Tickers mentioned in this show: RSKD, Z, ZG

Tidal River Investments positions the day after the first show airing:

Long: NFLX, ETSY, SPY, TDOC, U, WK, ATVI, AVGO, JPM, PRLB, ANET, RSKD

Show Notes: Collected RSKD data spreadsheet

Photography from Tidal River Investments can be purchased at tidalriverinvestments.com

Script

Welcome to Fluctuating Tides - Episode 12, the final episode of Season 1! I’m your host, SomeCodingGuy, and let’s get right to it!

This week I’m going to be covering Riskified Ltd, an Israeli company that qualifies as a “foreign private issuer” and trades on the New York Stock Exchange as ticker RSKD.

There’s two topics I’d like to discuss for this week’s knowledge segment - GAAP and chargebacks.

GAAP, spelled G A A P, stands for “Generally Accepted Accounting Principles”, and represents the kind of accounting standards that we expect public companies to adhere to in the filings they post with the SEC. In this show, we’ve used GAAP all the time, usually when we’re analyzing and talking about financial statements. Companies also tend to report what they call “non-GAAP measures”, or other useful numbers not required by the accounting standards, such as how many subscribers Netflix has or how many virtual visits Teledoc users did, and typically I add these non-GAAP items to the spreadsheets when they help me understand an investing hypothesis. But GAAP is a set of US standards, so when looking at foreign companies listed on US exchanges, it helps to be aware that the presentation of the numbers may not be the same as what we’re used to, and filings may be less frequent than quarterly. Riskified mentioned both of these things when they initially filed to sell shares on the New York Stock Exchange.

Now chargebacks, on the other hand, happen almost everywhere people are using credit cards. A chargeback shows up if a customer bought something with a credit or debit card, and then later they disputed the charges, such as when the item they bought wasn’t in good shape and they returned it, or if someone stole their card and bought a bunch of things with it. In addition to refunding the money to the customer (and not paying the merchant selling the goods), often there’s fees associated with processing the chargeback paid by the merchant. While it can happen for a variety of reasons, merchants generally want to minimize chargebacks if transactions look shady or fradulent.

Riskified’s main business is trying to detect future chargebacks and fraud at the time of the sale, a common and growing problem with online transactions, and they use their sophisticated AI machinery to do that. Based on their initial model with 100 datapoints on a billion transactions, they trained their computers to spot what looked like fraud, and the training generally improves as they get more data. Their customers are generally online stores, with most of their business coming from their “Enterprise Merchants”, what they define as a customer doing over $75m in online sales per year. They have also been growing their product line with smaller online retailers, commonly as part of a tie in with shopify. Riskified offers merchants a chargeback guarantee - if they run the transaction through them, and take their AI’s decision to allow or reject the transaction, they will guarantee the transaction for the merchant in case there’s a chargeback, for a small transaction fee. Riskified noted in their early case studies that their customers all increased good sales and decreased fraud across the board, in some cases by more than 60%, compared with the custom systems merchants were using beforehand.

They refer to the dollar amount of merchandise sold as be good investments for you, depending on your financial situation.

We’re here for learning, not advice, and thanks for all your support and questions over the season. I wish you the best on your financial journey, and remember, tides fluctuate! GMV, or “Gross Merchandise Volume”, a non-GAAP measure that gives us, as investors, a reasonable guess about how the business is growing or not, assuming that Riskified continues to keep their current levels of spotting chargebacks. When they’re wrong, and they have to eat the guarantee, the charge shows up as part of their “Cost of Revenue” item on the income statement, since it cost them that much to earn their revenue. If we get the ratio of this cost to the total revenue collected, we can get an idea from quarter to quarter of how the business is improving - recently, they dropped from about 47%, to 40% in the most recent quarter, with a fairly solid trend of improvement, as detailed in the spreadsheet linked from the show notes.

As a practical AI play, this looks like a fairly innovative use of the technology in the field. As Gross Merchandise Volume grows, Riskified collects more data that it can use to detect fraud in future cases, and while there’s no guarantee that fraudsters won’t outwit the AI, so far Riskified’s tech investments have been getting better at spotting the chargebacks before they happen.

Given all this, Tidal River is going to take a position in Riskified this week, and we’ll keep an eye on their growth metrics.

In addition to that, Tidal River is also going to be closing its position in Zillow Group, Inc, on both the Z and ZG tickers. The company announced that they would stop their Zillow Offers homebuying business, which was the main segment of their growth and part of the investment hypothesis in the spreadsheet included in episode 4 of this season.

I mentioned earlier that we’re in stocks for the long term, and as I mentioned in episode 1, the best time for people who buy and hold a stock to sell it is.. “never” and that we’d talk more about it later, but later has finally arrived. I don’t sell stocks because they went up a lot, or any other sorts of market measures - I sell them when the investment hypothesis has either been met, as in the company has already been fully valued based on my valuation model, or the hypothesis has been broken, usually because something changed in the company, and I’m not sure about the new business direction. While I think Zillow is still a great company with great products, without the AI home buying component, I don’t see a large amount of growth available to the company in the future above what’s already baked into the stock’s current value.

To be clear, this isn’t just about one bad quarter in my analysis, stocks can be up or down at the whims of the market, and often will move a lot on significant news, but in this case, the company is dropping the business line that represented about 60% of their revenue at the time I first analyzed it, and despite its ups and downs, also the fastest growing segment of the business. I’m sure they’ll do well with being a well run company, but in the mean time, I’m going to cut my loss and either look for some other stocks with the proceeds, or just add to existing positions.

This episode is the last one of 12 from season 1. I’m going to take break as we head into the holidays to research some more stock ideas for season 2, while leaving these positions some time to grow, and focus on winding down a very interesting year. I’m glad that all of you joined me for this show, and if you have a moment, take a look at the new website on tidalriverinvestments.com. There’s still a few series 1 photos available there, and any money earned on them will, of course, be deposited in the investment account.

As always, Tidal River Investments and I are not financial advisors, market analysts, or otherwise in any way offering advice for or against any of the securities discussed - meet with a financial advisor for that information. Stocks and funds may not be good investments for you, depending on your financial situation.

We’re here for learning, not advice, and thanks for all your support and questions over the season. I wish you the best on your financial journey, and remember, tides fluctuate!