Amplitude's Direct Listing: What It Reveals About Growth & Value

Amplitude's Direct Listing on Nasdaq

Amplitude is preparing to become a publicly traded company through a direct listing. Its shares will be available for trading on the Nasdaq stock exchange under the ticker symbol “AMPL.” The initial announcement regarding this direct listing was made in July, with the S-1 filing submitted in August.

The company, headquartered in San Francisco, identifies several key shareholders in its S-1 filing. These include Battery, Benchmark, IVP, Sequoia, and Jasmine Ventures. Each of these investment firms holds at least a 5% stake in Amplitude.

Analyzing Amplitude’s S-1 Filing

Similar to recent analyses of IPO filings from companies like Freshworks and Toast, a detailed examination of Amplitude’s S-1 document is now underway.

A central question is the rationale behind the company’s decision to pursue a direct listing rather than a traditional initial public offering that includes raising capital. Understanding the company’s vision for the future is also crucial.

Product Thesis and Future Growth

Amplitude’s core product strategy effectively outlines its anticipated long-term expansion. Investor valuation will be significantly influenced by whether the financial markets align with Amplitude’s projections for the evolution of technology.

A thorough assessment of the company’s revenue streams and their quality will be conducted. This will be followed by an evaluation to determine a potential valuation for Amplitude.

The analysis will cover key aspects of the business, aiming to provide a comprehensive understanding of its financial health and future prospects.

Amplitude’s Fundamental Product Philosophy

Typically, S-1 filings are laden with corporate jargon that I avoid subjecting you to. We don’t necessarily need to discuss a specific vertical SaaS company’s belief in the potential of its chosen market. Their perspective is already inherent. However, in the case of Amplitude, a more detailed examination is warranted.

Amplitude markets what it defines as “digital optimization” software. Essentially, this software assists other organizations in developing superior software products.

The company posits that the methodology for building digital products has undergone a significant shift. The era of relying on gut feelings regarding digital design choices is waning, according to their assessment. Instead, Amplitude anticipates that companies offering digital products will increasingly prioritize data-driven decision-making. As stated in their filing, digital product design is transitioning from a “Mad Men” approach to a more “Moneyball” oriented strategy.

Data is central to Amplitude’s vision of how companies will design future products. However, they observe that many organizations currently depend on a fragmented suite of software tools to gather data regarding their digital presence. Amplitude believes it offers a more effective method for collecting and analyzing digital user data.

For its clientele, Amplitude provides a database product – the “Amplitude Behavioral Graph” – to collect and organize behavioral data. This data then feeds into its product analytics service, “Amplitude Analytics.” This product constitutes the primary source of Amplitude’s revenue, as detailed in its S-1 filing. The document also outlines several risk factors.

What functionalities do the newer products offer? Amplitude Recommend assists customers in refining product design based on observed user behavior, while the Experiment product facilitates A/B testing and phased feature rollouts. In essence, the company’s database gathers user data, its analytics product interprets it, the recommend product enables data application, and the experiment product supports idea validation.

My overall assessment is that the core principle driving Amplitude is valid: data will increasingly influence product decisions within digital companies, and specialized tools will be necessary to empower businesses of all sizes in making these decisions. Nevertheless, this doesn’t automatically guarantee Amplitude’s success; the company faces considerable competition from players like Mixpanel, Heap, and Pendo, among others.

These competitors have collectively secured $500 million in funding, according to Crunchbase data.

Therefore, let's analyze how effectively Amplitude’s product vision is performing in the current market.

Financial Performance Overview

Amplitude reports its revenue as a unified figure, differing from certain software businesses that categorize their income streams. However, considering that the vast majority of Amplitude’s revenue originates from a single software offering, it’s reasonable to conclude that its revenue is predominantly derived from SaaS income.

Between 2019 and 2020, Amplitude experienced revenue growth from $68.4 million to $102.5 million, representing an increase of 49.8%. Focusing on more recent data, revenue climbed from $46.0 million in the first half of 2020 to $72.4 million in the corresponding period of 2021.

Revenue Growth Trajectory

This translates to a growth rate of 57.2%. Amplitude is demonstrating an acceleration in revenue growth during 2021 when compared to the previous year, which coincided with the initial stages of the COVID-19 pandemic. Sustaining growth exceeding 50% at its current scale is noteworthy.

An accelerating growth rate above 50% is particularly encouraging, and the strength of Amplitude’s top-line expansion likely contributes to its decision to pursue a direct listing. Companies typically seek to go public when their key metrics are robust.

Profitability Concerns

However, not all of Amplitude’s financial metrics are positive. The company’s gross margin decreased in the first half of 2021, falling from 71% in the year-ago period to 69%. Despite revenue growth, Amplitude reported net losses in 2019, 2020, and the first half of 2021.

Furthermore, after recording net margins of -24% in 2020, Amplitude only achieved a 1-percentage-point improvement to -23% in the first two quarters of 2021. A more substantial improvement in operating leverage would generally be expected.

Adjusted Profitability Analysis

Examining adjusted profit metrics reveals that the profitability challenges persist. Amplitude’s non-GAAP operating income deteriorated in the first half of 2021 to -$7.4 million, or -10%, compared to -6% for the entirety of 2020.

Rapidly expanding companies often prioritize capital investment for growth, and Amplitude’s losses are relatively modest when compared to some competitors. While these losses are not ideal, they represent a manageable concern rather than a critical threat to the company’s viability.

Understanding Amplitude's Direct Listing Strategy

As Amplitude prepared for its S-1 filing, the decision to pursue a direct listing rather than a traditional Initial Public Offering (IPO) sparked considerable interest. Examining the company’s cash flow performance may provide insights into the rationale behind this choice.

The following analysis illustrates a key point: Amplitude’s operational cash burn remains minimal. Specifically, the company demonstrated a stabilization of cash usage from operations during the latter portion of 2020. A return to cash consumption was observed in the first half of 2021, but these figures remain relatively small in relation to the company’s growing revenue.

A significant detail is visible in the lower right corner of the provided data – a substantial $180 million cash injection. According to Crunchbase, this influx stemmed from a $150 million Series F funding round spearheaded by Sequoia, which established the company’s valuation at approximately $4.15 billion.

Rather than seeking capital through an IPO, Amplitude opted to secure funding from its current investor base prior to the direct listing. This sequence of events – a recent funding round followed by a swift direct listing – creates an interesting scenario. It allows for a future assessment of Sequoia’s investment if Amplitude’s market capitalization surpasses $4.15 billion upon its public debut.

It’s important to remember that an inaccurately priced IPO remains a mispricing, regardless of whether the company determines its price independently before a direct listing or utilizes banks to ascertain its valuation during an IPO process. Therefore, the question arises: did Sequoia accurately assess Amplitude’s value, or were they off in their estimation?

• Key Takeaway: Amplitude's minimal cash burn allowed for a direct listing.
• Funding Round: A $150 million Series F led by Sequoia valued the company at $4.15 billion.

Further investigation into the company’s financial metrics will be necessary to determine the success of Sequoia’s investment and the overall effectiveness of Amplitude’s direct listing strategy.

Determining the Value of Amplitude

Before delving into pricing considerations, a few additional points are worth noting. For those following along who are interested in SaaS metrics, Amplitude reported the following regarding its net retention rate:

This figure is quite positive and demonstrates an upward trend. Now, let's examine the breakdown of revenue by geographic region:

These data points suggest that Amplitude is increasingly successful in generating revenue from its existing customer base. This could signify that its newer product offerings are contributing to growth. This is a positive indicator. Furthermore, the company’s international revenue performance appears strong, suggesting Amplitude’s potential for global expansion and a larger total addressable market.

We have no significant concerns regarding the company’s growth trajectory. With this understanding, let’s review some key figures:

• Amplitude’s Q2 2021 revenue totaled $39.3 million.
• The annualized run rate is $157.0 million.
• The implied revenue multiple based on the final private valuation is 26.4x.

Amplitude’s growth rate is slightly above that of the top quartile of publicly traded SaaS companies, which stands at 44% according to Bessemer. These comparable companies are currently valued at approximately 28x revenue. Therefore, we can reasonably expect Amplitude to maintain or exceed its final private valuation upon its public debut.

A case can be made for Amplitude deserving a somewhat higher revenue multiple, considering its limited losses and accelerating growth. Should this be the case, the price paid by Sequoia in the last funding round may appear undervalued in light of a revised, higher valuation.

The greater the difference between the price Sequoia paid for Amplitude shares and the initial trading price, the more significant the insight gained from Amplitude’s direct listing. Even a modest premium to the Sequoia deal would suggest that venture capital firms are no more adept at accurately valuing private companies than investment banks during a traditional IPO.

It’s understandable to point out that venture capital firms naturally seek a quick return on their investments. However, this doesn’t necessarily mean that Amplitude’s decision to pursue a direct listing, rather than a traditional IPO, does anything beyond shifting value between affluent parties.

Further analysis will be possible once a reference price is established.