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Investors have been falling over themselves to get exposure to artificial intelligence (AI) stocks this year.

Since ChatGPT's launch nearly a year ago, investors have been convinced that AI and generative AI, specifically, will be the next transformative technology, and excitement about the possibilities is a major reason the Nasdaq Composite has soared this year, including AI stocks such as Nvidia and Microsoft.

However, investing in stocks selling generative AI capabilities like Microsoft or selling the building blocks necessary to run the advanced computing they require, like Nvidia, isn't the only way to get exposure to the fast-growing field.

There's another picks-and-shovels approach to getting exposure to generative AI, which is buying the stocks that provide the technology that these rapidly growing AI companies need. One company that is already serving generative AI customers and well positioned to benefit from their growth is Amplitude (AMPL 0.20%), a cloud software company that helps companies learn how their customers use their digital products and how they can improve. For example, Amplitude helped Peloton figure out that social interaction was key to getting loyalty from its members.

Image source: Getty Images.

Because Amplitude has focused on digital products, it has long been popular with tech start-ups that are eager to see how customers experience their products and improve their user interface, and Amplitude is now seeing a boom in demand from generative AI start-ups.

Two new generative AI companies just became Amplitude customers in its recently reported third quarter. Those are Midjourney, an AI image generation company similar to Stable Diffusion or OpenAI's DALL-E, and Character.ai, a large language model chatbot similar to ChatGPT.

Midjourney is using Amplitude to understand free-to-paid conversions, see how demographics relate to users, and to A/B test changes to its user interface. Character.ai, meanwhile, is using Amplitude's analytics and experimental products to allow them to better understand the user experience and improve it.

On the earnings call, Amplitude CEO Spenser Skates said, "Amplitude is the platform of choice for some of the biggest, brightest, and best names in generative AI, helping them guide their businesses in ways that our competitors cannot match."

Skates also saw Amplitude playing a key role for AI companies because they are competing, in large part, on user experience, which makes the product data that Amplitude provides so valuable. He also said the demand from AI companies was part of a larger trend, adding, "I would compare AI to actually previous waves of technological innovation. We've seen stuff like VR, crypto, mobile, SaaS, all of the new companies that those categories created ended up becoming day one Amplitude customers from the very start, starting out with a small -- growing with us -- you know, us growing with them over time as they continue to scale."

Amplitude's ability to grow with its customers is key here.

Amplitude stock sold off following its third-quarter earnings report on Tuesday night, even as the company topped estimates in the report and raised its guidance.

Like a lot of cloud software companies, Amplitude is still seeing some macro-related challenges as many of its customers have grown more cautious, and it's seen an uptick in churn. That's not surprising, given the recent layoffs in the tech sector and broader fears of a recession.

In an interview I had with Skates, he expressed optimism about faster growth returning by the second half of next year, but the company is also making progress on the bottom line. It's on track for an adjusted operating income profit in the second half of this year, and it posted $7.5 million in free cash flow in the third quarter, giving it a free cash flow margin of more than 10% in the quarter.

Still, the company's strength with tech start-ups like Midjourney and Character.ai could be its biggest strength as the artificial intelligence industry is expected to explode. Digital product usage should only increase with the proliferation of generative AI tools, and Amplitude is well positioned as a leader in product analytics.

With a market cap just north of $1 billion, the company has a lot of upside potential if it can take advantage of the generative AI wave.

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