since its IPO in September 2021, making it appealing today. While Amplitude's price alone is not a reason to be interested in the company, its product and leadership certainly are. There are, however, at least three things that investors should know before diving in.
Image source: Getty Images.
1. Amplitude offers customers a full solution
Amplitude's solution is wide-reaching and helps businesses do everything from monitoring data to taking action. Amplitude Analytics provides insight into customer behavior, and it is the base on which its other products are built. Whether it is altering a product for customer personalization or helping product development teams tweak and experiment with different things, Amplitude's Recommend and Experiment solutions help companies turn analytics into action so they can thrive.
The company had almost 1,600 customers in Q4, which represented 54% year-over-year growth, and many of its customers are rapidly expanding their usage of Amplitude. It has a mixed business model, with both subscription and usage-based revenue streams, and its usage-based revenue is growing nicely. The company's remaining performance obligations (RPOs) in 2021 grew 78% year over year to $170 million, driven by 231% year-over-year growth in its RPOs expected to be used more than 12 months from now.
NASDAQ: AMPL
Additionally, the company's land-and-expand approach is doing well. Its net retention rate at the end of the year was 123%, which grew from 119% at the end of 2020. This means that existing customers from the year-ago period are now spending 23% more. If Amplitude can continue to create new products and convince companies to spend larger portions of their budgets on its platform, it could continue expanding its customer relationships.
2. Adoption of Amplitude products is high
The company's industry leadership is especially impressive. According to G2, Amplitude Analytics is the best product analytics solution and the third-best software product overall on the market, showing just how important product analytics is to companies.
If you look at its star-studded customer base this becomes even clearer. The company has customers ranging from Ford Motor Company to Shopify. This impressive pace of adoption is critical considering the size of the product analytics market. The company estimates that its total opportunity is worth $37 billion -- and with its industry-leading product and adoption by established businesses, Amplitude looks well-positioned to capture this.
So far it has seen impressive growth. The company made $167 million in revenue in 2021, which grew 63% year over year. That being said, this growth is not expected to continue. Guidance for 2022 revenue is $230 million, which represents just 38% growth year-over-year. Amplitude noted that the timing of its existing customer growth is uncertain in the future, which is causing the lower guidance -- which could mean that it delivers a surprise to the upside in the future. That being said, If you are expecting Amplitude to continue growing at the rates it did last year in the long-term future, you might want to reconsider.
3. A long-term mindset is key to above-average returns
For a company like this, thinking in terms of years or decades is the only way to invest. The decline in third-party marketing data from companies like Apple could benefit Amplitude. Considering that this outsider data could be less accurate or abundant as cookies fade away, many companies could shift to gathering data from their own products, and Amplitude would capitalize on that. While this shift might be great, it won't happen overnight, and it will likely take time to fully come to fruition.
And aside from slowing growth, there are also financial risks to this company. Amplitude burned through nearly $35 million in free cash flow last year. For me to consider investing in this company, its free cash flow needs to begin moving into positive territory, which could take a while considering its free cash flow burn grew 178% from 2020 to 2021. Its valuation, however, is appealing. The company trades at just 10 times sales, much lower than many other software companies, which can trade between 15 and 20 times sales, and sometimes even higher.
I would hold off investing today for a few reasons. Investing in free-cash-flow-negative companies can be risky, and while the company might be an industry leader right now, it's a tight race at the top. The company faces competition from three other services, all of which are in close contention with Amplitude. The company is operating in a lucrative market, but waiting to see improving cash flows and a more stable track record of leadership might be the best idea today.
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