Down 10% today but up 123% in a year, what’s up with this growth share?

Jon Smith notes a short-term dip in the Trustpilot share price today, but explains why the growth share could continue to rally in the long term.

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Growth shares typically have higher volatility than more mature large-cap firms. This is because investors are trying to keep up with the expectations of how well the company could do in the future. Given that this can change significantly as a growth business gets larger, the stock can take large swings both up and down. Here’s one such case.

Details moving the share price

So far today (20 March), the largest faller in the FTSE 250 index is Trustpilot Group (LSE:TRST). It’s down 9.8% following a share placement announcement.

In short, private placements can be done by either the company selling new shares to a group of investors, or with an existing shareholder selling a bulk load of existing shares.

In this case, Vitruvian Partners sold a bulk of 15.5m existing shares at a discounted price of 200p in a private placement. As a result, the reaction to the private placement was that the share price fell to compensate somewhat.

However, in the long term, the expectation is that if the company continues to focus on core business operations, the share price should rally higher.

Trustpilot won’t receive any proceeds of the placement, as the sale was of existing shares.

Focusing on growth

Even though new investors will focus on the sharp drop today, it’s not really anything I see to worry about. It’s true that Trustpilot has been running at a loss for several years. In fact, it only flipped to making a profit in the last year.

However, the recent pivot to profit allows the business to organically help keep growth going. Although I don’t know exactly how retained earnings will be used, there are signs from the latest annual report. It spoke of how the firm “continued to invest in innovation to improve our platform. By doing so, we drove retention, new business, upsell, and further consumer engagement”.

I think further investment into tech, artificial intelligence, and development will be key areas to put more money towards in 2024 and beyond.

Given the solid set of financial results, I think the business will be able to continue to use it’s own funds in the future for new investment. Although this might mean investors looking for dividends could be disappointed, I think it should help to boost the share price going forward.

One for the future

The main risk I see with the business is that it’s quite concentrated in the offering. Aside from being a review platform, it doesn’t really have any meaningful other operations that can help to grow revenue. Right now that might not be a huge problem, but I think it will have to think outside the box for spinoff ideas as it gets larger.

Putting it all together, the 123% share price gain over the past year certainly puts the business on the map. I’m not worried about the blip today, and am considering buying the stock for further growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith 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.

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