E-commerce is rapidly becoming a cornerstone of the international economy. According to a study from Infiniti Research, the global e-commerce market is expected to grow at a compound annual growth rate of 29% until 2025. This would result in the e-commerce market rising in value by more than $10 trillion over that time frame. With such rapid growth, investing in e-commerce today has the potential of massively paying off.
Both Global-e Online (GLBE -3.40%) and Riskified (RSKD -2.76%) are not participating in the selling but rather providing services that can help all e-commerce companies in the world. Here's why I think investing in these companies has the potential to pay off in a decade.
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1. Global-e Online: Borders, be gone
Although the company is valued at 27 times sales, Global-e could be worth buying today. The company allows e-commerce businesses to become border-agnostic by making it easy for companies to expand their operations internationally. With so many language, payment, and cultural barriers between countries, it can be extremely difficult for businesses to expand into new geographies, especially small and medium-sized businesses (SMBs) that might not have the expertise to do this in-house.
Global-e serves as an international e-commerce expert for these companies. Global-e has partnerships and capabilities in over 25 native languages, 100 currencies, 150 different payment methods, and 20 shipping providers across the world. Considering how hard it is for SMBs to do this in-house, Global-e becomes a vital piece of its customers' growth strategy. The company has seen rapid growth from customer adoption and customer success: Gross merchandise volume (GMV) for Global-e grew 86% year over year.
Once a company joins Global-e, it is incredibly difficult to cut ties. International expansion is a major opportunity for every business, and Global-e is making it easy for a business of any size to achieve this. If a customer wanted to do this in-house, they would likely have to spend millions of dollars and many years developing the relationships, partnerships, and skills that Global-e has already spent years accumulating. While some enterprises have figured this out internally, it is often unrealistic for SMBs to do the same, which is why the company has just 2% customer churn.
Global-e is incredibly strong operationally, but it does have weak spots. The company lost $28.5 million in Q3 2021 compared to break-even profitability in Q3 2020. This has been primarily because of the amortization of warrants granted to Shopify. Without these warrants, Global-e would have had almost $1 million in net profit. However, the company had almost half a billion dollars in cash and $5 million in free cash flow in Q3, so a $28 million net loss is not incredibly worrisome.
With a strong partnership with Shopify that allows Shopify merchants to use Global-e's services, I think the company has an extremely bright future. A high valuation can be concerning, but with a high-quality company like Global-e, paying up for it today might pay off in a decade.
2. Riskified: Using AI to spot fraud
Riskified is also taking a pick-and-shovel approach to the e-commerce industry by providing an artificial intelligence-based engine that detects fraudulent orders. Companies can lose lots of money through fraud online, and they might not notice it for weeks after goods have been shipped. Riskified is trying to change that by detecting fraud before the transaction is even made.
For e-commerce merchants, the risk-reward ratio for using Riskified is extremely skewed in their favor. Riskified's 10 largest customers on average see a 39% decrease in operating expenses while increasing revenue by an average of 8%. Additionally, the risk of paying for fraudulent orders disappears with Riskified's Chargeback Guarantee. If Riskified is wrong and permits a fraudulent order, Riskified will pay for the lost goods -- almost fully mitigating any risk that a company takes by using the company. As a result, Riskified's customer churn was 2% or lower in 2019 and 2020.
Even with this solid business model, shares of Riskified are down over 81% from their all-time high. This is because, in its third quarter, it reported a gross margin -- which primarily consists of chargeback expenses -- of 46%. This fell from 53% in the year-ago quarter because the number of chargebacks it paid out increased drastically, meaning that its AI engine was wrong more often. Management said that it was because it entered new markets, like cryptocurrency, where its AI was still learning and developing. Yet another potential reason could simply be that its AI engine is inaccurate.
The company's valuation toppled, now at less than 5 times sales, indicating that the market fully believes its AI is flawed. But if management is right and it just needed time to have its AI mature in newer industries, the company has the potential to explode.
Riskified's AI has shown its strength over the past few years, demonstrating that it can be very accurate in its core markets. This gives me the confidence to trust management for now, although monitoring the company's gross margin in the first few quarters of 2022 will be critical. If its chargebacks can decline and its margins improve, this company could bounce back and become a major winner over the next decade.
