It’s tempting to think of all businesses the same way. In reality, companies create all kinds of business models. And different business models are better at creating shareholder value than others. And some business models are really out of the box.
For three unique examples, consider Riskified (NYSE:RSKD), 23andMe (NASDAQ:ME), and Coinbase Global (NASDAQ:COIN). All three have interesting approaches to their respective industries that give them undeniable long-term upside.
Riskified: Zero downside for its customers
Let’s set the stage here: E-commerce is still a red-hot growth industry. According to eMarketer, global e-commerce sales amounted to $4.2 trillion in 2020. But by 2025, global sales could be approaching $7.4 trillion, good for a compound annual growth rate (CAGR) of almost 12%.
The problem for e-commerce companies is that some sales are fraudulent. To prevent this, e-commerce companies can decline suspicious charges. But they risk denying legitimate purchases, hurting their own sales volume in the process.
Enter Riskified stage left. It says that its machine-learning software can increase the amount of purchases that are approved while simultaneously decreasing the amount of fraud that slips through. According to the company, from November 2020 through January 2021, its top 10 customers decreased costs by 39% and increased revenue 8% just by using Riskified.
It processed just $63 billion in sales volume in 2020, or just 1.5% of the total global e-commerce market. So you can certainly see the case for growing its business as it gains market share and as the industry continues its impressive growth trajectory.
But how can Riskified get more customers? Here’s where the uniqueness of its business model really shines. It offers its clients its Chargeback Guarantee. With this policy, the company promises to increase approval rates, and if fraud gets through, it assumes the cost. In other words, there’s literally zero downside for Riskified’s customers. That’s a hard-to-beat business model, as long as its machine learning is up to the task.
When Riskified’s machine-learning software makes a mistake, the company refunds its customers. Therefore, this expense is listed under cost of revenue, meaning we can track the effectiveness of its software simply by measuring improvements to the company’s gross margin. In the second quarter of 2021, it had a gross profit margin of 60% as opposed to just 53% last year. In other words, it appears the business model is indeed working, making Riskified a stock to take very seriously right now.
23andMe: Getting paid to build its real business
23andMe’s mission statement is “to help people access, understand, and benefit from the human genome.” You’re probably familiar with its genetic testing kits. These help people find out more about themselves, where they come from, and whom they’re related to. Therefore, genetic testing kits speak to two parts of 23andMe’s mission statement: access and understanding.
In the first quarter of 2021, revenue was up 23% year over year to $59 million. All of this revenue came from testing kits and related subscription services. But in my opinion, this part of 23andMe’s business ultimately won’t create meaningful shareholder value. The true value proposition will come from the third aspect of its mission: helping people benefit from the genetic data it has.
Right now, 23andMe is partnering with pharmaceutical companies like GlaxoSmithKline to leverage genetic data into effective drugs. In this particular case, sharing the costs of development could result in a 50/50 split of the profits from a drug to treat cancer, which is currently in phase 1 trials. But this is bigger than one drug: There are currently more than 40 programs underway using 23andMe’s unrivaled genetic data set.
If any of those 40 programs result in a breakthrough medical treatment, 23andMe could enjoy unprecedented growth. And it’s all made possible because it has genetic data that no one else has, and this is what makes the company unique. It didn’t pay to buy this data set — it got paid $59 million in the second quarter by consumers. Therefore, I think it’s fair to say that 23andMe is getting paid by consumers to build a business with a lot of upside, and that should excite investors.
Coinbase Global: Powering a new economy
The cryptocurrency industry didn’t even exist until 2009, so this is a new economy. But it’s staggering to think how far it’s come. According to CoinMarketCap.com, the value of all cryptocurrencies combined is around $2.6 trillion as of this writing.
And consider that this is just the market capitalizations of the cryptocurrencies. There’s far more to this space, including the cryptocurrency mining hardware, ancillary products and services, and non-fungible tokens (NFTs). And Coinbase is looking to power it all everywhere.
We could focus on Coinbase’s recent announcement to launch an NFT marketplace or how the company was selected to perform custodial services for Facebook‘s new cryptocurrency project. But here I want to discuss something called Coinbase Cloud, which management says is like the cryptocurrency equivalent of Amazon‘s cloud computing business Amazon Web Services (AWS).
Let’s say you have an e-commerce business and want to allow payments by cryptocurrency. Coinbase Cloud can both facilitate the transaction and provide a wallet to store the payment. Or perhaps you want to build a cryptocurrency exchange that competes directly with Coinbase. Yes, Coinbase Cloud could provide everything competitors need to power their own platforms. And given the complexity of supporting hundreds of different cryptocurrencies, it might make a lot of sense to outsource the infrastructure to Coinbase rather than build it from scratch.
It might sound, well, unique, to provide a cloud service that allows competitors to build a product that rivals your own. But this could actually provide Coinbase with long-term upside. If more financial services companies started offering cryptocurrency services, then perhaps long-term adoption would be pushed further than where it is today.
Moreover, Coinbase’s cryptocurrency exchange relies on unreliable trading volume to generate revenue. If it was primarily powering other cryptocurrency exchanges, it would mitigate the uncertainty that comes with trading volume and make revenue more sustainable.
The one for me right now
Riskified, 23andMe, and Coinbase Global have all caught my eye with their uniqueness and long-term potential. However, Riskified is the one I believe is most worthy for inclusion in your portfolio today. Coinbase and 23andMe need small parts of their business to grow in order to be long-term winners, in my opinion. Since that future is less certain, I’d go with Riskified. Its business model is already showing signs that it’s working.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.