1 Growth Stock That Could Turn $200,000 Into $1 Million in a Decade | The Motley Fool (2024)

Experts believe artificial intelligence (AI) will have a profound impact on business productivity in the coming years. AI will accelerate software development, automate factory operations, and streamline workflows for employees across virtually every industry. To that end, Ark Invest estimates that AI software revenue will grow at 42%annually to reach $14 trillion by 2030.

Fintech Riskified (RSKD -0.96%) is one of many companies that could benefit from that trend. Its market capitalization is currently $965 million, but that figure could easily grow five-fold over the next decade given the tailwinds behind AI adoption and e-commerce. At that pace, $200,000 invested in the stock today would be worth $1 million by 2033.

Here's what investors should know about Riskified.

Solving the problem of e-commerce fraud

Riskified believes traditional risk management systems are prone to inaccurate decisions because they lack sufficient data. That creates a couple of problems for e-commerce merchants. They lose revenue when legitimate transactions are declined, and they incur chargeback expenses when illegitimate transactions are approved. Ultimately, both problems have the same outcome: The merchant in question becomes less profitable.

Riskified uses big data and AI to solve those problems. Its platform leans on AI to correlate buyer behavior with fraud, using data from billions of past transactions as a reference point. Of course, Riskified faces stiff competition from larger payments companies and financial institutions, but its platform features deeper integrations engineered to capture richerdata than alternative systems. That theoretically makes its AI better at identifying legitimate and illegitimate transactions.

Ultimately, Riskified increases approval rates and reduces chargeback events for online businesses, which translates into higher revenue and lower costs. In fact, the 10 largest merchants on its platform have reported an 8% increase in revenue and a 39%decrease in fraud-related operating expenses. That compelling value proposition has helped Riskified keep churn very low. The company reported a gross retention rate of 99%last year, meaning it kept the vast majority of its merchants.

However, the broader e-commerce industry struggled last year as consumer spending slowed in response to high inflation, and that led to lackluster financial results from Riskified. Revenue increased only 14% to $261million, a material deceleration from 35%growth in the prior year. On the bright side, the company reported a non-GAAP profit of $0.03 per diluted share, up from a loss of $0.04 per diluted share, and it's well positioned to reaccelerate top-line growth in a more favorable economic environment.

The potential for fivefold returns

On the latest earnings call, CEO Eido Gal said Riskified is "the best at analyzingan e-commerce transaction and determining whether or not it's fraudulent." That advantage positions the company for strong growth in the coming years. E-commerce is taking share from physical retail, and online merchants should naturally gravitate toward the most effective risk management system.

Not surprisingly, Riskified is indeed gaining market share. Its gross merchandise volume (GMV) climbed 18% to $106billion last year, easily outpacing the 7% growth in retail e-commerce sales. But the company has only started to realize its potential. Retail e-commerce sales totaled $5.7 trillionlast year, meaning Riskified captured less than 2% of its addressable market.

With that in mind, sharescurrently trade at a reasonable 3.6times sales. If Riskified grows revenue at 18% annually over the next decade, its $965 million market cap could climb five-fold without any change in its price-to-sales ratio. That seems entirely plausible given its superior technology, and the tailwinds behind e-commerce and AI software adoption.

A caveat about concentrated portfolios

Investors that sink large sums of money into a small number of stocks are taking on substantial risk. They are effectively tying their financial wellbeing to the performance of a few companies. But portfolio diversification can mitigate that risk. Investors that spread capital across a large number of stocks (i.e. at least 25) are less likely to suffer catastrophic losses.

With that in mind, very few investors have portfolios large enough to warrant a $200,000 investment in any single stock. But the prospect of five-fold returns is still attractive with much smaller sums of money. While I believe Riskified is a stock worth owning, I would keep your position relatively small -- no more than 2% of a portfolio.