one of the hardest things to do as an investor is to sell a stock that you own especially one that
you are really excited about today i'm gonna tell you why i'm gonna be selling shares of riskified
a stock that i was very excited about but now i'm ready to part ways and hopefully by hearing
my reasoning it might make sell decisions easier for you my name is brian stovel
so if you look at this stock chart you can see that my investment in risk fight has not been a
good one i bought at the all-time high and when i sell my shares it's going to be all the way down
here that is literally buying high and selling low usually what we want to avoid when we're
making an investment but i'm still willing to do it to understand why i'm willing to sell shares
even though the stock is down by so much it's important to revisit our thesis now riskified
is a company many people might not know about so let's review this real quick the company's
mission is to empower business by realizing the full potential of e-commerce by making it safe
accessible and frictionless what does that mean well riskified is in the business of reducing
chargebacks for e-commerce players amazon being the largest e-commerce players but
there are many others like wayfair and etsy so here's what happens when a chargeback is made
typically a buyer makes a decision to buy a product and it's shipped to them however once
it's shipped to them something happens either it's the wrong item or it's damaged maybe it's a charge
that the buyer didn't actually make or maybe that buyer is perpetrating some type of fraud or theft
once the buyer notifies their credit card company then there's a chargeback where the buyer gets
their money back and the e-commerce company is left without the money and the inventory that they
sent in the first place now if you run your own e-commerce site and you want to avoid these types
of chargebacks then you need to create a system to identify when it might be possible and then deny
those purchases when they're made as you can see from this figure here that can be a mind-bending
headache to try and figure out riskified basically says that instead of that huge maze of confusion
you can simply plug in this software and it can approve purchases for you by measuring the risk of
any specific buyer now here's where the proof is really in the pudding if i run an ecommerce
website and i want to know if riskify works here's what it's telling me if i sign a contract
with riskified and riskified is in charge of approving or denying specific purchases it's a no
lose situation here's why on the left you can see that of risk fights 10 largest customers
they are able to cut down on spending to prevent fraud by 39 that's huge savings but it doesn't
stop there because if you're using riskified software then you're able to approve more
purchases and that leads to an eight percent bump in revenue now already that seems like
a no-brainer proposition but riskify even goes so far as to say that if they approve a transaction
and it ends up getting charged back then riskified will cover the cost of that loss that makes it a
truly no-brainer proposition and that's the big reason why i bought in now powering all this
technology is the company's proprietary artificial intelligence and based on those results it seems
like that artificial intelligence is working when brian and i first reviewed the company it reminded
me of another company that was making waves using artificial intelligence that company's upstart a
stock which i've wanted to own for a really long time haven't been able to buy because of trading
restrictions but is clearly doing a good job at changing its niche using ai so why am i selling
my shares of riskified well it all comes back to this charge back guarantee which i thought makes
it a win-win proposition but also introduces a certain level of risk as you can see here in this
promotional material risk fight says that it can offer this guarantee while still increasing your
revenue that's because it is designed technology specifically to approve high risk transactions and
it's exceptionally accurate at detecting fraud again because of its artificial intelligence
now how can we know whether or not this is true well if you dig through the notes you see that
it really comes down to gross margins which has to do with the cost of revenue right here risk
fide states that cost of revenue primarily consists of chargeback guarantee expenses
and other expenses directly related to this in other words if it's doing a good job at detecting
whether or not someone is going to be fraudulent or not then the cost of revenue should be lower
nowhere will that be more apparent than in looking at the company's gross profit margin now we can
see that that gross profit margin was steadily improving from the third quarter of 2019 all
the way through the middle of 2021 last year the company went public right at this point and it's
about at that point that brian and i reviewed this company and i was so excited that i bought shares
now it's worth pointing out that because riskified was such a small investment for me it wasn't one
that i was dedicated to keeping really close tabs on so i took a while before going back to review
my thesis when i did this is what i found while the gross profit margins were going up right after
the ipo they fell precipitously thereafter and while they've recovered somewhat they're still
far below where they were before now there are reasonable explanations for why this happened as
the company highlighted in its own conference call there is higher risk when they are in peak travel
seasons because people can cancel their travel plans furthermore they called out the fact that
they've onboarded lots of new merchants that's a good thing and those new merchants might be in new
industries like payments what that means is the company's artificial intelligence hasn't gotten
enough numbers to crunch to make it exceptionally accurate at detecting fraud now is that a huge
problem not necessarily but if i'm going to be investing in a company that i think has a
winning ai i need to know that it is applicable useful and profitable starting today i didn't
get the feeling that that's what i was getting anymore with riskify and as you can see this is
such a small part of my portfolio it's not a huge consideration this doesn't mean that riskify won't
be a good stock to buy in the future it just means that after reviewing the operations i realized
this was no longer a stock i wanted to hold it's not going to make that big of a difference on my
portfolio one way or the other the real thing to point out here is that i didn't make this decision
just because the stock went down if the stock goes down but my thesis is still very much intact then
it's worth holding on to shares perhaps even buying more and this isn't even necessarily to
say that my thesis was proven wrong risk fight has offered some pretty good reasons for why
their gross profit margins have fallen rather what this really shows is is that i made a relatively
risky bet on a company and after going back and revisiting the thesis what i really realized
is that this is one of those that i'd rather put in my too hard pile and focus on other stocks
that are down significantly from their all-time highs that i understand and have higher conviction
in what do you think of this decision let me know in the comments section below brian out