Why risky stocks soared today

Stocks of enterprise software companies dangerous (RSKD 15.30%) Shares soared on Wednesday after the company reported first-quarter financial results and showed meaningful progress in important areas. As of 3:10 PM ET today, the stock is up 14%.

slight improvement

Riskified’s software helps businesses more accurately detect the number of fraudulent purchases, theoretically increasing sales and lowering chargebacks. In the first quarter, the company’s merchandise volume increased 17% year-over-year, and sales increased 11%. That’s not bad, but the bigger problem is that profitability has increased.

Riskified has been using artificial intelligence (AI) software since before it was available. But how do investors know how effective it is? Well, the most important thing to pay attention to is the company’s gross profit.

If the company’s software runs into problems and authorizes incorrect transactions, Riskified will cover the costs. This reduces total profit. The good news for investors is that the company’s first quarter gross margin was up to 55%, a meaningful improvement compared to 52% in the same quarter last year. So it seems like AI has improved compared to last year.

These improvements have improved overall profitability. We just reported record quarterly free cash flow of over $10 million. And that’s why stocks are up.

Balanced view from here

Improvement is improvement, so please give Riskified credit. That said, the company’s gross margins were between 55% and 60% during the company’s first quarter as a public company. So the software hasn’t really shown any improvement in the long run, which is disappointing.

As far as financial risk is concerned, Riskified is very low. The company has no debt and has $455 million in cash, deposits and investments. Annual free cash flow is expected to be $30 million. This makes it easy to stay in business and execute our new $75 million share repurchase plan with plenty of headroom.

That said, for a small company, the growth isn’t that impressive. You can expect profits to come more easily. And given that it’s a small company, losing just one important customer could be a terrible development. So there is a risk here.

Considering that Riskified only expects revenue growth of about 10% this year, we don’t think there was much reason for investors to buy. However, with only a small improvement in the first quarter, there isn’t much reason for shareholders to sell.