Small-cap software stock Amplitude (AMPL -0.30%) took a dive after its recent earnings report, falling 14%.
Despite the double-digit sell-off, there was nothing particularly concerning in the report. The company actually beat estimates on the top and bottom lines in the fourth quarter, but guidance was a bit on the light side. Management sees revenue of $283 million-$291 million in 2023, representing 19% to 22% growth.
Amplitude specializes in digital optimization, or helping businesses maximize the potential of their customer-facing apps and digital interfaces. It provides a suite of product analytics that help businesses gain insights they wouldn't otherwise have, improving ROI. For example, Peloton worked with Amplitude to determine that social interaction was key to member engagement and retention.
Amplitude went public late in 2021 just as tech stocks were peaking. Consequently, shares are down sharply from their debut, but there are a few reasons to believe that the company looks like a long-term winner.
Image source: Getty Images.
1. Amplitude is taking customers from Google
Amplitude's focus is on product analytics, but its biggest competitors are marketing analytics providers, specifically Google Analytics and Adobe Analytics. Management has consistently made the case that its product analytics suite is a better tool than traditional "martech" (marketing technology) software.
In the fourth quarter, the company got some more evidence that its thesis is playing out. Some of its biggest customer wins came from companies that switched from Google Analytics, including Fandom, Allbirds, and Brainly.
On the earnings call, CEO Spenser Skates said Fandom chose Amplitude because of its ability to integrate product and marketing analytics to serve a wide variety of customers, as well as Amplitude's innovation and scalability.
Allbirds chose Amplitude to help learn more about what leads to repeat shoppers, getting crucial insights into user behavior across its websites. Amplitude also shared that a recent Forrester Wave report on digital intelligence platforms ranked it far above Google on both strategy and execution.
Taking customers from Google Analytics represents a significant opportunity for Amplitude. The company saw some of its largest new deals in the fourth quarter, landing two new customers worth more than $1 million a year in revenue. Amplitude now has 30 customers with over $1 million in annual recurring revenue, and growing that pool could be a significant growth driver ahead.
2. Free cash flow positivity is in sight
2023 is expected to be a challenging year across the software industry as enterprises are cutting back on spending in preparation for a recession. That's one reason why Amplitude sees slower growth ahead, but the company is also making improvements on the bottom line, even during a challenging year.
Its 2023 bottom-line guidance was better than expected, calling for an adjusted per-share loss of $0.11-$0.16. The company said it expects to generate positive free cash flow for the year.
While a number of tech companies have laid off staff in recent months after overexpanding during the pandemic, Amplitude has taken a balanced growth approach, aiming to be judicious with its spending. In an interview with The Motley Fool, Skates said Amplitude has always been a cost-conscious company. And while it's slowed hiring to adjust to the macroeconomic climate, there hasn't been a drastic shift in its approach as seen in other companies.
The free-cash-flow positivity target should also reassure investors that the company is capable of turning a profit, and the bottom line should improve even more when the economy bounces back.
3. There's significant upside in the recovery
More so than most companies, Amplitude caters to digital natives and start-ups. The category it competes in, digital optimization, is new. And digital optimization is what follows digital transformation. Once companies have their digital infrastructure, learning how to make the most of it comes next, and digital-first companies are more likely to value and embrace the kind of analytics tools that Amplitude offers.
On the earnings call, Skates described being part of an early category like digital optimization as "a double-edged sword," adding:
Companies that had accelerated our growth are now pulling back the hardest. The whiplash our customers are experiencing is very real. We expect the rolling layoffs and reduced risk appetite to be headwinds in the near term, but these short-term headwinds will pass.
In other words, once the current macro volatility fades, the company's revenue growth should reaccelerate as the overall macro environment improves. Investors seem to be ignoring that possibility -- the stock looks well priced today at a price-to-sales ratio of 7, especially with its forecast of free-cash-flow positivity.
Though its 19% to 22% revenue growth forecast for 2023 isn't going to excite the market, once the current macro headwinds pass, the stock should have considerable upside.
