Amplitude is going public in a direct listing that will see its shares trade on the Nasdaq under the ticker symbol “AMPL.” The company first announced its intention to direct list in July and filed its S-1 document in August.
The San Francisco-based startup lists major shareholders Battery, Benchmark, IVP, Sequoia and Jasmine Ventures in its S-1 filing. Each of those investors owns at least 5% of the company.
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Following our digs through recent IPO filings from Freshworks and Toast, this morning we’re taking a spade to Amplitude’s document.
We’re curious why the company is direct listing instead of raising capital in its debut. We also want to understand how the company sees the future, because its product thesis is essentially a roadmap to its long-term growth; how investors value the company will in part hinge on whether Wall Street agrees with where Amplitude sees technology heading.
And we’ll do our usual work to understand the company’s revenue mix and quality, wrapping with some noodling on what it may be worth. Sound fun? Good. Let’s get into it.
Amplitude’s core product thesis
Most S-1 filings are full of corporate babble that I don’t drag you through. After all, we don’t really need to chat about how a particular vertical SaaS company thinks that its chosen niche is a great market. You already know what the debuting concern thinks. But with Amplitude, I want to do a bit more.
Amplitude sells what it calls “digital optimization” software. In practice, that means its software helps other companies design better software.
The company thinks that the way that digital products are built has changed. Gone are the days, in its view, of trusting intuition when it comes to digital design choices. Instead, Amplitude expects that companies with digital products will instead lean on data-driven decision-making. Or as it phrased it in its filing, digital product design is leaving the “Mad Men” phase for a more “Moneyball” era.
Data is at the core of how Amplitude sees companies designing future products. But in its view, many companies currently rely on a collection of disparate software tools to collect data on their digital footprint. Amplitude thinks it has a better method of collecting digital user data — and learning from it.
For customers, Amplitude has a database product to collect and sort behavioral data (“Amplitude Behavioral Graph”) that feeds information into its product analytics service (“Amplitude Analytics”). That product is the core of the Amplitude revenue base, the company says in its S-1 filing. Per the document’s list of risk factors:
Although we recently released our Amplitude Recommend and Amplitude Experiment products, we currently derive, and expect to continue for some time to derive, substantially all of our revenue from our Amplitude Analytics product. As such, the continued growth in demand for and market acceptance of Amplitude Analytics is critical to our success.
What do the newer products do? Amplitude Recommend helps customers change product design based on observed user behavior, while the Experiment product allows for A/B testing and segmented feature releases. Simply: The company’s database collects user data, its analytics product parses it, the recommend product helps customers put the data to use, and the experiment product helps them test different ideas.
My general view is that the thesis behind Amplitude is correct, that data will power product decisions among digital companies, and that tooling will be required to help businesses of all sizes make product decisions. But that doesn’t mean that Amplitude is a slam-dunk; the company has stiff competition, including Mixpanel, Heap and Pendo, among others. Those three companies have raised a half-billion dollars, per Crunchbase data.
So, let’s see how well Amplitude’s product vision is performing in-market.
Financial results
Amplitude reports revenue as a single block, unlike some software companies that break their top line into several categories. But, as we’ve already noted, Amplitude generates “substantially all” of its revenue from a single software product, so we can infer that its revenue is pretty purely SaaS incomes.
From 2019 to 2020, Amplitude grew from $68.4 million in revenue to $102.5 million, or 49.8%. Narrowing our time range to the most recent periods, Amplitude grew from $46.0 million in H1 2020 revenue to $72.4 million in the first two quarters of 2021. That works out to 57.2% growth.
Amplitude is showing accelerating revenue growth in 2021 compared to its year-ago results, which came during the early COVID-19 era. A growth rate of greater than 50% at scale is impressive; a growth rate above 50% that is accelerating is even better, and given the strength of Amplitude’s top-line expansion, it isn’t hard to see why the company is choosing to direct list. You want to float when you have a strong set of metrics.
But not all metrics at Amplitude are so edifying. The company’s gross margin slipped in the first half of 2021, from 71% in the year-ago period to 69%. And despite its top-line growth, the company posted net losses in 2019, 2020 and H1 2021. Even more, after posting net margins of -24% in 2020, Amplitude only managed a 1-percentage-point improvement to the metric in the first two quarters of this year.
We’d generally hope to see a bit more operating leverage than that.
Turning to adjusted profit metrics, the profitability issue doesn’t relent. Amplitude’s non-GAAP (adjusted) operating income worsened in the first half of 2021 to -$7.4 million, or -10%, from -6% in all of 2020. But quickly growing companies often invest capital to grow, and Amplitude’s losses are modest in comparison to some peers, so while we don’t love to see its losses as they are, they are more vexing quibble than existential question.
Why direct list?
Heading into the Amplitude S-1, I was more than curious about why the company chose to direct list. Let’s see if its cash flow results can help explain:
Image Credits: Amplitude S-1
This is illustrative. Cash burn from operating activities at Amplitude is slim. Notably, it appears that Amplitude’s cash consumption from operating activities was essentially flat in the second half of 2020, and it returned to cash consumption in H1 2021. But as with the company’s losses, the negative numbers are modest when compared to the company’s expanding revenue base.
And then, in the bottom right of the table, we see the key metric: a nearly $180 million cash infusion. Crunchbase has that round listed as a $150 million Series F that Sequoia led, valuing the company at around $4.15 billion.
Instead of raising capital in its IPO, then, Amplitude chose to raise from its existing investors before direct listing. That puts us in a fun situation, as the recent round followed by a quick direct listing means that we’ll be able to mock Sequoia if Amplitude winds up worth more than $4.15 billion when it floats.
After all, a mispriced IPO is still a mispriced IPO, even if the company going public decides to price itself with private money right before a direct listing or during its IPO using banks to help it discover its valuation. So, did Sequoia overpay? Underpay? Let’s tinker.
What’s it worth?
A few more notes before we talk price. For the SaaS fans along for the ride this morning, here’s what Amplitude had to say about its net retention:
As of December 31, 2019 and 2020, our dollar-based net retention rate across paying customers was 116% and 119%, respectively.
That’s pretty good, and going in the right direction. Now, regarding geographic revenue mix, what do we know? The following:
For the year ended December 31, 2020 and six months ended June 30, 2021, 36% of our revenue was generated outside the United States.
These two data points tell us that Amplitude is seeing more success over time selling its wares to its existing customers, which could indicate that its newer products are helping it grow. That’s bullish. And the company’s international revenue results are, in my view, pretty solid, hinting that Amplitude will be able to sell globally, potentially expanding its TAM.
We’re not growth-concerned when we talk about the company. With that context, some numbers:
- Amplitude Q2 2021 revenue: $39.3 million.
- Annualized run rate: $157.0 million.
- Implied revenue multiple at final private valuation: 26.4x.
Amplitude is growing a bit quicker than the top-quartile of public SaaS companies (44%, per Bessemer). Those companies are trading at around 28x revenues. We can infer, then, that Amplitude should at least be able to defend its final private price when it does debut.
It isn’t hard to argue that Amplitude should command a slightly higher revenue multiple, given its modest losses and accelerating growth. If so, the price that Sequoia last paid will retreat in the face of a new, higher valuation for the company.
The further that the price that Sequoia paid for Amplitude shares a few months ago slips compared to its first trading price, the clearer a data point Amplitude’s direct listing will prove; if it trades for even a moderate premium to the Sequoia deal, the result will indicate that VCs are no better at giving private companies fair value for their pre-IPO shares than bankers in a traditional public offering process.
And if you are protesting under your breath at the moment that of course a venture capital firm wants to make a quick return on its investment, sure. But that doesn’t mean that Amplitude will have done anything by direct listing over a traditional IPO beyond moving the value transfer from one wealthy group to another.
Regardless, more when we get a reference price.