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Shares of enterprise software company Riskified (NYSE: RSKD) jumped on Wednesday after the company reported financial results for the first quarter and showed meaningful progress in important areas. As of 3:10 p.m. ET today, the stock was up 14%.

A marginal improvement

Riskified’s software helps companies detect a more-accurate number of fraudulent purchases, boosting sales and lowering charge-backs, in theory. In the first quarter, the company’s merchandise volume was up 17% year over year, and its revenue was up 11%. That’s not bad, but the bigger deal is that its profitability is up.

Riskified has used artificial-intelligence (AI) software since before it was cool. But how are investors to know how effective it is? Well, the best thing to watch is the company’s gross margin.

When the company’s software messes up and approves a bad transaction, Riskified eats the expense. This reduces its gross profit. The good news for investors is that the company’s first-quarter gross margin was up to 55%, which was a meaningful improvement from 52% in the same quarter of last year. Therefore, it seems that its AI improved over the last year.

This improvement boosted overall profitability. It just reported record quarterly free cash flow of over $10 million. And that’s why the stock is up.

A balanced outlook from here

Improvement is improvement, so give Riskified some credit. That said, the company’s gross margin was between 55% and 60% during its early quarters as a public company. Therefore, its software hasn’t really shown improvement over the longer term, which is discouraging.

As far as financial risk goes, Riskified’s is quite low. The company is debt-free and has $455 million in cash, deposits, and investments. It expects full-year free cash flow of $30 million. Therefore, it can easily stay in business and execute its new $75 million stock buyback plan with plenty of breathing room.

That said, its growth isn’t very impressive for a small company — one would expect gains to come easier. And given that it is a small company, losing just one important customer could be a terrible development. So there is risk here.

Given that Riskified only expects to grow revenue by about 10% this year, I don’t think it has given investors much reason to buy. But with the small improvements in the first quarter, there isn’t much reason for shareholders to sell, either.

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Jon Quast has positions in Riskified. The Motley Fool has positions in and recommends Riskified. The Motley Fool has a disclosure policy.

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