2021 has seen a flood of IPOs. Some have failed to inspire investors. Others have probably delivered beyond their wildest expectations. One clear example of the latter is the review platform Trustpilot Group (LSE: TRST). Its stock is up 70% since coming to the market in March. Should I, therefore, consider this FTSE 250 member as one of the best shares to buy now?
Trustpilot: what’s it all about?
While relatively new to the stock market, Trustpilot has actually been around for 14 years. Its aim is to “foster trust and inspire collaboration“. It does this by allowing shoppers to submit reviews of businesses, thereby allowing other consumers to gain an understanding of whether it’s worth dealing with them. It also gives the businesses an opportunity to improve operations based on customer feedback.
As a consumer, I can’t deny that I’m influenced by online reviews. If I know something I need works well based on what other people have to say about it, I’m more likely to buy. It’s a form of ‘social proof’ — the tendency for us to copy what others do if we can see that whatever decision they’ve made has benefited them. With 120 million reviews on its site by the end of last year, Trustpilot is perfectly set up to take advantage of this powerful psychological urge.
So, business is good?
Yes, it seems so. In its most recent update, the company said that it had grown revenues by roughly 31% over the first six months of 2021 compared to the previous year. It now expects these to be $62m when it officially confirms interim numbers on 15 September.
The fact that a lot of revenue is also recurring is something I really like since it gives the company a good degree of visibility. Throw in a market that only looks likely to grow in the years ahead due to the huge rise of e-commerce and Trustpilot’s recent performance makes sense.
And the risks?
One rather obvious thing to highlight is that Trustpilot doesn’t make a profit. So, I do wonder what might happen to the share price when the next market correction or crash arrives. I know I’d probably want to be holding some more established companies when it does.
It’s also apparent that Trustpilot’s platform has the potential to be abused through the proliferation of fake reviews. Earlier this year, the company said that it had removed more than 2 million dodgy entries over the previous year. Sure, most of this was done via automated software. However, this does send a message to me that I can’t be absolutely sure that what I’m reading is genuine. And if I can’t completely trust what I see on Trustpilot, would I want to own a slice of it?
Third, I’m questioning how strong the economic moat (if any) is here. Trustpilot is a giant in this space. However, most successful companies eventually attract competition.
On the sidelines
TRST is certainly an interesting proposition. Is it one of the best shares to buy right now though? As good as its performance has been, I can’t say I’m desperate to own the stock yet. A valuation of almost £2bn looks full enough to me.
Whether I get it or not, I’m content to sit on the sidelines for a better opportunity to buy.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Paul Summers 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.