Shares in Trustpilot (LSE: TRST) – which came to the market in March via an Initial Public Offering (IPO) – have experienced a sharp pullback. In early September, Trustpilot’s share price was near 480p. Yesterday however, the stock closed at 330p.
So what’s going on with the Trustpilot share price? And has the recent weakness created an attractive buying opportunity for long-term growth investors like me?
Why Trustpilot’s share price has fallen
There are two main reasons Trustpilot’s share price has fallen recently, in my view. The first is that first-half 2021 results, posted on 15 September, were a little disappointing.
While revenue for the period was up by a very healthy 31% (22% at constant currency) to $62m, the company reported a large loss of $17.2m, due to its IPO expenses. That was much bigger than the H1 2020 loss of $5.8m. Earnings per share came in at -$4.35 versus -$1.59 in H1 2020.
What spooked investors was the H2 outlook. While the group said it expects to achieve a rate of constant currency revenue growth for the full year consistent with H1 FY21, it also said that bookings growth in H2 is likely to be little lower than in H1.
That’s because the bookings performance in H1 (37% actual growth, 28% constant currency growth) reflected an “element of recovery” and a re-acceleration from the disruption caused by Covid-19 a year ago.
The second reason the share price fell recently is that, yesterday, institutional investors sold 41.1m shares in an accelerated book-building offering at a significant discount to the previous day’s closing share price.
The institutions sold Trustpilot stock at 345p per share, representing a 9% discount to Tuesday’s closing share price. The fact that the shares were sold at such a large discount suggests demand for the stock is not so high right now. News of this accelerated book-building offering sent TRST shares down 12.8%.
Should I buy Trustpilot shares today?
As for whether I should buy Trustpilot stock for my portfolio after the recent share price decline, I’m not convinced that buying shares is a great idea.
Sure, there are things I like about the company. For example, recent growth has been impressive. Between FY2018 and FY2020, revenue climbed from $64.3m to $102m. This year, analysts expect revenue of $130m.
And Trustpilot looks set to benefit from the growth of e-commerce. The more we buy online, the more important merchant reviews become.
However, the valuation here is quite steep, to my mind. Currently, Trustpilot has a market-cap of about £1.4bn. That means the forward-looking price-to-sales ratio is about 15. That’s relatively high.
Add the fact that Trustpilot is still generating large losses and the risk/reward proposition doesn’t look so good, in my opinion.
Of course, the share price could bounce back as Trustpilot continues to grow. However, all things considered, I think there are better growth stocks I could buy today.
Like some of these…
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Edward Sheldon 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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