Amplitude: Sales OK, Margins Not So Much (NASDAQ:AMPL)

In October of last year, I observed that Amplitude (NASDAQ:AMPL) was enabling digital, allowing companies to make their move both online and digital. With the direct offering being well-timed during the boom in technology names, valuations were far too demanding to even contemplate a potential position.

I am glad that I passed on the opportunity as shares have fallen a great deal as well alongside the correction in technology and IPO names. While momentum in terms of sales is still very solid, the issue is that margins have taken a huge beating, with losses being too high to see any potential appeal.

Former Take

Amplitude offers companies to use data better in order to develop better digital products, often relating to customer behavior and measurements, to thereby maximize their impact and being able to predict actions better.

The company operates in an emerging software category which is labeled Digital Optimization, with Amplitude operating as the command center for customers to connect the digital world to business outcomes. With consumers interacting more online and digitally with customers, while the amount of data is growing at a staggering pace, this makes that the solutions provided by Amplitude were in great demand.

The company served some 1,200 clients at the time of the offering, with many of them relying on the service for customer retention, instead of customer acquisition, as reduced churn is often a very interesting economic position.

The company went public in a direct listing, instead of an IPO, with the reference price set at $35 per share. At that level, the company was awarded a $3.5 billion equity valuation, or about $3.2 billion if we factored in some net cash balances.

Such a valuation was applied to a business which generated a mere $68 million in revenues in 2019, actually accompanied by an operating loss of $33 million. Revenues rose 50% in 2020 to $102 million, as losses narrowed to $23 million, both being encouraging results. Momentum was solid in the first half of 2021, with revenues up 50% to $72 million, coming in at a $150 million run rate, as operating losses for the six-month period came in flattish around $16 million.

All of this makes that shares were valued at 20 times sales at the reference price, yet given that shares traded in their fifties on the first day of trading, the valuation only increased further to some 30 times sales, as I saw absolutely no reasons to get involved with the shares given these valuation discussions.

Boom – Bust

Shares of Amplitude even traded in the high-eighties following its listing last year, to fall back to their $40s in February, to even fall to the mid-teens by Mid-February, as shares have been trading between $15 and $20 per share ever since.

The bombshell report came in mid-February when the company posted its fourth quarter results with revenues up 64% to $49.4 million, revealing a $200 million run rate. Moreover, remaining performance obligations rose to $170 million, up $75 million from the year before. That operating momentum seems pretty solid, as adjusted operating losses actually increased to $5 million, with GAAP operating losses quadrupling to $21 million.

With some 110 million shares outstanding, and these shares falling to $17 overnight, the equity valuation fell to just $1.9 billion. If we factor in a roughly $300 million net cash position, the resulting $1.6 billion valuation has dropped to about 8 times sales, a huge difference from the time of the listing just a couple of months before as the fourth quarter was strong in terms of sales momentum, just weak in terms of margins.

The reason for the decline in the shares was quite easy as a midpoint calling for 2022 sales at $230 million simply feels very lackluster. More so, non-GAAP operating margins are seen around minus 21%, implying a near $50 million operating loss expected in 2022. With these losses only coming in at $5 million in the fourth quarter (with GAAP losses much higher), this is not inspiring much confidence.

Shares continued to trade in the mid-teens in May, as the company posted first quarter results. First quarter revenues of $53.1 million were up 60% and came in ahead of the guidance. Non-GAAP operating losses inched up to $7.7 million, yet GAAP operating losses increased to $22 million. Following these results, the company hiked the full-year sales guidance in a minimal fashion to $232 million, with non-GAAP operating losses seen around 19.5%.

Second quarter revenues were reported at the start of August, with revenues up 48% to $58.1 million. Non-GAAP losses inched up to $9.0 million with GAAP operating losses coming in as high as $24.6 million. Note that remaining performance obligations are up nearly $100 million on the year, as the actual traction is a bit stronger than the sales numbers reveal, albeit that there are real margin questions, of course.

The company now sees full-year sales at a midpoint of $234 million, with non-GAAP operating losses narrowing to 15.5% of sales. That suggests that operating losses will narrow from about $50 million this year to $35 million, but that is ahead of stock-based compensation expenses which trend around $60 million per annum, revealing realistic losses around $100 million.

With 112 million shares now trading at $18, the operating asset valuation comes in around $1.7 billion, reducing sales multiples to around 7 times sales. The issue is that realistic losses come in around $100 million per year, as the company is really going into an investment spree, which has huge impacts on the bottom line.

And Now?

The paragraph above really sums it up. Current sales multiples look reasonable at 7 times, while revenue growth comes in around 50%, as that growth rate is even understated with performance obligations showing meaningful growth on top of that as well. That is about the good news, as the question is of course how margins will evolve, with realistic losses of $95 million here now being equivalent to negative margins of around 40% on the bottom line, indicating that any incremental growth is seen with increased losses, something which was not the case ahead of the listing.

This makes me quite a bit cautious, as this simple fact in combination with opportunities seen left and right makes me very cautious, and not bothered to get involved here.