An exciting part of investing is finding new companies few people have heard about. The market doesn't award style points, so investors must do their homework on under-the-radar companies to determine if they are better than other stocks.
Two relatively unknown stocks with 2022 outperformance potential are Riskified (RSKD 3.45%) and dLocal (DLO 6.38%). Both operate in separate industries and have favorable tailwinds.
A constant battle for e-commerce retailers is fraud. Brick-and-mortar stores still deal with it, but transactions completed online pose a different challenge. Riskified's software reduces fraud by preventing account takeover, reducing refund claims, and approving more sales. Its 10 largest merchants have seen revenue increase by 8% and operating costs reduced by 39%. It is so confident in its solution that if unauthorized card activity occurs, Riskified will refund its retailer the full price -- showing management is serious about its offering.
This wager cuts both ways. Should Riskified have a bad quarter filled with fraud, its cost of revenue will increase faster than revenue itself. Riskified's 2021 third-quarter results showcased this dynamic and sent shares tumbling 27%. Its revenue and gross merchandise volume increased 26% and 28% respectively, but gross profit only grew 10%. During the quarterly conference call, management noted this metric should be analyzed from an annual basis because of multiple factors. Still, investors need to keep an eye on this metric heading into 2022.
Another consideration is Riskified's concentration risk. Its three largest merchants accounted for 36% of revenue in 2020, down from 45% in 2019. Expanding to its largest five customers grows the concentration to 46%, down from 55% in 2019. Investors must factor this risk into their assessment, but if customers are saving operating expenses and growing revenue, they should have no reason to switch away from Riskified's product.
Riskified's growth prospects are still promising. It is guiding for 32% to 33% fiscal-year (FY) 2021 revenue growth and has a strong customer use case. In 2020, it retained 98% of revenue, excluding tickets and travel -- those customers cut back because of COVID-19. As experience revenue returns during 2022, look for Riskified to put up healthy growth numbers. With customers like Dick's Sporting Goods (DKS 2.02%), Peloton (PTON 6.34%), and Wayfair (W 6.57%), Riskified works with some big logos and will look to add more throughout 2022.
Emerging markets are difficult for retailers to break into because of payment processing. dLocal claims 83% of e-commerce revenue comes from local payment methods -- like cash -- in its 14 core markets. It is changing the industry by offering three solutions: pay-ins, pay-outs, and direct issuing. Pay-ins allow local credit cards or cash to be used through different avenues to purchase items. Pay-outs occur directly to banks or digital wallets. Direct issuing allows customers to issue site-specific prepaid cards.
dLocal is growing remarkably fast. Revenue increased 186% to $59 million and had a net retention rate of 196%. Additionally, its total payment volume grew 319%. Remarkably, dLocal is profitable unlike many of its high-growth tech peers. It earned $0.06 per share and had a 30% profit margin during Q3. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin was 44%, putting dLocal among elite company when profitability is addressed.
With crazy growth numbers and strong profitability, it is no surprise dLocal is highly valued. At 47 times sales and 151 times earnings, dLocal is expensive. Investors should determine if the valuation risk outweighs the benefits, as the market punishes high flyers from time to time.
dLocal has an even more impressive list of customers than Riskified with Amazon (AMZN 1.82%), Nike (NKE 2.15%), and Booking.com (BKNG 2.96%) enlisting dLocal's services. It offers its products in many countries but derives 89% of revenue from Latin American countries like Brazil, Mexico, and Argentina. It also has operations in India, the world's second-most populous country.
As both are relatively small market caps -- Riskified's is $1.4 billion and dLocal's is $9.5 billion -- each has significant room to grow. Finding smaller market cap companies is critical to producing huge returns if the stock is held over the long term. Typically, smaller market cap companies aren't established and rely on a few customers. As they grow, more customers find the platform and reduce the revenue concentration risk.
Both dLocal and Riskified are in an early stage. However, each is also fragile and could be squashed by a bigger competitor. If either company takes off and becomes the next 10-bagger, investors only need a small portfolio allocation. Keep this in mind if Riskified and dLocal present a captivating investment thesis.