This uncertain stock market has gotten very good at dashing investor hopes this earnings season. Many stocks have reacted to earnings reports with volatility; some names have soared 20% or more, while others have been severely punished. In some cases, the reasoning behind the large swings is unclear.
Digital optimization company Amplitude (AMPL 0.15%) is among the stocks that were punished this quarter. The company just reported its second quarter of earnings since going public late in 2021, and investors sent the price down almost 60% in a single day. Investors should always explore the potential causes for a significant stock move like this.
Here is why Amplitude could have dropped, and why the stock's long-term story could still be promising.
Image source: Getty Images.
What does Amplitude do?
Amplitude is a pioneer in "digital optimization," using data to understand customer behavior and predict which business decisions lead to which outcomes. For example, it can help companies answer questions like whether subscription or on-demand billing is better for their products. Or, if a company is testing free trials, where along the trial period are users dropping out. In other words, Amplitude helps companies answer these questions proactively instead of reacting to results with trial and error.
Amplitude's business falls under product analytics, a competitive space with offerings from companies like Alphabet's Google. However, Amplitude contends that its platform is more flexible, and is more than a marketing tool that can aid decision-making in areas like engineering, product management, and customer support.
The company has proven its ability to acquire high-profile customers, doing business with 26 companies in the Fortune 100 and 1,597 in total. Additionally, the company has a net revenue retention rate of 123%, showing that customers spend more once they start using the software.
So why did Amplitude stock drop like a rock?
Management's revenue guidance for 2022 was the most likely culprit behind the stock's sharp decline recently. Amplitude closed out its fiscal 2021 year with $49.4 million in revenue during Q4, a 64% year-over-year increase.
However, management is guiding for $226 million to $234 million in revenue for 2022, which is 40% growth, a noticeable slowdown from the 63% growth it did in 2021. You can see in the chart below how the stock came into earnings with a price-to-sales ratio of 20. The company's guidance likely wasn't enough to convince investors to support that valuation.
AMPL PS Ratio (Forward) data by YCharts.
CFO Hoang Vuong spoke on guidance, and how the timing behind how customers ramp up spending on the platform could impact revenue, during the Q4 earnings conference call:
We believe we're still in the early days of Digital Optimization... it can take a few years for new customers to completely embrace the full capabilities of our Digital Optimization System and drive larger expansion. As we share, these can be quite meaningful for our results as we saw in Q2 2021. But the precise timing of these can fluctuate and that timing uncertainty is reflected in our 2022 guidance.
No matter how you cut it, the company appears poised for a growth slowdown in 2022 compared to 2021. Of course, Amplitude could surprise you -- but in a market environment that has been unkind to growth stocks over the past year, companies are no longer getting the benefit of the doubt.
Why might the stock perform well moving forward?
A nearly-60% drop could easily incite panic, but I think there's a sound argument that all this selling activity is an opportunity for long-term investors to build positions.
First, suppose you look at Amplitude's customer acquisition to indicate what future revenue growth could look like. The company is continually picking up new accounts, which is a great sign; Amplitude grew its paid customers 54% year over year in 2021 Q4. Amplitude has a lot of room to expand its customer count moving forward, and it could reasonably double its footprint in the Fortune 100. There are thousands of publicly traded companies and millions more that are private to do business with.
Additionally, the company's primary product, Amplitude Analytics, is currently driving the vast majority of revenue. It launched Amplitude Recommend and Amplitude Experiment in Q2 of 2021 and noted that they've only begun to generate revenue over the back half of the year. These new products work with the analytics product to let customers discover insights using machine learning and run tests and experiments with their data. Amplitude's existing customer base could help drive revenue growth through cross-selling opportunities if these new products are well-received.
The company's market cap is now roughly $2 billion, so Amplitude's small size could make the stock a great investment even if it can simply sustain solid growth over the years ahead. There are a lot of "what ifs" that need to prove out in future quarters, but the massive price drop arguably removes a lot of that risk from the stock.
