What happened

Shares of Riskified (NYSE:RSKD), a technology company serving e-commerce businesses, fell sharply on Tuesday, after the company reported third-quarter financial results. The company beat guidance and expectations and even raised its outlook for the rest of the year. But a couple of warning flags outweighed these positives, sending the stock to an all-time low. As of noon EST today, the stock was down 21% for the session.

So what

Going into the third quarter, management had guided for revenue of up to $51.2 million, and that's about what analysts were expecting as well. However, the company bested this number with revenue of $52.5 million, up 26% year over year. Moreover, management raised its full-year revenue guidance from a range of $224.4 million to $225.4 million, to a range of $226.2 million to $227.2 million.

A person appears to be frustrated with something he sees on a computer.

Image source: Getty Images.

But here's what might be weighing down Riskified stock today: First, in the conference call, management suggested growth could be challenged in the first half of 2022 due to a business slowdown for its e-commerce partners compared to strong results during the early days of the pandemic. This could suggest that Riskified won't add enough new customers to compensate for this decline, which is troubling if true.

Additionally, Riskified's technology uses machine learning to improve outcomes for e-commerce companies. But if its software makes bad decisions, it has to eat the cost. Therefore, investors can measure the effectiveness of the software by looking at its gross margins. Unfortunately, its gross profit margin declined from 52.8% last year to 46.2% this year, which could suggest Riskified's platform isn't up to the challenge. The mere thought of this helped send the stock down to where it is now, 63% below its all-time high reached earlier this year.

RSKD Chart

RSKD data by YCharts.

Now what

This could be the wrong takeaway when it comes to Riskified's gross margin. Management said it has recently entered new e-commerce categories and it's still collecting data points. And since it's still a small company, financial results can swing from quarter to quarter. If you zoom out and look at results from the last three quarters, gross margin still seems to be trending in the right direction: 54.1% this year compared to 52.9% in the same three quarters of 2020.

Nevertheless, this is something to watch with Riskified. If it's going to be a good long-term winner, it needs to keep winning new customers and continue improving its profit margins. 

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.