Riskified (RSKD -0.81%) went public in July 2021. After skyrocketing 40% in August, the share price has since fallen and the stock now trades 50% below its high. Of course, it's always risky investing in a newly public company, but there's a lot to like about this fintech business.
Specifically, Riskified has a massive market opportunity and a strong competitive position, and the company should benefit from digital tailwinds as e-commerce becomes more popular. In fact, I wouldn't be surprised to see this stock -- which currently has a market cap of just $3.1 billion -- grow tenfold in the next 10 years.
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Market opportunity
E-commerce undoubtedly offers conveniences to both consumers and merchants, but it also creates new challenges related to fraud. And the solutions designed to combat this problem are frequently slow and inaccurate, meaning merchants reject valid transactions and accept fraudulent ones at a much higher rate than you might first imagine. That results in missed revenue opportunities and increased fraud-related operating expenses (i.e. chargebacks).
By 2021, e-commerce losses due to false declines are expected to reach $443 billion in the U.S. alone. And by 2024, e-commerce losses related to fraudulent transactions will total $25 billion, according to Juniper Research. In both cases, those figures pose a serious headwind to a seller's bottom line.
That's where Riskified can help. Its AI-powered platform offers a range of solutions, helping merchants prevent fraud and reduce friction at checkout. Specifically, Riskified helps clients secure customer account information (i.e. saved payment card credentials) and identify consumers that are abusing store policies. It also automates the transaction approval and denial process, while guaranteeing a minimum approval rate and accepting liability for all fraudulent charges.
Competitive position
Riskified leans on artificial intelligence to reduce fraud and boost approval rates. Specifically, its platform collects hundreds of data points each time a consumer makes a payment, then uses smart linking technology to match each transaction to previous transactions, correlating those data points with the risk of fraud.
This allows Riskified to approve or deny transactions in real time with a 99.8% accuracy rate. More importantly, its platform boosts merchant revenue by an average of 8%, while reducing fraud-related expenses by 39%. This creates a powerful flywheel effect: As Riskified processes more transactions, it collects more consumer data, making its AI models more powerful.
Currently, the company draws insights based on over 1 billion transactions. But as that number continues to climb, Riskified's platform should become increasingly valuable to merchants.
Financial performance
Fraud is a serious problem for many merchants, and providing a fast, frictionless checkout experience is critical to maintaining customer loyalty. That has translated into strong demand for Riskified's platform. Gross merchandise volume (GMV) surged 55% to $21.5 billion in the most recent quarter, and revenue rose 47% to $55.7 million.
While the company is still unprofitable on a GAAP basis, Riskified generate positive free cash flow of $4.2 million, demonstrating the sustainability of its business model. And in fiscal 2020, the company posted a gross retention rate of 98%, meaning it kept the vast majority of its customers. This suggests that Riskified has a very sticky product. Going forward, that should help the company execute on its massive market opportunity.
The potential for tenfold returns
Riskified currently trades at 15 times sales. That's not cheap, but it's far cheaper than other highflying fintechs like Affirm and Upstart. More to the point, given its relatively small market cap, I think Riskified can deliver tenfold returns over the next decade.
Case in point: If the company can maintain sales growth of 30% -- far slow than its current growth rate -- Riskified's top line would reach $2.8 billion in 2031. Assuming the stock trades at a more reasonable 11 times sales, the company would achieve a market cap of $31.2 billion, slightly more than 10 times it current market cap.
Of course, if you choose to add Riskified to your portfolio, my recommendation is to build your position slowly through dollar-cost averaging. As a newly public company, Riskified still has to prove it can survive in the spotlight and live up to Wall Street's expectations.
