Amplitude (AMPL -2.02%) stock popped on its second-quarter earnings report Thursday as the digital-optimization specialist delivered some of its best results since its went public nearly a year ago. The software as a service (SaaS) stock finished the session up 12.7% as it posted strong revenue growth and raised its guidance for the year. Among the highlights were:

  • Revenue jumped 48% to $58.1 million, beating estimates at $55.2 million.
  • Paying customers increased 43% to 1,836.
  • It reported record free cash flow of $8.2 million in the quarter.
  • Its adjusted per share loss of $0.08 was ahead of expectations at a $0.12 per-share loss. 
  • Management raised its top-line guidance from between $229 million and $235 million to between $232 million and $236 million, and hiked its bottom-line guidance from an adjusted loss of between $0.41 and $0.39 to between $0.36 and $0.34.

Altogether, the results show that the company is outperforming expectations and managing well through a difficult macroeconomic environment. The quarter also puts the stock on track for a rebound after it plunged earlier this year when it cut its guidance for 2022.

1. Growth fears were overdone

The stock crashed in February after the company stepped back from its 2022 guidance of growing revenue by at least 40%. However, after 54% revenue growth in the first half of the year, 40% full-year growth seems very achievable. Amplitude's top-line guidance now calls for 40% growth at the midpoint, and that forecast is likely conservative as the company surely wants to avoid lowering or missing its forecast again.

Amplitude's land-and-expand model is delivering results. Not only did its customer base increase by 43%, approaching 2,000, but its dollar-based net retention rate, a measure of how much existing customers are increasing their spending, rose 126% compared to 119% in the quarter a year ago. That figure encompasses the last four quarters, and CFO Hoang Vuong warned that it would decelerate in the coming quarters as earlier high-growth periods become part of the comparable base. Still, the company said on the earnings call that it expected to deliver net retention of at least 120% over the long term as it introduces new products and has a large addressable market to grow into.

2. Cash flow is improving

With record free cash flow in the quarter at $8.2 million, Amplitude actually delivered a free cash flow margin of 14.3%. This was actually the third time Amplitude reported positive free cash flow in a quarter, though it was by far the biggest. 

Part of the reason for the record free cash flow, according to Vuong, was that the company brought in $10 million from an early renewal expansion that it would have normally expected to get in the third quarter. Getting that cash in early still benefits the business, though.

On the income statement, its losses are still expanding, but management stressed that the company is growing the business mindfully and keeping an eye on spending. Vuong and CEO Spenser Skates stressed on the call that Amplitude has never been a "grow-at-all-costs" company, and it's taking a balanced approach to hiring and investment.

That should reassure investors that profit margins should hit an inflection point where they start improving soon.

3. The product is sticky

Amplitude's revenue growth in the quarter should brush off concerns that the company is being impacted by the macroeconomic environment or fears of recession. The company did acknowledge a modest headwind in its guidance from the economic slowdown, especially as a number of its customers are start-ups, Covid beneficiaries, or in crypto. However, the evidence from its customers is that Amplitude's software is a key tool for them to grow their business and improve their return on investment (ROI).

Skates said on the call that customers often tell the company that Amplitude's product analytics software is "mission-critical." He also noted that one of Amplitude's customers had announced a hiring freeze but still increased its spend on Amplitude, showing how important the software is to its success.

Amplitude's results in the quarter and that kind of feedback from customers show that the company can thrive even when businesses are pulling back on spending.

Amplitude is a fast-growing leader in a new industry -- digital product analytics. The company is currently worth $2 billion and trades at a price-to-sales ratio of 9, meaning it has considerable upside potential if it can continue to grow the business, roll out new product, and take market share from traditional marketing analytics products like Google Analytics.

Though the market may still be skeptical of the stock after it's sell-off earlier this year, the fundamentals are solid and the future opportunities are promising. If the company continues to execute like it did in the second quarter, the stock should be a winner.