Amplitude (AMPL): Deep Dive Analysis
Join me as I explain my excitement around a recent tech IPO - Amplitude.
Hi everyone - and welcome back to my second Substack-hosted deep dive analysis on a company. The first one covered Olaplex, a haircare company with tech-company margins and growth.
So excited about this one! Sit back, grab your coffee (or beer, depending on what time of day you’re reading this) and let’s talk everything Amplitude.
In this post, I’ll be covering:
What exactly Amplitude is
How exactly they make money
Why I’m excited about this company
Where the stock could be headed in the coming 24 months
Adobe: The cloud-based marketing and design company had an incredible pivot in 2016 and focused on enhancing product innovation. Consequently, it grew revenue by nearly +275% over the last 7 years.
Twilio: The cloud-based communication platform as a service company - used by Chime, Coke, Lyft, Stripe and countless other enterprises - grew revenue by +2,450% over the last 7 years.
Salesforce.com: The cloud-based CRM whose most recent claim to fame is entering the Dow Jones Industrial Average and acquiring Slack grew revenue by +480% over the last 7 years.
Something very specific had to happen for the above mentioned companies to experience exponential growth - they pioneered a new category of software deployment.
Before Adobe really kicking things off over the last decade, no one was deploying marketing and design through the cloud like them. Before Twilio, no one was really deploying a communication platform as a service through the cloud like them. Before Salesforce.com, no one was really deploying a CRM tool through the cloud like them.
These companies pioneered a completely new product category that allowed each of them to become the authority in their respective spaces - essentially going from Zero to One.
Before we jump into how I believe Amplitude is pioneering their own respective product category, we should first better understand what the company does.
What Exactly Amplitude Is:
I think the best way to describe what this company is, exactly, is to describe how companies like Walmart, Ford, Square, Calm, Burger King, Intuit, NerdWallet, and countless other use them.
Let’s pretend you’re a tech company - you sell some sort of digital product.
Maybe that’s access to software like Intuit does with Quickbooks - or maybe it’s a digital product inside a mechanical product (like a car) with Ford. Regardless, your digital product is flowing to your customer one way or another.
Considering your entire business is built on how your customers interact with this digital product - wouldn’t it be in your best interest to know exactly what that looks like?
The specific path they travel when trying to send an invoice to a customer within your QuickBooks app - allowing you to understand upticks and drop-offs in customer usage to better optimize the task.
The specific buttons they press when trying to find a setting inside your Ford F150 - allowing you to better understand user intent.
What if there was a software that completely mapped out what that user experience was like - their intent, if your value proposition was accurately communicated, if on-screen instructions were made clear enough, etc.
Well, there is.
It’s called Amplitude (AMPL) - and they’re doing it for every major company you’ve heard of and used. For their comprehensive list, click here.
Through Amplitude, companies like Square (SQ) can track customer usage, measure their key performance indicators, better understand where change needs to occur while identifying major drivers for that change, begin to predict user outcomes if change was made, then finally - share their learnings once changes are made.
Wait - did I say Square?
Yes - the $110 billion company uses Amplitude and has 100 employees working full-time leveraging this platform to best build product and design for their users. Learn more about Square’s specific relationship with Amplitude here.
Just to really make sure you all understand what this company does and how valuable they are to the vast new digital world - countless companies provide digital products. Billions of people interact with those digital products - leaving behind traces of data regarding intent, understanding, usage, etc.
The countless number of companies creating these digital products need to decipher how their customers use them.
They can’t manually go in and watch everything - they need a software platform that can run in the background and concisely determine trends, drop-offs, upticks, and trouble spots in order to make their digital product easier to use and more profitable.
That is Amplitude.
Amplitude is used to analyze digital products in relation to the customers that use them. If that product is created by Instacart, Walmart, Square, Intuit, Under Armor, Bud Light, Ford, GoFundMe, Rosetta Stone - it doesn’t matter.
Amplitude analyzes them all - and concisely shares all data points with their product teams.
The below image is one of my favorite from their S-1 filing - clearly showing the inferences and data the company provides its enterprise customers.
Jumping back to pioneering a product - something we alluded to above (Adobe, Twilio, Salesforce)..
Pulled straight from their S-1:
We are pioneering a new category of software called Digital Optimization. Our Digital Optimization System serves as the command center for businesses to connect digital products to business outcomes. Digital optimization is emerging as a strategic investment for every company to survive in the digital-first world.
The way that companies build digital products is going through a fundamental change from being intuition-based to data-driven. Today, the best teams are those that build their strategy around product data, which connects the attributes of individual end users with their actual behavior. Product data has become the next untapped growth lever to transform how businesses build products, gain key insights into which features have the greatest business impact, and connect with customers.
The amount of time that consumers spend interacting with digital products has led to an explosion of both the quantity and diversity of data. Because products themselves are generators of data, for the first time, in-product behavior can now be analyzed. With product data, teams can gain insight from the specific actions end users take within digital products and answer important questions, such as where in the purchase journey do users experience friction, what are the top user paths between signup and trial conversion, and which features increase new customer retention.
Amplitude is pioneering and completely unlocking a new growth lever for digital-first businesses (every business that plans to stay in business throughout this decade) around the world.
How Amplitude Powers Digital Optimization:
Amplitude Analytics - named #1 product analytics software by G2, this tool provides teams with fast, self-service insights into customer behaviors
Amplitude Recommend - a no-code personalization tools that allows teams to increase customer engagement by adapting digital products and campaigns to every user based on their behavior
Amplitude Experiment - an end-to-end experiment solution that enables teams to determine the most impactful product experiences for their customers through A/B testing
Through the above mentioned solutions this company provides, they’re able to offer over 900 billion data points on a monthly basis to their customers.
Wrap your head around that for a moment.
I hope you’re nodding your head now and completely understand just how cool and how valuable this company is to over 1,200 companies around the world.
How Exactly Amplitude Makes Money:
Good question! Let’s talk about it.
Long story short, the company generates revenue by selling subscription access to their platform. Their pricing model ranges - and generally leans into both expected usage as well as tools offered.
Acquiring customers is generally easy for the company - as a lot of their current customers first looked at Amplitude to identify a “hunch” or “assumption” the company was making about their customers.
Once used, these customers tend to stick around - which is why Amplitude has a 119% dollar-based net retention rate. In case you’re unfamiliar, this means that on average, Amplitude is able to sell an additional +19% worth of services to the customer on an annualized basis. This is why the retention rate is above 100%. Which is a good thing.
A fantastic thing, actually.
I believe this company will continue to make money given this insanely important and growing industry they’re operating inside of.
Today, digital products are embedded into every part of our lives.
From joining a morning exercise class on a Peloton, to managing project tasks in Atlassian, to streaming a favorite show on HBO, to paying business expenses in QuickBooks, to meditating at the end of the day using the Calm app - digital products are the primary way businesses connect with customers.
The ability for companies to offer compelling digital products and services has become a matter of survival.
Secular growth trends happening right now that are propelling this digital revolution faster:
Mobile and cloud are sparking disruption forcing legacy businesses to adapt to digital-first products
For example, direct-to-consumer financial services upstarts now offer a full menu of financial products to be consumed from the convenience of a few taps on one’s phone. As a result, traditional consumer banks can no longer rely on their large networks of local bank branches to maintain a competitive advantage of customer access and reach. Instead, they must shift to online and mobile apps to remain relevant. Digital laggards in every industry will need to adapt to a new playing field that is decidedly turning against them.
The digital economy is the only viable path to growth going forward
For example, large-box retailers, such as Walmart have looked with urgency to reinvent themselves and drive digital growth. For the pre-COVID-19 fiscal year ended January 31, 2020, Walmart’s U.S. and Sam’s Club segments collectively recorded 70% growth of eCommerce sales compared to only 2% for non-eCommerce sales. COVID-19 has only accelerated this trend with the same segments collectively recording growth of 160% and 5% for the same categories, respectively, for the fiscal year ended January 31, 2021. As digital continues to become a growing portion of the economy, every business will need to transform their business and drive digital growth to not be left behind.
Businesses are shifting away from acquisition and leaning more into user retention - allowing businesses to stop depending on one-time purchases and instead on lifetime customer value
For example, DoorDash does not just focus on acquiring new customers – offering broad restaurant selection and services that increase order frequency and size is core to its strategy. Business models like Salesforce sell subscription licenses that prioritize recurring revenue and customer retention. And Match.com and Tinder have launched new digital products to keep users engaged when there are fewer in-person dates and/or even after they find love. As the costs to expand an existing customer relationship are significantly lower than acquiring a new one, this change in strategy has led to more efficient sales & marketing spend and more durable growth prospects.
All of this has enabled the company to generate $102.5 million in revenue in 2020, a +50% increase when compared to the amount of revenue generated in 2019.
Throughout the first 6 months of 2021, the company has generated $72.4 million in revenue, a +57% increase when compared to the first 6 month of 2020.
Gross profit margins on this revenue are hovering around 70%.
Why I’m Excited About This Company:
This list is long, but in short - the company’s total addressable market (TAM) is ever-expanding and their founder / CEO is an absolute visionary.
Amplitude’s Growth Levers:
Acquire new customers across every industry - since inception, this company has captured already 1,200 massive enterprises to use their products, including 26 of the Fortune 100 companies
Expand product subscription throughout existing customer base - this is done through upselling and cross-selling subscriptions, which is something they’re obviously good at if they’re rolling 119% dollar-based net retention rates
Extend product development within their platform - just last year the company introduced their Recommend and Experiment features; this is only the beginning
Global reach - revenue generated outside of the USA throughout the first 6 months of 2021 was 31%, Amplitude, and myself, think this number will absolutely trend higher because digital-focused products are worldwide
The company’s Founder and CEO - Spenser Skates:
First, Spenser is an MIT graduate with a massive focus on engineering and technology. He’s a genius, young, hungry for success, and seemingly down to Earth.
I don’t think I’ve been this excited about a company in a long time. There’s a massive need for both customer data and a robust platform that can decipher it all in such a way that enables action - Amplitude does exactly that for every digitally-focused company in the world.
They’re used by the best - do I need to share the names of their Fortune 100 companies again? The very best companies around the globe use their platform for data collection and A/B product testing - this to me signals an exceptional product and business.
Finally, they’re new.
This company just IPO’d the other week and they’re trading around a $5 billion market cap - representing substantial upside if they’re able to capture the global product analytics market and trend toward $1 billion in annual revenue by 2026.
Where Their Stock Could Be Headed in the next 24 Months:
Again, not financial advice.
Also again, they just IPO’d - which means the market is still trying to figure out how to price this company. Since making their market debut, their stock has held up relatively well despite the broader volatility.
Right now, at $49 / share, the company is trading around ~27X forward (2022) gross profit. This is absolutely pricey - and I acknowledge that, which is why I’m not at all diving head first into this stock at the moment.
But, with that being said - I believe this company can absolutely continue to grow revenue at +60% annually for the coming years (definitely over the coming 24 months, and likely throughout the next 4-5 years), which could mean a $1 billion run rate in 2025.
Assuming $700 million of that $1 billion in revenue flows through as gross profit in 2025, and we peg a much more conservative ~18X gross profit multiple on the stock, you’re looking at a stock price much closer to $130-140 / share in the coming years, representing substantial potential upside. Meanwhile, this is also assuming much more conservative trading multiples.
Maybe I’m dead wrong and the stock doesn’t take off like a rocket in the next year or so - I’m putting it on record right now that I’m 100% okay with that considering the absolute potential this company has to grow within their respective market.
Just think about the positive reaction that 26 companies in the Fortune 100 have had with this platform. Just think about the massive potential for the other countless companies around the world to also experience that positive reaction. Just think about the $32 billion total addressable market in which this company is operating.
I don’t know what the stock price will do in the near term - but this company is pioneering a business in the same way I believe Adobe, Twilio, and Salesforce all did within their respective categories years ago; and we’re only in the early innings. Heck, maybe we’re still singing the National Anthem.
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
Cover Image Source: AP Images