I’ve been screening for stocks that may have been oversold as stock markets have fallen. This led me to a company in the FTSE 250 as its share price has fallen a disastrous 51.5% so far this year. For some additional context, the next worst performer in the index is down by 39%. Still bad, but not quite as bad.
Let’s take a look to see if I should buy this stock for my portfolio.
A rollercoaster ride since its IPO
The company is Trustpilot (LSE: TRST), the global online review platform. It’s a widely used ratings service that’s trusted by many consumers across various different sectors.
Trustpilot listed through an initial public offering (IPO) on 26 March last year at a share price of 265p. It since rallied to a price high of 482p, or 82% above the IPO, but has crashed back down to 159p as I write today. However, I do wonder if this decline is totally warranted. I think the company could have an expanding economic moat as it’s a recognisable and trusted brand. This would be hard for a lesser-known competitor to copy, at least straight away.
However, I think the valuation was just too high to begin with, and more so when the shares surged after the IPO. As it stands, the company is loss-making, which adds risk to any investment. On a price-to-sales ratio, Trustpilot is trading on a multiple of 5 for 2022. This seems a touch high to my mind. Having said this, revenue is expected to grow at a pretty punchy 24% in 2022.
So today, I think the Trustpilot share price just rallied too far, and too fast, after its IPO. The selling pressure since the peak in the share price has meant it’s now the significant underperformer in the FTSE 250.
Should I buy this FTSE 250 stock?
I do view the company favourably. As mentioned, it’s a trusted brand, and this would be hard for a competitor to replicate. Indeed, the CEO said in the recent trading update that the company is “fast becoming a universal symbol of trust”.
On this point, the financial performance in the trading update for the full year to 31 December was positive, in my view. Trustpilot said it expects revenue to have grown by 24%, and its annual recurring revenue (which is more predictable, and therefore higher-quality income) grew by 26%. Encouragingly, this was ahead of the company’s expectations. So there could be a buying opportunity here.
The last issue I have, though, is just how high the share price volatility has been. I’m not sure the selling pressure is over just yet, so my initial investment may well fall in value if I bought the shares today.
On balance, I’m going to keep Trustpilot on my watchlist for now. I see the potential here, and there might be an expanding economic moat developing. I’ll review the company again when the final results are released on 22 March.
Dan Appleby 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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