Description

Amplitude (AMPL) is a product analytics solution used by product managers and growth teams. The company is positioning itself as the platform for product managers in the same way that Salesforce is the platform for salespeople and Adobe for marketers. They claim to be riding the product-led-growth tailwind and are used by digital leaders like Atlassian, Peloton, Doordash, Instacart, Shopify, and Twilio while also breaking into the digital arms of legacy companies (Toyota, Goldman, NBC Universal, Disney etc). 

Amplitude competes with legacy analytics solutions like Google Analytics and Adobe’s Omniture, venture-backed companies like Heap, Pendo, and Mixpanel, and custom in-house solutions. 

This is a software short based on a softening business and doesn’t even mention the typical software bear cases - higher rates, high SBC, inability to generate GAAP profits for shareholders. 

The short thesis hinges on a few key points:

1. Amplitude’s core analytics product is decently penetrated in its three key end-markets (SaaS, eCommerce, Media), which are entering a severe contraction post-COVID

2. New product / upsell growth comes from unattractive and highly competitive segments where Amplitude has questionable competitive positioning (Experiment, CDP)

3. Leading indicators of growth are stalling, suggesting downside risk even to my estimates

I estimate Amplitude will do ~$298M in 2023 revenue growing 25% with minimal Non-GAAP operating losses, thus trading for ~6.3x 2023 revenue ($1.9B EV). These estimates are potentially high and I expect growth to continue to decelerate in 2024 and 2025 with little margin expansion. Amplitude has 30-50% downside and should significantly underperform its software peer group. 

History

Amplitude was founded in 2014 by Spenser Skates (CEO), Curtis Liu (CTO), and Jeffrey Wang (Chief Architect). Spenser and Curtis went through YC in 2012 with a different idea, but pivoted to Amplitude (and brought on Jeffrey) when they realized the analytics tool they built to track user behavior was the real crown jewel. 

The company raised $150M from Benchmark, Sequoia, Battery Ventures, IVP and others before raising another $150M in a June 2021 pre-Direct Listing raise (~$300M total raised). They were a Silicon Valley darling - scaling quickly to $68M in 2019 revenue by selling to many other VC-backed companies. They gained many of their early customers by undercutting Mixpanel - a formerly high-flying competitor - on price as Mixpanel lost focus on core product analytics. Amplitude’s three primary verticals are SaaS, eCommerce, and Media. 

They are a pioneer behind the “product-led growth” movement where product teams hyper-optimize their digital funnels to move customers further along in their journey. Atlassian is considered the leader in PLG and is a large (likely the largest) Amplitude customer. Atlassian famously went public without any sales people and drove business through an Amplitude-assisted optimization of a free-to-paid funnel as well as deep understanding of which user actions predicted customer success or churn. 

Amplitude charges based on “event volume” which is a combination of (i) how many metrics the customer wants to collect and (ii) how much digital traffic or product usage the customer expects. To Amplitude’s credit, their customer list is a who’s who of tech and media: Atlassian, Shopify, Hubspot, Cloudflare, Paypal, Instacart, Square, NBC Universal, Disney, FanDuel, BeReal, and others.   

Skates has said several times that in order to hit $1B in revenue, software companies must become multi-product platforms. In mid 2021, Amplitude launched Experiment, an experimentation solution similar to Optimizely, and Recommend, a personalization engine, that is now part of the Amplitude CDP offering. 

Experiment is a logical product adjacency: the point of capturing usage data is ultimately to make product changes that drive “better” usage. Experimentation is a big market in that every digital company is constantly running experiments, but Optimizely never built a successful business and most of the space is custom-built. 

Recommendations (and now CDP) are also logical adjacencies, though it’s not obvious that Amplitude’s “also-ran” CDP will attract serious customers. 

On the latest earnings call (Nov 2022), the company disclosed that these combined products are now $10M in ARR.  

The company went public via Direct Listing in September 2021 - the CEO is a very outspoken leader opposed to IPOs. They bungled the first few quarters with poor communication around billings and a failure to raise their initial 2022 guidance given in September 2021, which everyone (wrongfully) assumed was sandbagged. 

Growth Stalling

ARR growth is decelerating as Amplitude laps the COVID digital boom. Amplitude had two exceptional quarters in mid 2021 (right before the direct listing) due to some large renewals and pull-forwards from customers like Atlassian. Other than that, the company has been adding ~$15M of ARR per quarter for 2 years now (left) as sales efficiency worsens (right). 

There are several reasons for the growth stall which I expect to all worsen in 2023. 

First is the lapping of the COVID digital boom, which is only just starting to hit the numbers. Amplitude’s three main segments are SaaS, eCommerce, and Media (incl streaming services), which are all deeply in “recession.” Amplitude’s contracts are ~98% ratable based on pre-committed event volume, meaning most customers are currently paying for volume they committed to in 2H 2021 or Q1 2022. As the Instacarts / Doordashes / streaming services / Shopify’s renew in a post-COVID world, I would expect many to reduce their commitments. Some may even try to bring the functionality in-house as Twitter did earlier this year (a large ~$3M customer). Amplitude is probably the company most indexed to the VC-backed digital boom of the past decade, other than maybe Silicon Valley Bank. This is why billings grew 5% YoY in Q3 (though management noted some questionable puts and takes that may bring billings up into the teens).  

The core Analytics product is almost ex-growth. Given their disclosure of $10M in ARR from new products, we can estimate the amount of revenue from core analytics alone. Assuming a ramp from $0.1M in Q3 2021 to almost $2M in new-product revenue in Q2, we get to QoQ Analytics growth of ~3%, or 10-15% annualized. Upsell from new products is a legitimate business - so those dollars count - but I don’t know of any true software platforms where the core product fell to 10-15% growth at ~$250M ARR. The new products are also questionable at this point given the lack of success for other players in that market. 

Second, net new customers are slowing (see below).

This is particularly concerning given Google Analytics is sunsetting its Universal Analytics 360 product and Amplitude’s most fruitful source of replacements is under stress (originally sunsetting in October 2023 pushed to July 2024). In Q3, more than 25% of Amplitude’s lands had Google Analytics as an incumbent solution. This might persist for a few more quarters, but eventually the Google Analytics exodus will subside. 

Third, much of the company’s growth is international (40% of total revenue growing 52% YoY) but the company bills in US dollars. Given revenue is ratable and largely on upfront contracts, most European or APAC customers will face a much more expensive bill on renewal - and new customers are also facing higher effective Amplitude prices. The US business grew only 5.3% QoQ in Q3 (~23% annualized), and I would expect international growth to come down materially in the next few quarters. 

Fourth, the company recently saw a ton of employee turnover, particularly in GTM. This is not entirely unexpected given they recently hired Thomas Hansen as President (formerly UiPath), Lambert Walsh as Chief Customer Officer (DocuSign), and Tiffen Dano Kwan as Chief Marketing Officer (Collibra). Notable departures include:

Sales: SVP WW Sales (April), VP Americas (May), VP Southern Europe + Middle East + Africa (October), VP APAC and LATAM (Sept)

Marketing: CMO (January), VP Global Marketing (March), VP Corporate Marketing (Sept), VP Product Marketing (Oct 2022)

Notably, all of the Marketing leaders departed before the new CMO - so it was not just a cleaning-of-house. 

The company seems to be experiencing high employee attrition in general. If you just look at the total LinkedIn employees and monthly hires, you can estimate the monthly employee attrition rate (below). Average annual attrition seems to be at ~30% in 2022 compared to ~20% in 2021. Most in the industry are reporting lower attrition recently as the economy wobbles. 

Forecast

I estimate growth will slow to the mid-to-high 20s next year and low 20s in the subsequent years. 

With a current EV of ~$1.9B, the company trades for ~6.3x 2023 revenue. 

Risks

The first risk to this short is if inflation cools, interest rates come in, and software multiples generally inflect upwards. Macro is driving software right now, so Amplitude is best as a short in a portfolio of other high-duration longs or as a more tactical short around earnings when numbers are likely to disappoint. 

The second is M&A risk given. Thoma Bravo recently paid 4.8x 2023 revenue for UserTesting, so could always pay 7x for Amplitude. I think it’s unlikely given there are now dozens of companies in that price range and Amplitude is unlikely to sell (strong-minded, young CEO). 

Adobe is a logical acquirer, but unlikely to do so given the Figma deal. Salesforce is in the M&A penalty box and Amplitude would not be a top priority. Twilio could have been an acquirer to pair with Segment, but they also have other issues. 

M&A is always a possibility in software, but I think it’s unlikely given a young founder and deteriorating business. 

Last, this could be a trough in the business and growth accelerates exiting 2023. I think this is unlikely. SaaS is only just starting to crack down on expenses. Most digital disruptors will soon have to cut costs (Carvana, Instacart etc) and I would guess that product managers and point-solution software tools are on the chopping block. 

Catalyst

2023 guide in February