Amplitude: Holds Attractive Potential Beyond Temporary Headwinds (NASDAQ:AMPL)

Amplitude (NASDAQ:AMPL) provides a digital analytics platform that helps companies understand user behavior in their digital products. It offers self-service insights, customer journey analysis, and experimentation tools, enabling data-driven decisions for product improvement and business growth.

Since its IPO at $54 in 2021, share performance has been lackluster. The share price has plummeted by -78%. Upon testing the all-time high of $83 in November 2021, the share price would then gradually decline, reaching a low double-digit level as of late. Today, AMPL trades around $11.

I initiate my coverage with a buy rating. My relatively conservative 1-year target price of $13 presents a projected 10% upside from today’s price of $11.8.

Financial Reviews

AMPL has moderate fundamentals. Post-IPO high quarterly revenue growth almost mirrored Datadog’s (DDOG) initial surge, reaching over 70% YoY at one point. However, unlike Datadog, this growth rapidly cooled as AMPL appeared to shift towards optimizing cash flow generation and profitability.

In FY 2023, AMPL grew its revenue by 16% YoY, a stark contrast to 63% in 2021. Operating cash flow / OCF has significantly improved over the same period, demonstrating a disciplined growth approach. For context, AMPL was still burning through over $20 million to $30 million of OCF on a TTM basis during the early post-IPO phase. Yet, AMPL in Q4 2023 already generated over $25 million of OCF.

In my view, it has contributed to the relatively solid balance sheet. Liquidity has been solid, with cash and short-term investments consistently sitting around $300 million, with no debt.

Catalyst

While the recent growth slowdown might raise eyebrows, I believe it’s largely temporary headwinds specific to the tech industry. Tech layoffs and IT cost optimization initiatives impacting their tech-heavy user base have been the culprits of the recent slowdown, not a structural flaw. As the macro outlook and tech industry improve, I see a clear path for a performance rebound. The demand for deep user behavior insights to help drive decision-making in digital product development remains growing, and AMPL is well-positioned to capitalize on that demand.

The demand is driven by the increasing trend of data-driven decision-making in various organizations globally, as highlighted by the research conducted by Drexel University and Precisely in 2023. While 77% of the survey participants agree that data-driven decision-making is crucial, 70% of them also believe that data quality remains the biggest issue. AMPL solves this problem. Its tools enable the extraction of user behavior insights, which I believe are higher-quality data points compared to data from traditional analytics tools.

In my view, it is also what differentiates AMPL in a crowded analytics landscape. Unlike competitors focused on general web analytics, their laser focus on CDP (Customer Data Platform) analytics provides deeper behavior-driven insights specifically valuable for product development and optimization. This, combined with their broader data capture including qualitative feedback and feature usage, paints a more holistic picture of user interactions.

Moreover, the launch of Amplitude Plus with its fixed monthly pricing model also holds significant potential, in my opinion. Traditional analytics event-based or usage-based pricing, while seemingly transparent, can often lead to unexpected bill spikes and budgeting challenges. Therefore, Amplitude Plus solves the right pain points here, in my view. The attractive pricing structure combined with the ease of use could significantly expand their reach and drive efficient growth through self-service adoption.

Risk

While the catalysts are exciting, I believe some risks deserve investors’ attention. A worsening macro outlook could unfortunately extend the current IT budget pressure, further impacting their tech-focused user base.

Additionally, the recent decline in growth, while attributed to temporary factors, could raise a red flag. Even with their unique offering, there’s a possibility of users not perceiving the tool as less mission-critical, leading to higher levels of churn or hesitant adoption.

I would also note that the competition in digital analytics is fierce, with established giants like Google Analytics, Mixpanel, and HubSpot vying for dominance. Even with AMPL’s unique strengths, the battleground is crowded. Larger players offer comprehensive suites, while smaller, niche players cater to specific needs and generally have a more agile product development cycle. In this scenario, I believe AMPL needs to effectively differentiate itself and clearly demonstrate its value proposition to carve out a sustainable space.

To navigate these challenges, I see several possibilities. Expanding beyond their tech-heavy user base and diversifying their client portfolio across industries could be crucial. Additionally, highlighting the unique value proposition of their platform and showcasing the tangible impact it can have on business outcomes is essential.

By effectively communicating its uniqueness and further educating its potential customers about its mission criticality, AMPL can have a better position in navigating the competitive landscape.

Valuation / Pricing

My target price for AMPL is driven by the following assumptions for the bull vs bear scenarios of the FY 2024 projection:

1. Bull scenario (50% probability) assumptions – AMPL to achieve FY 2024 revenue of $294.5 million, a 6.6% growth, at the high end of AMPL’s guidance. I assign AMPL a forward P/S of 6x, an expansion from the current level to imply higher-quality revenue generation as a result of the growth visibility into the FY.

2. Bear scenario (50% probability) assumptions – AMPL to deliver FY 2024 revenue of $287 million, a 3.9% growth, missing AMPL’s low end guidance by $4.5 million. In this scenario, I would expect AMPL to experience deeper macro challenges. I assign AMPL 5x forward P/S, where it is trading today, implying a neutral price action into 2024.

Consolidating all the information above into my model, I arrived at an FY 2024 weighted target price of $13 per share, suggesting a 10% upside from the current price level of $11.8. I rate the stock a buy. Despite the seemingly low double-digit upside, my projection model is relatively conservative, as shown by a 50-50 bull-bear probability and also a steep guidance miss assumption in the bear case. In my view, AMPL holds not only long-term growth but also attractive cash-flow generation potentials.

Conclusion

While AMPL stock has plummeted 78% since its IPO, I see a buying opportunity with a 10% upside potential in the next year. Their valuable analytics platform caters to growing demand for data-driven product decisions. Fixed-price Amplitude Plus targets SMBs, and temporary headwinds are easing. However, declining growth and fierce competition are risks. My conservative 1-year target price of $13 reflects these factors, suggesting attractive potential.