Riskified (NYSE:RSKD) leans on artificial intelligence to help merchants identify and combat e-commerce fraud. Since going public earlier this year, the stock has fallen 50% from its high, but investors shouldn’t count this company out just yet.
In this Backstage Pass video, which was recorded on Oct. 27, 2021, Motley Fool contributor Trevor Jennewine explains why Riskified has the makings of market-beating investment and highlight its strong financial performance and massive market opportunity.
Trevor Jennewine: I’m going to go with the company Riskified; the ticker is RSKD. Riskified is a fintech company that went public back in July. Just to give a little bit of background: It works in the e-commerce industry.
E-commerce will continue to gain traction in the years ahead. It’s been a major growth driver in past years and it’s been a great thing for businesses and consumers alike. At the same time, as online sales have become more common, so has fraud. Riskified’s platform addresses that.
The problem that it specifically solve is that a lot of companies still lean on in-house solutions to identify fraudulent transactions, and those solutions tend to be expensive, hard to maintain, and they tend to be inaccurate a surprising amount of the time.
To give you some context there, Juniper Research believes that e-commerce fraud will total $25 billion by 2024, which means that a lot of the illegitimate transactions are being approved. And when that happens, if you go online or you see a charge show up on your credit card that you didn’t make, you call your bank and say, “Hey, I didn’t buy this.” The bank reverses the charge and that money gets pulled back out of the merchant’s account. The person who gets hit the hardest is the merchant.
On top of that, there’s also the other side of that equation, where valid transactions are actually being declined. False declines will actually total $443 billion this year. That means those systems are incorrectly declining transactions that were valid.
Riskified uses artificial intelligence to automate the approval and denial process; its platform is 99.8% accurate. Basically, it collects hundreds of data points per transaction, and then it correlates those data points with the over one billion transactions that have already been processed on its platform. And that allows it to quantify or predict the risk of fraud.
One of the things I really like about the company is that they guarantee a minimum acceptance rate for their clients, and that acceptance rate varies depending on the industry in which their clients operate. It’s going to be a lower minimum acceptance for higher-risk industries and vice versa. They also assume liability for all fraudulent transactions. So if they let a fraudulent transaction past them, they’re going to take responsibility for it. That really creates a lot of value.
To put that in context, looking at the top 10 merchants on its platform, they’ve seen revenue rise by 8% per year, and fraud-related operating expenses fall by 39% per year. But some companies have seen revenue go up higher than 20%, and some have seen fraud-related operating expenses fall by more than 60%. It’s creating a lot of value.
It’s still a very small company. In the most recent quarter, gross merchandise value on its platform, which is $22 billion. So to put that in context, there is trillions of dollars being spent on e-commerce every year. But the GMV, gross merchandise was $22 billion, that was up 57% over the previous year. Revenue was $56 million, and it was up 47%.
One other thing I really like is that through the first six months of 2021, they had a positive $5.3 million in cash from operations. So not profitable on a GAAP basis, but positive cash from operations. This company reminds me of Upstart and I think it has a lot of potential here.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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