One UK stock that’s getting plenty of attention from investors right now is Trustpilot (LSE: TRST). Last week, it listed on the London Stock Exchange via an Initial Public Offering (IPO).
Should I buy Trustpilot shares for my own portfolio? Let’s take a look at the investment case.
Trustpilot’s business model
Trustpilot is the owner of trustpilot.com – a consumer website that hosts reviews of businesses worldwide. At the end of 2020, over 529,000 domains had been reviewed on the website, with over 120m reviews by consumers.
Trustpilot sees itself as a ‘software-as-a-service’ company (providing software services to companies in return for a regular subscription fee) and operates a ‘freemium‘ business model. This is where businesses get a limited service for free, but can pay for additional services.
The subscription offering provides businesses with a range of benefits including access to actionable insights from Trustpilot’s big-data ecosystem and proprietary data analytics software. These services can help businesses raise their profile, build their own trust credentials, and serve their customers more effectively.
At the end of 2020, Trustpilot had over 19,500 customers from over 100 countries and territories subscribing for its premium services.
What I like about Trustpilot shares
There are a number of things I like about Trustpilot from an investment perspective. Firstly, the company is easy to understand and its business model is quite straightforward. That’s a plus.
Secondly, Trustpilot has registered impressive growth in recent years. For the year ended 31 December 2020, the company recorded revenue of $102m. That compares to revenue of $81.9m and $64.3m in 2019 and 2018 respectively. However, it notes in its prospectus that in future periods, it may not be able to sustain revenue growth at levels consistent with historical periods, or at all.
Third, the company should benefit from the continued growth of e-commerce. This is an industry that’s set to get much bigger in the years ahead. This should provide tailwinds for Trustpilot.
What I don’t like about Trustpilot shares
Having said all that, I have some reservations about Trustpilot shares. One is that the company isn’t making money. Last year, it had an operating loss of $9.4m. This is pretty normal for a young, tech start-up but it does add risk. Adjusted EBITDA in 2020 was $6.1m.
Another issue is that the stock’s expensive. At the current share price, the company’s market-cap is around £1.1bn. That means the trailing price-to-sales ratio is about 15. That’s relatively high which, again, adds risk.
Additionally, I have concerns over barriers to enter in the industry. While I like the fact that Trustpilot has a simple product and business model, this could potentially be a weakness. Is there anything to stop another company such as Alphabet (Google) launching a similar product and stealing market share?
Finally, I have some concerns over the company’s reputation. In the past, it’s been criticised for allowing fake reviews to be posted on its website. It’s worth noting that trustpilot.com has 15% bad reviews on its own platform.
Weighing everything up, I’m going to keep Trustpilot shares on my watchlist for now. The company looks interesting, but I think there are better growth shares I could buy right now.
Edward Sheldon owns shares in Alphabet and London Stock Exchange. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares). 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.