With so many stocks suffering from beaten-down valuations, finding options with high medium-term upside potential in today's market might feel a bit like looking for a needle in a haystack. But, it doesn't need to be. In this segment of Backstage Pass, recorded on Jan. 12, Fool contributors Rachel Warren and Jamie Louko discuss one such compelling stock for investors to put on their watch lists.
10 stocks we like better than Riskified Ltd.
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Rachel Warren: I saw today on CNBC that Evercore just upgraded popular food delivery platform DoorDash. So, Evercore, they see the stock as having as much as an 80% upside. That's despite the recent sell-off that investors have been seeing in tech.
I found this particularly interesting, as something we've been talking about a lot lately is how down periods for certain stocks that have high-quality businesses can be a really great opportunity to buy in at a bargain price.
This is our "wild predictions" stage of the show. We're long-term investors here, so we don't buy stocks on the basis of what we think they can do, maybe, over a period of days, months, weeks, or even a year, but really based on a company's potential, the quality of its underlying business, and its ability to generate durable growth over a period of many years. But even so, what is a stock that you think has 100% or more upside potential over the next 12 months? Jamie.
Jamie Louko: Yeah. You're saying wild predictions, so I am going to go with a very, very wild prediction, and this is one of the riskiest stocks that I own. ...
This is a tech stock, this is an AI-based stock, so the fact that it is valued at 4.6 times sales should be concerning. Also, the fact that it's 81% off its all-time high.
Given that, and given that it is at a rock-bottom price, I'm going to say Riskified (RSKD 5.57%) is my best stock to go 100% in 12 months. This company uses AI to determine fraud in e-commerce companies, which is something that can be really difficult for e-commerce companies.
When they're looking at a potential fraudulent order, they're thinking of a lot of things, and sometimes, e-commerce companies go in and ask, "Hey, are you real?" Or do some secret tests to make sure that this order is fraudulent. If it's a real person, that can really degrade the customer experience.
When I'm trying to order something on Amazon, I don't want them asking me if I'm a real person or if I'm on a bot trying to steal some goods. That's really annoying. It degrades the customer experience.
What Riskified does is, it uses AI to almost automatically determine this, and it makes it almost unnoticeable for the consumers on the e-commerce app. That's something that's really important. As a result, like Global-e, their churn is less than 2%, which is awesome.
There's a reason for this. The two things that I find that really stand out with Riskified's products is that it, one, brings in more revenue because they are able to determine some real orders that their e-commerce customers have once turned down, and because Riskified lets their customers accept more orders and also turn away fake orders, they earn a lot more in their operating expenses from losing those goods.
Their top 10 customers save an average of 39% on their operating expenses, yet still earn 8% more in revenue.
Spending 39% less, making 8% more for their 10 largest customers -- that's a really good value proposition for Riskified's customers.
Another really good thing about the company is that they have this thing called a charge-back guarantee, which basically says, if Riskified's AI is wrong and they accept a fraudulent order, Riskified will cover the cost of the lost goods.
If they're selling $5 in clothes and Riskified accepts a fraudulent order, Riskified will pay that $5 so the e-commerce customer doesn't lose that $5. Basically, there's really no incentive not to use Riskified other than money that they pay Riskified per order to use the AI.
Why do I think it's 100% in  months? I think we first need to address why it has fallen 81% off its all-time high. That's basically because (this last bullet down here) their gross margin fell from 53% to 46%.
Why is that important? Almost all of Riskified's gross margin comes in the charge-back guarantee. When that gross margin falls by that much, that means that they are spending so much more in charge-backs, meaning their AI is wrong a lot more often.
Now, there are two potential reasons for this. One being, the AI is just really bad and inaccurate, and that is really bad. The other potential idea -- and this is what management has said in their third quarter -- was that they entered a couple of new markets, namely cryptocurrency markets, and their AI is simply very young in that industry.
They're collecting more data, they're going to be wrong while it's still not mature. But as it collects more data, as it makes more decisions, it's going to get better and grow.
Now, if I think it's going to be a 100% rise in  months, I am banking on the fact that management is right.
I, personally, am very on the fence about this. But the more I'm looking into it, and the more reading the management's decisions in detail, the more I believe that their idea of just being young in a couple of new industries is the case, and so that is why I think that Riskified could double in the next year.
Basically, because if they are right, and they're able to really improve in these markets and bring that gross margin back up, because of how low the stock has dropped right now, there's not really that many expectations of success going in toward the company. If they really have a blowout quarter in Q1 and Q2, maybe even Q3. I really think the stock could really reverse.
Warren: Yeah. It's interesting, I was looking at this company. So it's a newly public company -- I think it just went public last summer, is that right?
Louko: Yeah. I think it was August or September, I believe.
Warren: Yeah. We know that a lot of times, these newly public companies see these declines anyway. But it's interesting. The service it provides, I would think this would be something that would be really essential.
The more people are shopping online, the more opportunity it is for, let's say, "bad characters" to step in and try to scam or fraud. Are there a lot of other players in this space, or is this a newer market that they're tapping into?
Louko: It's definitely a newer market. Most of their competition comes from companies doing this in-house. They're not really focused on the SMB... They're not specifically focused on the SMB space, I should say. They're really focused on everywhere, but especially those bigger customers, all of them have a lot of AI or their own developed system in-house that's doing this stuff already.
But one testament that I think that Riskified shows to say, "Hey, we can beat your AI," is their biggest customer and their most prominent customer that they tout and put on a pedestal is Wayfair.
Warren: Oh, wow.
Louko: A company that big, I would think has some AI, and the fact that they're using Riskified and they're switching from a potential in-house solution to Riskified really shows that this company's the real deal.
Warren: Oh, yeah. The key there is to get companies to switch from their own inner quality controls over to them. But it sounds like there's a lot of benefits to moving that out of house. Very cool.