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Why Riskified Stock Is Worth the Risk

Why Riskified Stock Is Worth the Risk
Written by Publishing Team

On November 16 risk (NYSE: RSKD) It published financial results for the third quarter of 2021. The stock immediately fell more than 20% and for a legitimate reason: The company’s gross margin fell, which could reveal a problem in the business.

Following the third quarter results, I vowed that I would not add to my small risky stock position despite the stock price drop. Personally, I don’t buy more shares unless the investment thesis improves. And it’s fair to say that Reskived did not. However, several weeks after the company’s third-quarter results, I adjusted my thinking and bucked my rule to buy more riskier stocks. Here’s why I think this is a risk worth taking.

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Risk with Riskified

Riskified’s flagship product is called a Chargeback Guarantee and it’s for e-commerce businesses. When stolen credit card information is used online, credit card owners report it, leading to chargebacks from credit card companies and leaving e-commerce companies at a loss. E-commerce companies can try to reject more shady fees. But mistakenly rejecting non-fraudulent transactions leads to lost sales.

With a chargeback guarantee, risky promises to increase approvals and reduce fraud. And when fraud occurs, Riskified pays for its mistake, making this product risk-free for Riskified customers.

Riskified software makes consent decisions using a machine learning algorithm. And if he had to pay chargeback costs, those charges would be deducted from his gross profit. Therefore, Monitoring Riskified Gross Profit Margin helps determine the effectiveness of the program. In 2019, the gross margin was 50.3% and improved to 54.7% in 2020. But during the first three quarters of 2021, the gross margin at risk declined to 54.1%.

Simply put, it is possible – not certain, but possible – that Riskified’s cost-recovery guarantee will not be a product that creates long-term shareholder value. To create value, he must approve many transactions while accurately identifying fraud. If she fails to do the first, she will struggle to attract new customers – which is bad for business. If you fail to do the latter, it will not be a highly profitable endeavor.

Currently, a drop in gross margin indicates a lot of bad transactions, which goes against my investment thesis for Riskified.

A businessman raises his glasses, seemingly impressed by what they see on their computer.

Image source: Getty Images.

But here’s the reward

Riskified’s chargeback guarantee product seems to offer an undeniable valuation offer for e-commerce businesses, making it an easy sell. We don’t know the exact size of their customer base. But it has only processed $61.3 billion in sales so far in 2021, putting it on track to just over $80 billion for the year. This represents just 1.6% of the $4.9 trillion in global e-commerce sales volume for the full year of 2021 estimated by eMarketer. So, it’s safe to say that Riskified has room to easily grow its customer base from here, with a chargeback guarantee product alone.

But the chargeback guarantee is just a foot in the door. Riskified also has other products to sell to its customers. Its producer Deco hopes to recover 20% of lost sales due to payment glitches. Policy Protect helps identify people who create multiple accounts to take advantage of rewards and loyalty programmes. Importantly, management expects these and other ancillary products to account for nearly half of its revenue growth in the coming years.

Moreover, never sleep on the continuous growth in e-commerce. According to the Bureau of Commerce, e-commerce accounts for only 12% of US retail sales, suggesting there is room for further growth. eMarketer expects global annual e-commerce sales to increase by more than $2 trillion by 2025 in terms of sales today. Therefore, I reasonably expect Reskived’s revenue to grow once more transactions are processed from its existing customer base.

It’s worth the risk

Finally, we don’t Really Know if there is anything to worry about with risky stocks in the first place. Yes, its gross margin has decreased slightly. But that doesn’t necessarily mean there’s anything that needs to be fixed with its software algorithm. A decrease in gross margin could simply be some short-term fluctuation that can reasonably be expected with a small business.

However, if Riskified needs to pour resources into its core product to improve it, it is well capitalized and can do so. As of the third quarter, it had $534 million—that’s a lot of money—to fix a software shortfall if there was one. Compare this cash position with market capitalization of $1.2 billion. Obviously, this opportunity comes at a cheap valuation for today’s investors.

There are risks with risky investing to be sure. But the company has a cheap valuation, hundreds of millions in cash, and a huge opportunity. Moreover, there is a real chance that the risk is exaggerated. In short, I think this is a risk worth taking at its current price of around $8 per share.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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