A lack of rev

One of the reasons the Trustpilot share price has taken a tumble today is due to the slow down in revenue growth. Despite reporting an increase in revenue, its growth rate is decelerating. Full-year revenue growth came in at 29% compared to 31% in the same period in 2021. Additionally, hopes that the company would be more aggressive in its push to expand in the US were deflated. Trustpilot only managed to secure a measly 9% revenue growth there. The company’s record of delivering 30% compound annual revenue growth since 2015 was also missed, showing underperformance. Further, the platform’s cumulative number of reviews and number of reviewed domains also displayed a slow down in growth.

Not a full night

Bookings are usually a key metric I seek comfort in when revenue disappoints, as it acts as an indicator for future cash flow. However, Trustpilot’s bookings growth for the year also disappointed. It slowed to 27%, just below the 28% reported in H1 2021. On the flip side, bookings growth was at generally healthy levels for the UK (36%) and Europe/rest of the world (40%). This shows me that the company actually has potential, but is not maximising it in the world’s largest economy, as bookings growth only came in at a discouraging 15% for the US.

Turbulence ahead

Trustpilot finished the year with a loss of $26m, doubling the losses of 2020. Although the bigger loss this year was attributed to the firm’s IPO, it still shows that Trustpilot is not anywhere near achieving profitability. Moreover, headwinds from a high interest rate environment do not improve the outlook for the company as both merchants and consumers will be looking to save on costs if the retail sector cools down.

Trust the process?

Despite the negatives, Trustpilot still remains the market leader of the reviews space in the UK and most of Europe. Its net dollar retention rate came in at 99% which shows that merchants enjoy the services provided by the platform. The company also ended the year with $93m in cash and zero debt on its balance sheet. This gives it dry powder to grow more in a market that is still largely untapped. This sentiment was echoed on the earnings call as the board strives to accelerate investment in 2022 to secure more growth, particularly in the second half of the year.

In spite of that, I am still bearish on the stock due to the recent results and the economic headwinds for the year ahead. Quite simply, the figures reported for 2021 are not satisfactory for a growth company. Until guidance and return on investments come to fruition, I foresee the Trustpilot share price continuing to suffer. I won’t be buying the shares for my portfolio.

As the latter once remarked: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.“

Today, I’m going to focus on two UK growth stocks that, thanks to the ‘Sage of Omaha’ and his colleague’s advice, I thankfully never fancied and still don’t. 

70% down!

I was sceptical about global review platform Trustpilot (LSE: TRST) when I first looked at it last September. At the time, the share price had soared 70% or so since its IPO earlier in the year.

Despite such impressive gains, I just couldn’t shake the feeling that it lacked an ‘economic moat‘. This is a term coined by Buffett to describe a business with sufficient competitive advantages to consistently fight off rivals. Might it be possible to copy what Trustpilot has done with sufficient capital and eventually steal its crown? I believe it is. 

But this wasn’t the only red flag for me. As well as being concerned about the potential for Trustpilot’s review system to be abused by bad actors, I was wary that the company was not making a penny in profit. 

Since then, the shares in this growth stock have tumbled almost 70%!  

Trustpilot isn’t without promise. Back in January, the company announced it expected FY21 annual recurring revenue to hit $144m. That’s a sizeable jump from the $119m achieved in the previous year. Based on this, investors might suggest the stock is a potentially lucrative contrarian pick.

With the rotation into value showing no sign of abating just yet, however, the outlook for the share price looks pretty bleak. Like Warren Buffett, I’d prefer to stick to proven quality stocks rather than take on the additional risk here.  

Another struggling growth stock

A second company I’m steering clear of is furnishings and homewares retailer Made.com (LSE: MADE). Just the fact that I’ve never looked at this growth stock until now speaks volumes.

While investors in Trustpilot enjoyed early gains, anyone backing this other relatively new stock will only have seen their stake sink in value. From a 52-week high of 214p, Made.com’s shares are now languishing at 73p a pop.

Again, the lack of economic moat strikes again. With so much competition, is there anything that will compel me to only shop with Made? Not at all. Contrast this with Buffett’s huge holding in Coca-Cola. The owns so much of the beverage titan because he knows a lot of people refuse to drink any other brand. This advantage arguably makes it far less risky. 

On top of this, the rise in the cost of living can’t be good for business. The boom in home improvement we’ve seen since the pandemic arguably peaked long ago too. Yesterday’s news that CEO Philippe Chainieux is stepping down is another unfortunate development.

With a market-cap now below £300m, perhaps the fall has been overdone. The website certainly looks slick and Made appears savvy when it comes to social media. For me however, this mostly presents as another unprofitable story stock that was opportunistically listed. 

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.

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.

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.

The last time I covered Trustpilot, in October, I had issues with the stock’s high valuation. However, since then, this has come right down. Is this a buying opportunity for me? Let’s take a look.

Is now the time to buy the shares?

A recent trading update from Trustpilot, posted on 12 January, showed that the growth story here is still intact. For the year ended 31 December, total revenue came in at $131m, up 24% year-on-year on a constant-currency basis. According to CEO Peter Holten Muhlmann, this was ahead of expectations. Meanwhile, annual recurring revenue (ARR) amounted to $144m, up 26% at constant currency.

Looking ahead, City analysts expect Trustpilot to generate revenue of $165m for 2022. If the group can achieve this, it would represent top-line growth of around 26%.

These numbers suggest to me that Trustpilot is still enjoying a healthy level of growth. However, I’ll point out there’s no guarantee the company will continue growing at this rate. If rivals were to steal market share (‘barriers to entry’ here seem quite low, to my mind), growth could slow.

Is it making any money?

Of course, just because Trustpilot is growing at a healthy rate doesn’t mean the company is a good investment. One thing we also need to look at is profitability. Is Trustpilot making any money? Because if it’s not, it’s going to be a higher-risk investment. One reason the share price has tanked recently is that investor sentiment towards unprofitable software companies has really deteriorated.

Looking at analysts’ forecasts, Trustpilot is not expected to generate a profit in the near term. For 2021, they expect a net loss of $14.5m. And for 2022, a net loss of $7.3m is pencilled in.

This lack of profitability is a bit of an issue for me. That’s because the stocks of unprofitable companies tend to be both highly volatile and highly unpredictable. I prefer to invest in companies that are already profitable.

Is the Trustpilot share price too low?

We also need to look at the stock’s valuation. Is there value on offer here after the recent share price fall Well, Trustpilot doesn’t have a price-to-earnings ratio because it’s unprofitable. But it does have a price-to-sales ratio and that’s about 5.5 on a forward-looking basis.

That valuation is not that high, to my mind, given that Trustpilot has a strong level of recurring revenues. At that valuation, I do see a little bit of value on offer.

My view now

Putting this all together, I can see some appeal in Trustpilot after the recent share price fall. The company is still growing and the valuation doesn’t seem that high.

However, given the risks, Trustpilot isn’t a buy for me right now. Ultimately, it doesn’t make my ‘best stocks to buy’ list.

• Some FTSE 250 growth stocks have more potential than others
• These companies have unique competitive advantages
• They could report substantial growth over the next decade

Recently, I have been looking for FTSE 250 growth stocks to add to my portfolio. I am looking for companies with fantastic growth potential over the next decade and a robust competitive advantage to help them achieve their aims. 

Here are two companies I would buy, considering their growth targets for the next couple of years. 

FTSE 250 growth stocks 

The first on my list is Trustpilot (LSE: TRST). As the world becomes more digital, service providers need to show their customers they are trustworthy. Customers also want to know the enterprise they are buying from is not a scam. 

Trustpilot fulfils this niche in the market. The company has built a brand that is well trusted by consumers and businesses alike. This is a tremendous competitive advantage. The group has developed this trusting relationship over the years.

The longer it is able to maintain the relation with users, the more significant the advantage will become. Indeed, I think it would take years and a vast amount of capital for a competitor to achieve the same stakeholder trust and awareness level. 

Of course, this does not guarantee that the business will never face any competition. I think there will always be challenges to its dominance. The company also needs to ensure that it maintains the quality of reviews. If it lets its guard down, the trust between stakeholders will quickly vanish. 

Despite these risks and challenges, I would be happy to buy the stock for my portfolio of FTSE 250 growth shares today, considering its substantial competitive advantages. 

Defensive market

In my opinion, the food industry is one of the most defensive. Humans will always need to eat and drink, so it seems likely there will always be a market for these products. 

That is why I think Premier Foods (LSE: PFD) also deserves a position in my long-term growth portfolio. The owner of the Mr Kipling brand, among others, is coming out of a decade-long slump, which began during the financial crisis. 

However, over the past couple of years, the company has made substantial progress reducing debt, cutting pension liabilities, and freeing up cash to invest in marketing. 

Now it has removed these chains from around its neck, I think the group is primed for growth over the next decade. It is planning to hike marketing and investment spending further and increase shareholder returns. 

While the food industry is defensive, it is also incredibly competitive. And competition is probably the biggest challenge the group will have to deal with over the next few years. 

Despite this headwind, considering its long-term potential, I am excited about the outlook for the FTSE 250 company. 

Pre-IPO investors selling out

The main reason for the slump in Trustpilot shares was due to a large chunk of stock being sold by some early investors. These funds included Seed Capital and Sunley House Capital Management. The investors from these funds had bought in pre-IPO. Usually, there’s a lock-in period following an IPO, which means that investors can’t sell shares for a certain period. This helps to prevent a large amount of selling during the first few weeks of trading for the business.

It’s unclear whether this was the first opportunity the investors had to sell shares, or whether they all decided that now was going to be a good time to do so. Either way, the group of pre-IPO investors ended up selling £142m worth of stock in one block trade.

This caused Trustpilot shares to drop by 10% on Wednesday, without much demand to buy the shares. The fact that this was done in one go didn’t help things. Staggering share sales in smaller chunks over the next couple of weeks would have provided less of an impact. Ultimately, this didn’t happen, causing the rather unsightly slump in the share price.

Struggling to find value in Trustpilot shares

I don’t know exactly why the funds decided to sell. These were investors who had been involved in the company before it went public, so it might simply have been a case of wanting to take a profit. Given that these are early stage investors, the funds will have seen at least a 25% return. 

However, it might also be that the funds had decided that now was the right time to sell. If the current price was fair value, or future upside is limited, then it would have made sense to exit. 

When I look at the latest results from the company, I don’t see the kind of growth levels I’d get excited about. H1 2021 revenue grew by 31% year-on-year, but it made a loss of $17.1m. The loss was larger than the previous period, although this can be put down to high IPO costs.

For a high-growth company that has just gone public, I’d have thought the report would show greater momentum and optimism than it actually did.

So when I consider if Trustpilot shares are a bargain after the fall yesterday, I’m not convinced. I think the outlook growth isn’t high enough to make the shares undervalued at 330p. After all, the valuation of the company has already jumped by a quarter in less than a year. With no dividends currently being paid either, I don’t see much to be gained from buying its shares right now.

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.

With that in mind, here are three top tech stocks I’d buy for my portfolio today. 

Tech shares to buy

The first organisation is Moonpig Group (LSE: MOON). Some might argue this isn’t really a tech stock but more of a cards and gift retailer. That is a valid point, but it ignores the company’s tech focus. 

I think it’s unlikely the business would be as successful as it is, if it hadn’t invested so much money in technology to streamline the order process for customers. 

Today, the company benefits from repeat orders from its customer base, which it can support through marketing efforts and reminders. These marketing initiatives are paying off.

In July, the group announced that revenue in its current financial year would range £250m-£260m, implying growth of as much as 50%. In its latest trading update, management upgraded this projection to £270m-£285m. 

This growth is the reason why I think Moonpig is one of the best tech shares to buy today. That’s why I’d buy the company for my portfolio. 

Challenges it might face as we advance include higher costs and increased competition in the gifting sector. 

Trust is key

Trustpilot (LSE: TRST) is one of the world’s most trusted consumer review websites. In an increasingly digitised world, building trust between consumers and businesses has never been more critical. 

Trustpilot has witnessed rapid growth over the past few years as both businesses and consumers both want to improve their visibility with each other. I think this trend will continue. Digitisation isn’t slowing down, and neither are bad actors. The need for a trustworthy review platform is only increasing. 

Those are the reasons why I think this is one of the best tech shares to buy today. However, trust can evaporate overnight. As such, the most considerable risk the group faces is that customers start to mistrust the platform. This could lead to a sudden drop off in activity. 

Digital solutions

The final company on my list of the top tech shares to buy today is the software group Kainos (LSE: KNOS). 

Established in 1986, the organisation develops digital solutions to help organisations work more efficiently. 2020 represented the 10th consecutive year of revenue growth for Kainos. And as companies become increasingly digitally focused, I think this trend will continue.

Some of its biggest customers include the UK Home Office and the NHS, which stands testament to the organisation’s ability to attract and retain clients.

Once again, this is an incredibly competitive sector, so competition will be a significant challenge for the company. Still, considering its growth potential and existing market position, I’d buy the stock. 

Despite a 2021 recovery, Aston Martin shares are still down more than 80% since IPO. By contrast, the Trustpilot share price has gained 45%. And that’s just in the six months since the company came to market. But, as I write, the price is down 7.4% on half-year results day. So is something going wrong?

Shares in the FTSE 250 stock had already been slipping back since their peak. In fact, they had reached a 70% gain on the IPO price at one stage. When a popular growth stock climbs rapidly and then falls back, I think two things. First, I think “Ah, that always happens with popular growth stocks.” But next, I wonder if I’m seeing a buying opportunity.

Among the best UK stocks?

I avoid buying at IPO as a hard rule. Some obviously do well. But if, for example, I’d invested some money 50/50 in Aston Martin and in Trustpilot at their respective flotations, I’d still have lost out. But a winner falling back a bit, well that could offer a second bite of the cherry.

So what do the first-half figures look like? Well, not bad at all to me. In fact, the company upgraded its full-year guidance on the back of them.

Trustpilot said: “We previously provided guidance for high-teens constant currency revenue growth in the current year. On the back of stronger H1 FY21 performance, we now expect to achieve a rate of constant currency revenue growth for the full year consistent with H1 FY21.”

Revenue up, share price down

First-half revenue came in 22% ahead of the previous year, at constant currency. So that sounds like an impressive bit of upgrading to me. And yet it results in a sharp fall in the Trustpilot share price? Well, when I see something falling where there doesn’t appear to be a good reason, I do wonder if I’m looking at perhaps one of the best UK stocks. 

I can only assume the company’s widening losses lie behind the negative market reaction, even if that was largely expected. The apparent scale of the loss might have taken some by surprise though. Trustpilot recorded an EBITDA loss of $11.6m, which is quite a bit bigger than the EBITDA loss of $2.6m for the same period last year.

But on an adjusted basis, things look like they’re going in the right direction. The company reported positive adjusted EBITDA of $3.8m, more than double the $1.6m achieved in 2020.

What next for Trustpilot?

We’re still looking at negative EPS, so it’s hard to guess at any fundamental valuation measures right now. And I simply don’t buy growth stocks that aren’t yet delivering sustainable profits, recent IPO arrivals or not.

But what do I think will happen to the Trustpilot share price over the next 12 months? I wouldn’t be surprised to see the stock remain low until the market has properly digested the latest results. And then head upwards again.