The IPO market has been red hot in 2021. Through the first three quarters of the year, 1,635 companies went public, raising a total of $330.7 billion. In July, Riskified (RSKD -2.45%), a fintech powered by artificial intelligence (AI), made its public debut. And while the stock initially rocketed higher, the share price currently sits below the IPO price, trading at 46% below the all-time high.

However, that pullback creates an opportunity for long-term investors. In this Backstage Pass video, which aired Oct. 4, 2021, Motley Fool contributor Trevor Jennewine shares his thoughts on Riskified's business, highlighting the company's potential for growth.

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Trevor Jennewine: Riskified addresses fraud. Fraud is a costly problem for e-commerce merchants, and the systems they use to detect fraud and accept their declined transactions tend to be slow and inaccurate. That creates a couple of different problems.

First, merchants are missing legitimate sales opportunities, so they're declining transactions they shouldn't be. And they are approving transactions that are illegitimate; then when that happens, they incur fraud-related operating expenses, like chargebacks. Just to define that term: If somebody uses your credit card to buy something online and you call up your bank and say, "Hey, I didn't buy this," your bank is going to reverse that transaction and it's going to pull the money back out from the merchant's account. Two headwinds there related to fraud for merchants.

Just to put the opportunity in perspective, in 2021 false declines are going to total loss revenue for $443 billion. And by 2024, fraud-related expenses for merchants will reach $25 billion. A big market opportunity here.

To solve that problem, Riskified leans on artificial intelligence to automate the approval and denial process. It does this in real time with 99.8% accuracy according to its S-1. The end result is that merchants benefit from increased sales. Looking at 10 of the largest customers using risk advisory platform, the average increase in revenue was 8%. They also benefit from reduced fraud-related costs. The average benefit there was 39% reduction in those chargeback-related expenses. Kind of like Global-e, this creates a flywheel effect. This company reminds me of Upstart in a way. It's collecting data from each of these transactions. Its AI model is more powerful in terms of predicting the risk of fraud.

Two things that I really like: The company also reports gross retention and net retention. The gross retention was 98% in 2020, meaning it's keeping the vast majority of the customers on the platform. And net retention was 117%, just evidencing that customers or merchants tend to spend more on Riskified's platform over time. I think those are both strong indicators.

However, some of the biggest customers, those numbers actually, I think undersell the stickiness of its platform. Some of the biggest customers on the platform are, for example, Ticketmaster, [Booking Holdings'] They're related to ticket sales for events and travel. Those industries were hit pretty hard in 2020. If you remove those industries from the retention-rate calculation, the gross retention rate was actually 99% and the net retention rate was actually 154%. Even stronger when you remove some of those industries that had a tough time throughout the pandemic.

What I'm looking at going forward, I'm watching the gross merchandise volume [GMV] here. In the most recent quarter, GMV was up 55%. I'll be paying attention to those retention rates going forward, too. I think that's important to make sure that the product is really resonating with the customers. In the most recent quarter, revenue was at 47% of the top line, growing quickly, and the company is free cash flow positive. Just barely, at $4.2 million of free cash flow in the most recent quarter, but not burning cash. I think that's a positive thing here, too.