How I Found the Next Surging Stock + Updated Analysis: Amplitude (AMPL)
Walking you through how I analyze new stock ideas - from start to finish, with some updated analysis courtesy of Wall Street.
Don’t you love being right?
I sure do.
In this post, I’m going to walk you all through my discovery, research, distribution, and finally confirmation on the Amplitude (AMPL) stock idea - in efforts to allow you all to perhaps do the same in the future.
Institutions have taken notice of this one, with Bank of America and Baird both releasing formal research on the stock Monday (10/25). Let's discuss the process from potential winner to big bank validation.
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This is the hardest phase of the entire life cycle - finding the stock idea.
Lucky for me, I know that Unhedged.com exists. It’s the website I check every Monday to help build my “Investing Week Ahead” post for you all - Chris Sommers and his incredible team of analysts are always highlighting new companies that will be making their public debuts, and Amplitude was one of them.
In this post, I shared my “meh” mentality for the company - mainly driven by how much competition (I thought) the company had in this vast world of “Data”.
The company has been growing revenue steadily (for a software company), SG&A expenses as a percent of revenue has been on the decline (a good thing), and their operating margin is inching close to break even.
The numbers don't thrill me and the amount of competitors they have (Pendo, Mixpanel, Heap, Adobe, Google Analytics, Looker, Tableau) don't excite me. I'll pass for now.
And well - that was that.
Not until I made this video about Olaplex on TikTok and received such positive feedback that it forced me to revisit my original post - mainly looking for a starting place to further research Olaplex.
I thought.. if an under-the-radar company like Olaplex is going public and and is this well-received, maybe other upcoming under-the-radar companies will be well-received too?
Where better to start researching a company you’ve never heard of than their S-1? For those of you who might not be familiar, the S-1 is a 300+ page document every company must file with the SEC (and therefore the public) detailing every inch of their business, their financials, and where they’re headed in the future.
In this form, I found the “[A] Letter from our Founders” - which began to answer a lot of the questions I had about the company.
Next, I stopped and checked out their Customers section of their website - which offered more detail around how companies like Atlassian (TEAM), ABinBev (BUD), Ford (F), Walmart (WMT), and Square (SQ) are all leveraging Amplitude to better their businesses.
This is when I began to realize Amplitude was pioneering an entirely new form of cloud-based business around analytics and product management - similar to how some of our favorite cloud-based companies like Adobe (ADBE), Twilio (TWLO), and Salesforce (CRM) pioneered their own respective businesses.
With that being said, always be skeptical of companies announcing partnerships and truly try to understand what these relationships mean from a recurring revenue standpoint. In Amplitude’s case, it became clear that these relationships were both fruitful and growing at an exponential rate.
After totally diving into this company and thinking I understood just how important they are for businesses to better understand their customers, I got really excited and sent this email to Chris Sommers (and my co-founder Christian).
Then I got to work, and ultimately published this formal analysis on the company. 99% of the visuals, graphs, data, and well - everything, in the analysis was harvested from the company’s S-1 filing, website, and a simple YouTube search.
Time for feedback! This is when I tell everyone my thoughts in an effort to stir up a conversation about the company, maybe its experience with the product, or simply pointing out something I might have missed.
The first obvious form of publication was here on Substack - linked above.
I then sent out this tweet - drop your boy a follow. I try and tweet about stocks and crypto but sometimes a frustrated tweet about the Tennessee Vols slips in. We’ll beat Bama next year - mark my words!
I then dropped a little post on my favorite online brokerage app - Public.
Then, by some awesome happenstance, the Head of Marketing at Amplitude made this incredibly nice LinkedIn post about my Substack article.
Next, Chris and I sat down in front of the camera and filmed this YouTube video about the company - making some fun estimations on future stock price if successful with its plan of action.
Finally, a week later, Chris and I recorded another video (livestream) that I called out a few times to you all ahead of time - posted here. Another opportunity for us to have some fun speculating on the future price and get excited about the momentum the stock had seen that week.
I also posted this TikTok - a smooth 70K views.
Seeing the stock price rise +40% in 2 weeks was incredible, but having two well-known investment banks confirm your excitement about a company is unparalleled.
Now that I’ve walked you through my entire thought process on this company and how I researched their stock - I want to also drop in the details that our friends on Wall Street have published in their own analyses. Let’s make sure you have all of the information to make the best decision for yourself.
BofA Securities (Bank of America):
Let’s start this deeper analysis of their findings by quoting their opening paragraph, which generally summarizes their investment thesis.
We initiate coverage on Amplitude, a leader / evangelist of the Digital Optimization opportunity, with a Neutral rating and $75 price objective. Organizations leverage Amplitude’s next-gen Digital Optimization platform to better understand how consumers are using digital products to drive better customer experiences. We believe Amplitude screens well in our 4Ms framework: Market, competitive Moat, Management strength, and Margin potential. We estimate Amplitude is operating in a $36 billion market ripe for disruption and should create a long runway for the business to drive healthy growth.
That’s beautiful! Let’s now dive deeper into each of those talking points mentioned above with the 4 Ms framework.
Their analyst team then goes on to describe Amplitude’s moat:
Modern technology platform built for speed
Highly referenceable customer base - presenting a good upsell and cross-sell opportunity for future growth
Expanding partner ecosystem and international opportunity
A platform positioned in a digital-first future
Benefiting from strong secular growth tailwinds such as data, mobile, cloud, and IoT, etc.
The analyst team also wanted to make something very clear about their Neutral rating on the stock - it’s purely valuation based. They believe the stock’s near-term upside is already baked into the stock price of ~$70 / share, which I think is a fair assumption.
They did make it very clear how excited they were about Amplitude from a fundamental perspective.
Amplitude, with its next-generation columnar database and Behavior Graph, helps organizations make sense of it all through its Analytics, Recommend and Experiment products. The future will undoubtedly see more digital products being introduced, which means that the need for and usage of digital optimization platforms, like Amplitude, will likely increase too.
An interesting assumption from BofA is its valuation multiple on the company - which, is fair, but also sort of on the lower end of the spectrum.
I’m not sure if you all remember Chris and I talking about Amplitude’s revenue multiple, but we thought it was fair to peg it somewhere between Twilio (TWLO) and Snowflake (SNOW), as mentioned in this post.
We were getting excited about the idea of Amplitude’s stock landing somewhere between this 30-50X 2022 revenue, or about $90 / share using BofA’s 2022 revenue assumption of just $225 million. Personally, I think this company’s revenue will surpass $250 million in 2022, or about a +60% increase year over year.
Applying the same 30-50X multiple to our revenue assumptions you’re now closer to $100 / share.
BofA is pegging the stock around 32X 2022 revenue, or $75 / share. Again, totally fair considering that is indeed between Twilio and Snowflake’s current revenue multiples. However, I’d argue that given the company’s massive TAM, margin profile, and growth expectations being much more similar to Snowflake rather than Twilio - investors will begin to put a valuation more similar to Snowflake’s against the stock.
To put this in perspective, Snowflake is trading at 85X 2022 revenue. Twilio is trading at 22X 2022 revenue.
Another interesting call out I want to mention from BofA’s analysis is the number and identity of Amplitude’s customers. I didn’t see this in any of the IR materials:
We see Amplitude’s installed base of 1,280+ (+51% y/y) paying customers as a highly referenceable customer base that has the potential to drive good new logo activity. Amplitude serves 26 of the Fortune 100 companies. Customers include: digital leaders such as Atlassian, Instacart, IBM, Twitter, Vimeo, Squarespace, Doordash, Kahoot, Intuit, Shopify as well as more traditional enterprises such as NBCUniversal, EA Sports, American Express, AT&T, Volkswagen, AB inBev, Walmart, among many others across a variety of industry verticals.
The digital product market is currently underpenetrated, but as more companies innovate and build digital products, we believe Amplitude has a very good runway to grow and capture market share as a leader in the space. Its marquee customers can be good driver of pipeline expansion in the future. No customer accounted for >10% of total revenue in 2020 or 2019.
They also included a breakdown of customers by business..
Healthcare & Wellness:
Media & Entertainment:
Automotive / IoT:
This is blowing my mind. I knew they were working with 26 of the Fortune 100 companies, but this is so encouraging to see.
Finally, BofA added more color around the company’s rockstar management team - Spenser Skates (CEO), Curtis Liu (CTO), and Jeffrey Wang (Chief Architect).
Amplitude (called Sonalight at the time) was accepted into the Y Combinator (YC) Winter 2012 batch, with the aim of delivering cross-functional understanding of customer behavior through a product lens. We generally view founder-led management teams as a positive in software, and we favor Amplitude’s founder involvement and history of strong execution. The consistent track record of financial performance, go-to-market (GTM) execution, and technology innovation stems from Amplitude’s deep bench of management talent.
Beautiful. Let’s now see what Baird thinks of the company.
Starting again with the opening paragraph, which is usually a good summary of the company’s investment thesis on the stock.
We are initiating coverage of Amplitude with a Neutral rating and $70 price target. AMPL is a leader in Digital Optimization software. Digital transformation is driving the growth of digital-products, and as these become more pervasive, companies need new ways to align them with business outcomes. AMPL's best-in-class software measures millions of input signals real-time, empowering customers to deliver digital-products with “that extra push” of higher customer satisfaction and revenue. With stock up 90% from direct-listing (vs. Nasdaq+1%) and valuation >30x CY22 revenue estimates, we start with a Neutral rating.
Their analyst team then continues to share their investment thesis to mainly surround five different initiatives - growing total addressable market (TAM), proprietary technology (IP), moving from periphery to core, efficient go-to-market model, and having a strong founder-led management team.
I’m going to further explain each one.
Growth of Digital Products:
Simply put - for this company to succeed, their customers need to be selling digital products. Lucky for Amplitude, digital products are becoming a core of how many companies engage with their customers. Considering Amplitude is the authority in this space, as it grows, so will Amplitude.
Strong Proprietary Technology:
Amplitude’s “Behavioral Graph” analyzes close to 1 trillion behavioral data points monthly, giving customers the ability to optimize their digital products in real-time - driving improved customer success, satisfaction, and revenue.
Moving from Periphery to Core:
Despite boasting 26 out of the Fortune 100 companies as customers, these companies apparently don’t exactly use Amplitude for their “core” products. As digital products continue to become central to the business of these companies, Baird believes Amplitude has a meaningful opportunity to expand their footprint within existing accounts.
We’ve known this, and it’s nice to see it confirmed by Baird, but Amplitude’s land and expand business model is sticky and doing the company wonders. It’s further catalyzed by the ease of use, rapid time to value (TTV), and board applicability of the platform across organizations for mid-market and large enterprises.
Founder-led Management Team:
Similar to what BofA Securities had to say about the company’s stellar management team, Baird is excited for Spenser Skates to lead this company further - with support of his incredible executive team.
Moving now into the company’s rationale for its Neutral rating - also similar to BofA Securities, Baird is leaning into this valuation not because they’re bearish on Amplitude’s fundamentals, but instead because of the insane run up the stock has experienced during the last few weeks.
Despite our very sanguine view on AMPL’s fundamentals, we are starting at a Neutral rating based upon recent price appreciation (nearly a double from direct-listing price of $35) and valuation.
Wait - just realized I missed this graph on the company’s website of their customers. Baird included it in their report.
Lovely seeing other incredible companies we know and love on here - including HCA, Proctor & Gamble, Fidelity, Allstate, Target, GAP, TopGolf, and my favorite eatery Chick-fil-A.
Boom! There you have it. My entire process from discovering this company to finally learning more about them after these banks released their thoughts. I really hope this post can serve as a resource for you in your stock-picking journey throughout the future and don’t ever hesitate to ask me a question!
You can text me anytime.
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.
All research and analysis credit to the respective teams at Baird (Rob Oliver, Shrenik Kothari) and BofA Securities (Koji Ikeda, Brad Sills, Tanika Mehra, Lory Lou).