This week James Anderson, widely regarded as one of the UK’s top fund managers thanks to his early bets on Facebook, Amazon and Tesla, claimed that the FTSE 100 looks like an index from the 19th century. Anderson points to a scarcity of fast-growth technology companies on the London market and even went as far as to say there is a “sickness” in the UK market.
Back in March I wrote a post about how UK-US market disparity is undervaluing UK-listed companies after the chairman and CEO of Blue Prism Group claimed that the UK-listed company was worth a fraction of what it would be if it was listed in the USA, because British investors did not have enough understanding of tech.
It is curious then that Danish consumer-review site Trustpilot Group chose London for its IPO in March, with an opening market cap of £1.1 billion. Today Trustpilot shares trade near to the top of their 52-week range, with a market cap of £1.45 billion. The prospect of a large technology company with plenty of potential to exponentially grow its revenues whilst maintaining a relatively low-cost platform should be an exciting proposition – but is it?
I have been struggling to get excited about Trustpilot ever since its IPO despite its many positive attributes. Unlike other ‘young’ tech companies, Trustpilot isn’t burning through investor cash: the company makes a paper profit if you strip out interest and depreciation costs. The stock is also relatively cheap, trading at c.10 times sales, compared to the c.20 times sales multiple typically enjoyed by other SaaS businesses, most notably in the USA.
The freemium business model is also eminently simple: 420,000 businesses use TrustPilot for free, whilst 26,000 pay an average of $5,600 for additional ‘premium’ services. The brand is well established and should be able to leverage the network effect to entrench its position within a huge and fast-growing market: the more reviews and businesses that are listed on the Trustpilot platform, then the more value it offers users and customers.
So why can’t I get more excited about Trustpilot? Firstly, there are rumours that Trustpilot employs a ‘heavy lift’ human-led approach to its sales function to convert ‘free’ customers into paying ones. Relying on people-driven sales rather than ‘no effort’ endemic in-platform sales suggest an imperfection in the platform and a possible restriction on scaling growth.
I also worry that hubris might cause Trustpilot to overplay its hand and burn through its goodwill with its paying customers. There is not much loyalty when it comes to online platforms, and it would not take much for customers to downgrade to the ‘free’ service or to even migrate elsewhere, especially if a rival offered a saving on $5,600 in annual fees.
Google Reviews are also already endemic within search and Facebook also offers in-platform reviews too. With their ability to track their users’ behaviours and preferences across the Internet thanks to their portfolio of integrated services, Google and Facebook are aligning reviews much more closely with online purchase behaviours than TrustPilot is able to. As these tech titans make reviews an integral and endemic part of the online experience, they might be able to offer more value to paying customers in the form of deeper data, and may crowd out the importance of Trustpilot in the minds of consumers.
Google has long been increasing the emphasis on personalisation in its results, and it is inevitable that this will soon come into its reviews too. General or ‘generic’ reviews from the general populous are useful, but sophisticated consumers really want to know what people ‘like them’ think about a product or service. With its AI and big data sets, a player like Google could soon provide this using the same technology that is used to serve more relevant ads and sponsored search results, leaving Trustpilot trailing in its wake.
There is also the question of trust in Trustpilot. As it grows the platform has the mammoth task of removing fraudulent reviews and preventing manipulation. This moderation requires more employees and brings more cost, undermining the opportunity for unmediated exponential growth that investors look for in a platform play. And if Trustpilot fails in this, consumer affinity and trust in the brand could quickly migrate elsewhere.
All of which summarises why I cannot get excited about Trustpilot shares. Given its brand and the immediate market opportunity, I probably should be excited. But I just can’t get there.