2 reasons why Trustpilot shares could be in for a tough year ahead

Having fallen over 40% since its IPO, Trustpilot (LSE: TRST) shares could face headwinds in the near to medium term. This article will list out two reasons as to why I think this stock may have a tough year ahead, and won’t be buying it for my portfolio any time soon.

Reason #1 – the US market is competitive

As Trustpilot continues to expand within Europe, CEO Peter Muhlmann also recognises that the bulk of earnings potential comes from the US, which it has been trying to penetrate with the abundance of merchants available on the other side of the pond. However, the company has had trouble growing its market share due to Yelp’s and Google Reviews’ heavy dominance in the country.

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The reviews space is one that has low barriers to entry. As such, first movers’ advantage is paramount in order for successful penetration to occur, as seen with Trustpilot’s success in Europe, and more specifically in the UK. Trustpilot still has not got a unique enough selling proposition to convince retailers in the US to pay the premium on using their services. Therefore, until Trustpilot develops a groundbreaking feature, I am expecting its influence to be minimal and growth to be slower than expected.

Reason #2 – the economic landscape

With inflation at highs not seen in decades on both sides of the Atlantic, Trustpilot will struggle to get more merchants on board as increasing labour costs have forced the hand of many businesses to cut costs. In the UK alone, inflation is expected to peak at 7.3% in April, with interest rates expected to rise to at least 1% by the end of the year. This is accompanied by the US market pricing in as many as seven rate hikes as inflation hit 7.5% in January, a high not seen in four decades.

All this data certainly does not bode well for SMEs, which is the majority of Trustpilot’s customer base, and could possibly hinder further growth. As a result, I will be paying close attention to the firm’s earnings report that is scheduled to be released on the 22nd of March along with its guidance, which will paint a more accurate picture of the company’s future outlook.

The silver lining

With all of that being said, however, there could still be a potential upside to Trustpilot’s shares. Given that the stock is currently trading at close to its all time low at 159p, buying in at this price could end up being a bargain. In a year where the macroeconomic landscape is constantly changing with an extremely volatile equities market, a positive earnings report in late March along with positive guidance and a surprise decline in inflation could send the shares into recovery mode. I will be assessing the earnings report next month, which could possibly change my position of the stock.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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