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This Growth Stock Might Be Down, But It's Not Out

Shares of Riskified (NYSE: RSKD) have been clobbered since coming public in August 2021. Shares popped in September, but that quickly faded and now the stock is down more than 71% from its IPO price.

Riskified provides artificial intelligence (AI)-based determinations for e-commerce companies that help them detect fraud -- a service that is extremely valuable for its customers. The company has seen impressive adoption since coming public, but this was overshadowed by concerns about its AI accuracy.

If Riskified permits a fraudulent order for its customer, the company will foot the bill for lost goods. While this makes the company's services extremely valuable for e-commerce businesses, it can hurt Riskified's gross margins if its AI is wrong. The problem? It was wrong a lot in third-quarter 2021, and its gross margin tanked nearly 6.5 percentage points in Q3, convincing investors that its artificial intelligence wasn't all it was cracked up to be.

Riskified's margins bounced back nicely in Q4, but that does not mean it is out of the woods just yet. The company faces a few headwinds in 2022, but this quarter showed signs that Riskified is moving in the right direction, which is why I still have faith in it.

Image source: Getty Images.

The improvements in Q4

Last quarter, management noted that the decline in gross margin was primarily because of the new markets it entered -- such as the payments industry -- along with seasonally higher traffic in lower-margin industries like travel. Management backed its claim up by having gross margins bounce back in Q4, growing from 46% in Q3 to 53% in Q4. This was arguably the most important figure in the earnings report because of the past troubles the company had, and while this isn't the 58% margin it had in the past, it played a critical role in the company's solid quarter.

The company expects this to decline slightly to 51% in 2022, but a small drop like this is only caused by a minor decrease in e-commerce activity as the pandemic exits, so it is not a major concern. In fact, the company's gross margin levels are expected to be 1% higher than they were before the pandemic.

The company also grew its top line steadily. Q4 revenue jumped 22% year over year to $70 million as its gross merchandise volume (GMV) grew 23% in the same period to $27.8 billion. Riskified is still unprofitable -- posting a loss of $23 million in Q4 -- but this decreased substantially from its Q3 loss of $87 million. Free cash flow burn for 2021 was $34 million, but the company has over $510 million in cash and short-term investments to subsidize both its net loss and cash burn for the foreseeable future.

One important growth lever the business pulled in Q4 was its customer expansion, and it landed some big names. Binance -- one of the largest blockchain infrastructure platforms -- is now using Riskified. One of the largest travel retailers and one of the largest omnichannel retailers also became customers. These three players could play a role in increasing the company's GMV. This will not only drive revenue higher but also allow Riskified to capture more data, which will make its AI more accurate.

Work still needs to be done

Riskified's success in customer expansion and AI accuracy are great to see, but the company is still facing short-term headwinds. E-commerce activity is expected to slow in the first half of 2021 due to inflation, which will likely affect the number of customers spending money on fashion and luxury goods.

In 2021, the company made roughly $100 million in revenue from e-commerce businesses in this industry, so the company is looking at decelerating growth in the short term. It guided for 2022 revenue of $254 million to $257 million, implying just a 12% year-over-year jump at the midpoint of its guidance.

Over the long term, however, Riskified has a huge opportunity. Eido Gal, Riskified's CEO, said that the company controls just 2% of global e-commerce expenses, meaning that it has only scratched the surface of its total opportunity. 100% market share is unrealistic, but it still shows that the company has plenty of room to keep growing.

The opportunity to come

In terms of capturing that massive potential, Riskified is well-positioned. It saw 1% customer churn in 2021, improving from 2% in 2020.

More to the point, an internal study done in late 2020 shows that Riskified's services resulted in a 39% average decrease in operating expenses while increasing revenue by 8% for its top 10 customers. Riskified is providing immense value for its partners, allowing them to lose less money while accepting more real orders, and customers seem to be very happy with the job that Riskified is doing.

Because of the rough stock price decline, its valuation is low. Riskified trades at 4.8 times sales -- much lower than other e-commerce service providers like Global-E Online (NASDAQ: GLBE), which trades at 21 times sales. Riskified still faces plenty of competition from in-house platforms, but the value that the company brings to its customers is unmatched. At such a low valuation, shares of the company seem especially appealing today.

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Jamie Louko owns Global-e Online Ltd. and Riskified Ltd. The Motley Fool owns and recommends Riskified Ltd. The Motley Fool has a disclosure policy.


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