Trustpilot (LSE:TRST) went public on the London Stock Exchange back in March. It was seen as a big win for the UK in getting the listing at the time, given that the company is Danish. After rallying 16% on the first day of trading, the share price has done well. However, yesterday saw Trustpilot shares dump 10% to close at 330p (although they were up over 2% Thursday morning). What’s the story here?
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.
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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.