The way that businesses collect data about customer preferences is changing. Instead of relying on third-party sources or surveys to collect the data that drive product innovation, businesses are starting to realize that first-party data is much more effective. After all, if a business says one thing on a survey, but their actions say another about their usage habits, that data on their action is much more valuable.
Amplitude (AMPL -0.17%) is one of the leading platforms for product data analytics. It allows businesses to use their own data to see a story about how consumers use their product, and it also finds what drives consumer action -- or inaction. More importantly, Amplitude also allows businesses to experiment with new or altered features to see how they affect consumer behavior. The platform can even make recommendations about how to create a stronger product. Despite this appealing service, there are a few things I want to see before I become an investor in this tech stock.
1. Continued adoption
Amplitude has a large opportunity ahead of itself today. There have been a few early adopters of product-led development and growth, but the vast majority of businesses have yet to do this, meaning that Amplitude has a $37 billion market ahead of it right now. The company brought in just $167 million in revenue in 2021, so it has a lot of room to grow.
So far, Amplitude has done a good job of gaining big customers. Roughly a quarter of the Fortune 100 are customers, and the number of customers spending over $100,000 has grown rapidly. Amplitude had 385 customers spending this much in 2021, representing growth of 47% year over year. This boosted its total customer count by 54% in the fourth quarter compared to the year-ago period.
The continuation of this trend is critical for Amplitude over the coming years. While Amplitude is considered a leader by G2, three other players are in close contention. If Amplitude sees this adoption begin to slow, that could indicate that its competitors are taking more market share, which would make an investment in Amplitude much less fruitful.
2. Product expansion
Amplitude should also look to expand its product lineup. Its Recommend and Experiment products are both relatively new, yet they have seen nice adoption. Management noted that they are just now making an imprint on the top line, but they like what they see. This success shows that consumers have a strong demand for products that serve as additional layers on top of Amplitude's data, so continuing to bolster this portfolio could be a lucrative endeavor.
The company noted that it wants to do just that. Spenser Skates -- Amplitude's CEO and co-founder -- mentioned that he has goals to roll out one or two new products each year, and even if just a handful of them are successful, that could result in strong retention, which still has room for improvement. The company's net retention rate was 123% at the end of 2021, which is strong but not jaw-dropping. Considering companies like Snowflake (SNOW -1.05%) -- another company that works with data -- has retention rates of 178%, there is some growth potential.
While it might not be necessary for Amplitude to create new products, it would prove that the company has a relentless focus on innovation. It would also help it maintain its leadership. Lastly, and maybe most importantly, it would allow them to better monetize its user base. This would be seen through its net retention rate, which could improve a big risk: its cash burn.
3. Cash flow improvements
The primary concern for Amplitude is its cash burn. In 2021, the company lost $35 million in free cash flow (FCF), representing 21% of revenue. More importantly, this skyrocketed compared to 2020. In 2020, the company only lost $12.6 million in FCF, a staggering jump of 178% year over year.
The company does have $307 million in cash to fuel this loss, but if it continues to burn cash, it could be put in a precarious situation. At some point, it would have to choose between fueling its cash loss and staying alive or continuing to build the best product. The company would likely choose to stay alive and temporarily slow down innovation, but that would allow Amplitude's competitors to run over it. Therefore, this cash burn needs to turn around as soon as possible.
At 11 times sales, this company is trading at a bargain. While that is appealing for a fast-growing tech company, it shouldn't distract you from what it needs to do to improve before it is an enticing investment. Although this business has impressive potential, it has to continue succeeding while making a few tweaks to its business before it looks like a buying opportunity. If it can continue to grow while it expands its product offering and improves its cash flow, I would quickly become much more interested in this company. Until then, however, I will wait optimistically for the company to make those improvements.