AMPL...Time to Update the Rules?

AMPL – Another gut wrenching sell-off in a ‘newer’ position for the board.

I consider this an example of one of the “new” companies failing to provide much wealth building before being brought back to earth (compared to, say, DDOG, CRWD, NET, ZS which we’ve been in and out of a few times).

I lump Lightspeed, Upstart, Amplitude together, and possibly even ZoomInfo.

Growth investing is changing. It’s no longer a secret to chase high growth, and so it makes sense to start paying more attention to valuation to figure who’s in on the pyramid scheme. AMPL also is a good example of why newer ‘convictions’ should still stay small until several Prove-It quarters have elapsed.

Now I find myself wondering how “sure” I am about Monday and Sentinel One…

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My favorite post of all time on this board is Saul’s “Category Crusher” post. Datadog is certainly a category crusher. ZScaler is a category crusher. Snowflake is a category crusher. These companies have built products that promise to be fundamental underpinnings to the developing cloud that are entirely transformative and at least for now are simply unrivaled. Upstart could be a category crusher. But it is hard to know for sure.

Lightspeed and Amplitude never seemed like category crushers to me. They have good, fast growing products, but a category crusher is more than that. It is something that is just set to dominate.

Upstart and Zoominfo COULD be category crushers. It’s too soon to really know.

The board has discarded many companies that might be considered category crushers due to unsatisfactory metrics. MDB and CFLT spring to mind. I don’t like MDB or CFLT’s current metrics, but I would much rather hold them than LSPD or AMPL. I’m pretty sure MDB and CFLT will be thriving five years from now, and I’m not sure if the other two will even be around.

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What’s the point of SAAS subscription model, with guaranteed revenue & DBNRR eveb if 123% like for AMPL, when every quarter the stock fluctuate like this. I thought SAAS subscription means stability in revenue & growth ( translate into valuation) seems same story is repeating for ZI, LSPD, CRWD… how is 1 % low guidance leading to 40 % stock price cut off… seems we need to rethink this model.

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Growth rate is important.
Also important are: business model, target market, growth durability.

For new IPOs, as for several good quarters ER, there are some examples: MNDY, CFLT, DOCN all had at least two good quarters ER. CFLT’s last report disappointed the market but I think it’s seasonality.

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UrgentD,

The SaaS model is good for stability and having predictable/visibility into future revenue trends. This is why billings & RPO metrics are important to watch closely (see ZS/DDOG/NET). The SaaS model doesn’t guarantee sustained high growth. Although the high DBNRR’s do help for that, as it accounts for a decent amount of growth without even getting new customers.

The problem is last year towards the October-November timeframe almost every SaaS/cloud based software company had so much hot air/excess priced in that they were all being priced like they were the next Google/Amazon etc. Even the second rate ones that do not have the massive TAMs and extremely useful products/platforms were getting bid up like crazy. The FED’s shift in monetary policy has put a pin in those bubbles. Second rate software businesses that have eroding margins and are not showing leverage/accelerating growth are getting hammered left and right this earnings season. If there is any weakness in the report the stock price reactions have not been pretty (-15-30%). The ones that are surviving are showing strong/accelerating revenue growth and improving profitability metrics. I’m afraid MNDY’s stock price reaction won’t be pretty unless they show increasing margins AND strong growth above expectations.

Bnh

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BobbyBe,
I agree with most of your points.

I found Lightspeed confusing and difficult to understand. I was in it, then out of it, then back in it and unfortunately, still in it when they reported last quarter. Now I’m out of it never to return. I admit, I held a position in Lightspeed largely due to herd mentality - even though I found it difficult to understand, I figured with virtually all of the highly regarded members of this community holding a position, I didn’t have to have good grasp of the business.

That was misguided. I will endeavor to avoid that mistake in the future. If I really can’t follow it, I will trust my instincts rather than the actions of others. Saul continuously reminds us to do our own analysis. I got soft on this one. I got what I deserved.

OTOH, I had no trouble understanding AMPL, fortunately I kept my position quite small, but it was large enough for this market action to be painful. Oh well. At least I knew what I was getting into. And my position size was a reflection of my confidence level, pretty low.

MDB is another disappointment. I exited long ago, but it was with reluctance. I’m old enough to have watched Oracle start from nothing and grow into the dominant relational DBMS that it was (still is?). I was in IT at Boeing and watched its penetration and yet never invested in it. I saw MDB as playing the same movie for a different category of DBMS. The problem was that their performance as a business entity never achieved hypergrowth. MDB may eventually dominate it’s space, but that in and of itself doesn’t make it a good investment.

But with that said, I disagree with you about Upstart. I think it already is a category crusher destined to be a giant in an enormous market. CEO Dave Girouard spent several years at Google. He was president of Google Enterprise which was the part of the company responsible for delivering GCP apps worldwide. In the most recent quarterly conference call he even likened Upstart to Google, Apple and Amazon. Every would be competitor is playing catch up in a space where time is one of the primary ingredients demanded by the development cycle. While others are just taking a position at the starting blocks Upstart is already way ahead and gaining momentum.

I know, some folks think Chase, BofA, CITI, etc. will roll their own. Maybe, but I doubt it. It’s easier, cheaper and more efficient to partner with Upstart and let them focus on their core competence, the risk assessment technology while the banks adhere to their own core competence which is money management. IMO, Upstart already is the category crusher in AI/ML risk assessment lending space. But I could be wrong. It wouldn’t be the first time . . .

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Yes it may be time to update some of the rules we use to evaluate the growth companies that we are tracking and/or investing in.

Given the rising rate environment and market volatility, I am being more strict with my growth stock holdings. And I think we need to look at more than just growth, past and future. And valuation is the last metric I look at - after I decide whether my thesis in the stock has changed.

Here is what I dissect in an earnings report:

Revenue growth - YOY and QOQ. Future estimated revenue growth is more important than past revenue numbers. For some companies, a specific product line is more important to look at versus the overall picture. e.g. CRWD’s subscription revenue stream is more interesting than their professional services. Also good to look at other revenue-related metrics such as ARR, RPO, Deferred revenue etc.

Gross margins - overall as well as margins for specific product lines

Path to profitability - If a company is not yet profitable, I would like to see them move in that direction with purpose and action. EBITDA, imo, eliminates a lot of income statement noise and allows me to compare apples to apples across peers.

Gaining market share - denotes by customer growth YOY and QOQ. Enterprise and higher paying customers are more important than retail customers. NRR should be holding steady or rising.
NOTE: This is perhaps the most important set of attributes for the 2022-2023 environment.

Cash is king - Especially this year, I am closely tracking operating cash flow and free cash flow. I want to see a decent amount of cash on the balance sheet to avoid secondary stock offerings or bond/debt issuances.

Debt - Again this is very 2022-2023 specific. I prefer Total debt / Total cash on hand to be <= 0.75 and much lower than than if the company is not cash flow positive.

Beachman twitter.com/Iwannabeontheb2

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