Amplitude (AMPL -0.69%) stock crashed on Thursday after the digital optimization software company offered weaker-than-expected guidance for 2022 in its fourth-quarter earnings report.
After previously forecasting revenue growth of at least 40% in 2022, the company now expects the top line to increase by 35% to 40% reaching $226 million to $234 million. That was also below the analyst consensus at $235.9 million, which implied 41% growth.
Given the scaled-back expectations, it's understandable why the stock price fell on Thursday, but the 60% decline looks excessive. Even after the stock regained some of its losses on Friday, it was still down 50% since the earnings report.
Image source: Amplitude.
Since the company went public in September, the share price has ranged from more than $87 to less than $17. That range, and the stock's plunge on Thursday, which came even though there was no fundamental change in the business, indicates that Amplitude seems to be misunderstood by the market.
Here are three things investors need to understand about the company.
1. Secular tailwinds are building for Amplitude
Amplitude, which helps companies use data to make better product decisions, just capped off an impressive 2021 with revenue jumping 63% for the full year and 64% in Q4. It grew its customer base by 54% to nearly 1,600 and posted a net retention rate of 123%, meaning its existing customer base increased its spending by 23% over the last year.
While those numbers alone show the company's product resonates with a wide range of customers, what's gotten less attention is that the market Amplitude serves -- product data and the Chief Product Officer -- are gaining in importance.
There are two reasons for that. First, the Chief Product Officer is becoming a more common position in major companies as enterprises realize the need to devote more resources to product decisions. Companies like LEGO and NBCUniversal have recently added a Chief Product Officer, and CPO positions have increased by 41% on Linkedin over the last three years.
At the same time, third-party marketing data is disappearing. Meta Platforms' recent earnings report shows the challenges businesses face with ad-tracking tools. Alphabet's Google plans to ban third-party cookies which will further undermine the traditional pipeline of marketing data. With those marketing tools disappearing, there will naturally be a greater emphasis on first-party product data, driving demand for cloud software like Amplitude offers. In an interview with The Motley Fool, CEO Spenser Skates explained, "So I think you're gonna see a huge shift from third-party data because that industry is just totally dead. And now all those, you know, all that money and jobs and people are going to go ... to first-party data."
2. Guidance is subjective
Every company has a different method for coming up with guidance. Some give the same numbers they're using internally, while others take a more conservative approach, not wanting to fall short of the target they provide. While Amplitude may have disappointed by previously promising revenue growth of 40% and then lowering that range, investors need to remember that guidance is not the same thing as results and that the company could easily beat its forecast.
In response to several questions on the earnings call about guidance, management explained that it dialed down expectations a bit due to uncertainty around the timing of expansions from its current customers, especially as some of its tech customers are struggling with the post-pandemic reopening. At the same time, it's unclear when hard-hit companies, like those in the travel sector, will start to experience a comeback.
Skates likened the product adoption approach to "getting religion," or realizing the power of using data analytics. The challenge is that the timing is uncertain, and some companies have a longer journey than others. Management's confidence in the long-term opportunity of product data analytics hasn't changed.
The guidance, therefore, is a reflection of that uncertainty rather than a real weakness in the business.
3. Amplitude's business could be at a tipping point
For much of Amplitude's history, its customer base was primarily comprised of tech companies like Intuit, Atlassian, and Paypal Holdings. Naturally, tech companies tend to be early adopters of technology like product data analytics, partly because their customer interactions take place within digital interfaces.
However, due to the digital transformation that accelerated during the pandemic, every company has been forced to develop an online presence. That has spurred a boom in interest from non-tech companies like Ford Motor Company and Restaurant Brands International's Burger King. On the earnings call, Skates noted that Toyota Motor, the world's biggest automaker, became an Amplitude customer in Q4 to better understand how users engage with the Toyota and Lexus apps. Amplitude also signed up a wealth management firm. Those aren't companies that you would typically imagine using the kind of software Amplitude provides, but it's becoming imperative across all sectors, just like having an online presence. On the call, Skates elaborated, "If you had asked me a few years ago, hey, would Toyota be a customer? I'd be like, 'Ah, it'll probably take a while,' but we're seeing that happen in both tech and non-tech companies."
The company can't pinpoint the timing of these new customer additions or expansions, but demand is swelling, and the secular tailwinds are building. Customers readily understand the value of product data. In an interview with Motley Fool, Amplitude CFO Hoang Vuong said that "the train has left the station" regarding the need to understand product data, especially as the third-party marketing ecosystem dries up.
While the guidance may not reflect a tipping point, the more digital optimization goes mainstream, the greater the chances of Amplitude's success.
Investor takeaway
There's no such thing as a sure thing in investing, but the post-earnings sell-off looks like a golden opportunity to pick up shares. Amplitude is a fast-growing company at the forefront of an emerging tech sector, and the business fundamentals look strong.
