The crashed AI stock that’s about to rebound
Despite a sharp drop in the share price since its IPO in 2021, Riskit is (RSKD -9.52% ) recent earnings show an encouraging uptick. In this video clip of “The Rank” on Motley Fool live, recorded on March 28Fool.com contributor Jamie Louko sees the company’s gross margins and growing customer base as signs of a significant rebound.
Jamie Louko: Yeah, Riskified is a really cool company. It went public at the end of 2021 and since then I think it went public at around $24 a share, something like that. It’s trading around $6, so it’s been absolutely hammered lately. Riskified provides an AI engine for e-commerce businesses and basically the sole purpose of this AI is to reduce and mitigate fraud for e-commerce businesses.
What they really want to do is spot fraudulent orders coming through their SMB e-commerce customers and get rid of them without turning away real customers. This is a big problem for e-commerce SMBs because when they ask for more information about a potentially fraudulent order, they usually slow down the e-commerce experience for those customers, and if they are real customers, if they are real people like you and me buying something from the site that can really deteriorate the consumer experience.
So it’s a real problem to easily find these scam orders and not spoil the consumer experience and Riskified’s AI engine basically tries to do that. What’s really special about their company is something called a chargeback guarantee, and it basically tells the consumer, their agreement between Riskified and the e-commerce company that says, “Hey, if we allow a fraudulent order on your platform, and it’s a fraudulent order, but we say it’s real, then we’ll cover the cost of your lost goods.”
This therefore makes the value proposition for e-commerce businesses very important. Basically, they take no risk for these fraudulent orders. It is really useful for e-commerce businesses to use Riskified. The problem is that because the AI is inaccurate more often, that means it has to pay more in chargebacks, which is fully accounted for in its gross margin. The key for this company is to see their gross margin continue to grow, because that means they pay less in chargebacks and their AI is better.
What happened in their third fiscal quarter is that their gross margin completely plummeted. It went from 52% in the third quarter of 2020 to 46% in the third quarter of 2021. It basically signaled that our AI was getting a lot wrong and it was really bad because a lot of investors just said, “Hey, this AI doesn’t wasn’t all she was. cracked to be, the business is flawed.” Management said, “Hey, that’s not 100% true.” We’re entering new markets, namely the crypto market. But it really did bring down the business.
In the fourth quarter, he rebounded. Their gross margins were 53%. Basically, they just bounced back. Granted a period a year ago was 58% margin. It is lower than the period a year ago. But the company has yet to rebound even though its gross margin has. That’s kind of why I see it as a 10X opportunity right now.
It’s like, hey, the AI isn’t as bad as people think. It is still doing very well to return to normalized gross rates. Still, the stock hasn’t really jumped since reporting fourth-quarter earnings. With the company only having a 1% market share in the global e-commerce space, it is truly poised to continue growing and winning customers in the SME e-commerce market.
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