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The Good, The Bad, and The Ugly: Amplitude & Affirm
Diving deep into the earnings results from two of my long-term holds.
It’s so interesting to me to see how quickly the market can change its mind.
One day, Affirm is worth $34 billion — trading at 44X next twelve months (NTM) revenue expectations. Another day, Affirm is worth $12 billion — trading at 9X NTM revenue expectations. Then somewhere in between, the company bounces around between the $20 billion and $47 billion range given customer (Amazon, Target, etc.) adoption.
Same thing with Amplitude — one day the company is worth $6 billion, then $9 billion a few weeks later, then $3 billion a few months after that.
However, despite these violent movements to the upside and the downside, it’s important to remember the intrinsic value of these businesses continues to climb.
In this post, I’m going to walk everyone through the earnings results of Amplitude (AMPL) and Affirm (AFRM) — as well as try to make sense of all of the volatility.
Amplitude (AMPL)
Well, easy come — easy go. Here’s a post I shared a few months ago. Amplitude ran +70% in three weeks and I had been pitching them to you just before the move. After sharing this post detailing my playbook for the looming bear market around late-December when the indices were still hitting all-time highs, I then identified Amplitude as a “moonshot” stock given their market cap and limited trading history.
I have no clue what these stock prices will be in 5 years — and to pretend like I do is simply irresponsible. But, as stated by Warren Buffet in the video above, it’s my job as an analyst to best value a stock as if it were a bond.
There are countless events and circumstances that impact this — including unforeseeable macroeconomic events, political powers, and investor sentiment.
I cannot predict when, if, or how much the above mentioned will move up or down the prices of the companies I’m about to mention. I can, however, predict their free cash flows — and therefore what their stock prices theoretically could be.
This category of companies is called “Moonshots” for a reason.
Amplitude certainly is exhibiting “moonshot” behavior — let’s dive deeper into the earnings results as well as my decision for investment moving forward.
Q4 Earnings Results —
Q4 Revenue: $49.4 million (+64%)
2021 Revenue: $167.3 million (+63%)
Current RPOs: $137.3 million (+60%)
Number of Paying Customers: 1,597 (+54%)
Dollar-based Net Retention Rate: 123%, compared to 119% last year
The company released the names of some of their biggest wins from a customer perspective — including Taco Bell, Toyota, Twilio, HBO, Canva, and others.
The Good:
The company’s quarterly revenue results were above analyst expectations by a few million dollars. Their dollar-based net retention rate continued to expand. They reported an EPS a few cents better than analysts expectations, primarily driven by their operating margin being twice as high as expected.
They continued to aggressively increase their enterprise customer count (+54%), as well as Fortune 100 customer count (26 of 100 now use Amplitude). For example — Toyota (world’s largest auto manufacturer & #9 in Fortune Global 500) began using Amplitude to better understand how users engage with Toyota and Lexus apps.
G2’s 2022 Best Software Awards ranked Amplitude as #3 Best Software Product Overall. The G2 Winter 2022 Report ranked Amplitude as the #1 Product Analytics Solution for the 6th quarter in a row, as well as #1 in Mobile Analytics.
Ended the quarter adding 385 customers paying $100K or more (+47%), with 29 of these customer paying $1M or more (+93%).
Gross profit margins expanded slightly from 71% to 72% during the quarter. They’re also expecting Q1 2022 revenue growth of +53%.
The Bad:
The company guided to +37-40% revenue growth for the entire year of 2022. This was generally in-line with my +35-45% range, but lower than some analyst expectations. Their operating margin is likely to continue suffering, given their massive investments back into the business (R&D and marketing) over the coming 9-12 months. This will include their AMPLIFY summit in May.
The Ugly:
The company’s stock price quickly plummeted after releasing this information — primarily because analysts were shocked their management team would guide to only +37-40% YoY revenue growth.
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Conclusion —
So here’s the deal — the earnings call transcript makes it incredibly clear that Amplitude’s management team is simply guiding conservatively. Their customers don’t just sprint to the $1M / year spending category overnight. In the cases of A&E or Venmo, it takes 2-3 years before Amplitude is able to really pull them up to that category.
To quote their CEO..
“The precise timing of these expansions can fluctuate. A great example of that is call it Venmo in PayPal. So Venmo has been a customer with us for a really long time. And then when they got acquired by PayPal, it took a few years for PayPal to adopt the religion of digital optimization of data-driven product.”
Analysts saw this +37-40% guidance as “Oh no, Amplitude’s growth is slowing. There must be something wrong.”
Not exactly. Amplitude is expanding its core customer base, while also stretching the relationships in more meaningful ways. Again, I have no idea what Amplitude’s stock is going to do in the coming year or two — but they’re currently only a $1.5 billion market cap company.
This in bonkers to me. The #1 product analytics company used by 26 of the Fortune 100 companies (among countless others) is being valued by the market at less than 6X revenue. Maybe this is contrarian and might upset some readers, but if Amplitude can disrupt and grow the way I believe they can by the end of the decade — there’s no reason they won’t become a $20-25 billion market cap company.
Assuming they grow revenue by only +30% for the rest of the decade — they’ll do around $2 billion in 2030. Apply a 6X multiple and you’re at $12 billion, a reasonable “technology” 10-12X multiple and you’re at $24 billion.
After composing this piece, I truly realized just how much of the world is going digital — cloud businesses grew by +43% last year. It’s impossible for me to imagine a world where the globe goes digital, but the enterprises don’t care about their digital products. It’s just not going to happen — of course they care. Toyota cares. Twilio cares. Taco Bell cares. Wealthfront cares. The list is endless.
I’m buying the dip — will likely invest another $1,500 or so and continue to expand my position until the company’s fundamentals tell me otherwise. At the moment, all I’m seeing is fundamental momentum and a drunken psycho stock market. Amplitude is not a loser, Spenser Skates is not a loser, and betting on digital is not a losing bet.
Don’t get me wrong — Amplitude’s stock will remain range bound likely through the rest of 2022 and perhaps even into 2023 depending on the macroeconomic environment. It’s going to take a lot of investor confidence to boost this stock price back to historical prices driven primarily by a better guidance profile.
Isn’t it crazy that this company raised $150 million in funding from some of the best venture capitalist firms at a valuation of $4 billion just 6 months ago? And now after adding incredible customers and expanding their margins — they’re worth only 35% of that. Unbelievable.
12-mo WS PT: $36 / share
Affirm (AFRM)
Being an Affirm shareholder has been like having a crazy girlfriend — one day things are amazing, the next day she hates you. A week after that everything is fine again, then a few days later you’re back in the dog house.
Affirm became a Mid-Cap holding at the beginning of the year — which meant ~1% portfolio weighting.
Before we break down the results, I encourage you to check out this video. It’s a fantastic interview — Affirm’s CEO outlined exactly what the company is focused on.
Q4 Earnings —
Revenue: $361 million (+77%)
Revenue less Transaction Costs increased +93% YoY
Active Customers: 11.2 million (+150%)
Transactions per Active Customer: 2.5 (+15%)
Quarterly Transactions: 12.2 million (+218%)
Gross Merchandise Volume (GMV): $4.5 billion (+115%)
Active Merchants: 168.0 thousand (+2,030%)
The company released additional data on their enterprise customer base — I’ve attached a screenshot below.
The Good:
Revenue came in $32 million higher than expected. Gross merchandise volume came in nearly $1 billion higher than expected.
Customers continue to make more transactions on their platform — repeat consumer transactions are up +240% from 2.7M to 9.2M during this most recent quarter. Folks continue to flood their platform, specifically from a point of sale perspective (above). The delinquency rates on these transactions are ~2%.
The company processed 1.6% of all US online transactions during Black Friday and Cyber Monday — a 2X increase when compared to last year. Affirm is now present on sites that account for more than 50% of all US e-commerce transactions.
They’ve begun to rollout their Debit+ Visa debit card to those on the waitlist and have already started seeing transactions skyrocket on the card — a great sign for customer retention over the long-term.
They launched their BNPL services in Australia — growth is accelerating. Their Canadian business tripled in size.
Completed their initial rollout with Amazon in November. No single merchant, including Peloton, accounted for more than 10% of all GMV during the quarter. Travel and ticketing GMV in particular increased +314% YoY, even during the quick emergence of the Omicron variant in Q4.
Affirm’s expenses grew only +63% while revenue grew +77%. Transaction costs as a percent of total GMV declined -1.9% (a good thing).
Affirm doubled their headcount to over 2,000 employees.
Lastly — a quick note on interest rate hikes. As interest rates rise, so do the interest payments folks have on their credit cards. Considering Affirm is a credit card alternative, the macroeconomic environment we’re entering is favorable for the company.
The Bad:
From what I’ve read, the company’s non-Shopify GMV will only come in around +35% higher during 2022 — which is supposed to include the Amazon partnership. This is dramatically lower than original expectations.
Affirm still values customer growth over profit — which is both a good thing and a bad thing. I’m putting this in the “bad” category given profit is what the market seems to only care about at this time.
Expenses (i.e. marketing) will likely continue to ramp up as the space becomes more crowded.
The Ugly:
The company’s stock price is now at 52-week lows, back to IPO levels. Affirm’s stock IPO’d at $49, opened at $98, swing up to $150, back down to $46, skyrocket higher to $175, and now back to $45.
This tells me one thing — the market has no idea how to price this company. Zero.
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In Conclusion —
As I stated before, being an Affirm shareholder has been one of the most frustrating experiences of my investing career thus far. The market refuses to cohesively price this stock in a reasonable fashion — an exact replica of the opening photo I shared in this post.
A stock price moving about wildly, while intrinsic value continues to climb over time.
In my opinion — Affirm’s CEO, Max Levchin, is a rockstar. He’s been building this company for a decade and understands the payment landscape like the back of his hand (PayPal Mafia). Buy Now Pay Later is still largely in its infancy. Affirm’s credit quality is excellent with delinquencies around 2%. The company will likely become breakeven within 2 years — 3 years if you’re conservative.
Affirm’s Debit+ will take share from traditional credit cards. Industry consolidation will benefit Affirm. The company will continue to grow aggressively as enterprise partners have proven that this company is the BNPL partner of choice — period.
With all of that being said, Affirm will likely continue to trade lower — perhaps into the $20s throughout this year as investor sentiment moves lower and valuation multiples compress.
It’s really interesting to think about this. Let’s do the math together.
If Affirm continues to grow like it has over the last decade — assuming a revenue growth of +30% CAGR isn’t absurd. That’s around $11 billion in annualized revenue by 2030. According to the interview on their investor relations website, it’s very clear that Max Levchin is focused on becoming FCF positive. There’s no reason a tech company with 52% gross profit margins (likely to expand by 2030) won’t print 20-25% FCF margins.
That’s nearly $2.5 billion in FCF or about $8 in FCF / share. There’s absolutely a world where the market assigns the “traditional” 35X multiple against this FCF resulting in a stock price around $300 / share.
10X in 9 years.
But nothing is guaranteed and I’m not going to pretend to be some expert in the BNPL space. I’ll expand my position in Affirm eventually, but not yet. I’m going to give them a few quarters to better explain their GMV guidance and prove their expansion throughout rate hikes. I’m not sprinting to the “buy” button just yet.
With that being said, wealth is built through concentration and preserved through diversification. At sub $30 / share, I’ll begin to accumulate a much larger position in this company in efforts to make a long-term bet on an industry in its infancy (BNPL).
12-mo WS PT: $100 / share
Sign-Off
I’m just a guy on the internet trying to make sense of all of this. As always, please share your feedback, suggestions, criticisms, and thoughts in the comment section below.
As an update — I haven’t bought or sold anything new from my portfolio. I have, however, continually increased my cash position. It now rests around ~7.5% of my entire portfolio. I still think the markets are headed lower for the coming 9-12 months, forcing several names to trade for pennies on the dollar.
Today, Friday (2/18), I plan to make several changes to my portfolio — keep an eye out for that post in a few hours.
I plan to stick to my long-term playbook of “buying businesses” as we experience these selloffs, while doing everything I can to build wealth from a tax-advantaged perspective as outlined here.
Build yourself a game plan and stick to it. Heck, reply to this email with it and I’d be happy to share my feedback. We’re all on the same team.
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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