Expanding Multiproduct Platform Will Open Money Transfer And Food Verticals

Key Takeaways

• Expanding the multiproduct platform into new verticals and enhancing product capabilities aims to increase market share and drive revenue growth.
  
• Shifting to multiyear contracts and restructuring efforts focus on improving net margins, retention rates, and profitability through increased efficiencies.
  
• Riskified's dependence on acquiring new merchants amidst competitive pressures and restructuring exposes the company to execution risks and potential revenue challenges.

Catalysts

Develops and offers an e-commerce risk management platform that allows online merchants to create trusted relationships with consumers in the United States, Europe, the Middle East, Africa, the Asia-Pacific, and the Americas.

• Riskified plans to expand its multiproduct platform to capture more market share across various verticals and regions, particularly focusing on newer and emerging verticals like money transfer and food. This is likely to drive revenue growth.
  
• The company’s strategy to shift merchants to multiyear contracts is expected to increase its committed revenue base and improve retention rates, which should positively impact net margins.
  
• Riskified is enhancing its product capabilities with initiatives like Adaptive Checkout, expected to improve approval rates and reduce fraud, thereby potentially boosting net margins and earnings.
  
• Increasing research and development capacity while restructuring to lower costs is intended to drive efficiencies and innovation, leading to improved net margins and profitability.
  
• With significant cash reserves and zero debt, Riskified is positioned to explore strategic acquisitions, which could provide synergies and scale, thereby enhancing revenue potential and earnings in the long term.

Riskified Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Riskified's revenue will grow by 8.2% annually over the next 3 years.
• Analysts are not forecasting that Riskified will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Riskified's profit margin will increase from -10.7% to the average US Software industry of 11.8% in 3 years.
• If Riskified's profit margin were to converge on the industry average, you could expect earnings to reach $49.1 million (and earnings per share of $0.38) by about April 2028, up from $-34.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.1x on those 2028 earnings, up from -20.5x today. This future PE is lower than the current PE for the US Software industry at 29.6x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

Riskified Future Earnings Per Share Growth

Risks

• The decline in Riskified's annual dollar retention (ADR) and net dollar retention (NDR) rates below historical levels could be a sign of potential customer attrition and competitive pressure, which may adversely impact future revenue stability and growth.
  
• High reliance on new merchant acquisitions for revenue growth rather than upselling to existing customers may indicate potential challenges in maintaining or enhancing net margins, as acquiring new customers typically incurs higher costs.
  
• The company's stated strategy to restructure its workforce and relocate positions to lower-cost regions poses execution risks, and any failure to realize planned efficiencies could impede net profit improvement.
  
• Riskified's involvement in emerging verticals such as food and money transfer carries potential market risks and uncertainties, especially if these newer markets do not scale as expected, potentially impacting revenue projections.
  
• Increased competitive pressure, as indicated by the uptick in competition and resultant merchant churn, can challenge Riskified’s ability to maintain or grow its market share, which is critical for sustaining revenue and earnings growth.

Valuation

• The analysts have a consensus price target of $5.781 for Riskified based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.0, and the most bearish reporting a price target of just $4.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $414.5 million, earnings will come to $49.1 million, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 7.7%.
• Given the current share price of $4.43, the analyst price target of $5.78 is 23.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.