Interactive Investor

Stockwatch: should you put your trust in this rebound share and buy?

16th September 2022 10:42

Edmond Jackson from interactive investor

A lot of stocks have been sold heavily this year, and some may have fallen too far. Companies analyst Edmond Jackson examines the potential of this business to bounce back.

Does an initial 20% rebound in Trustpilot Group (LSE:TRST), the listed online review platform, set a floor for a stock that fell from 460p in August 2021 to an all-time low of 54p on 7 September? 

Founded in Denmark in 2007 and reporting in US dollars, Trustpilot floated in London at 265p in March 2021, raising £427 million. This was well-timed after Covid induced more people to shop online, hence pay attention to review sites.  

Trustpilot’s jump has now eased from 75p to 67p, around 75% down on what was determined a fair pricing only 18 months ago.  

When a lock-in period ended last October, private equity groups sold £142 million worth of equity at 345p, which clearly proved the right side of the trade to be on.  

Not a huge amount has changed in the business since then, so either Trustpilot was grossly over-valued at flotation, or a capitalisation now around £300 million represents value. Which is more likely? 

This last Wednesday, a non-executive director with a financial background acquired just under £10,000 worth of equity at around 65p. Manifestly, she believes in value, although non-executive directors are encouraged to own shares.  

It will be worth watching to see if other directors buy now that Trustpilot has lifted dealing restrictions after its interim results.  

Macro reasons trigger hard-hit stocks to rally 

Various cyclical and higher risk/reward stocks have jumped in the last week or so. For example, electrical lighting importer Luceco (LSE:LUCE), media publisher Reach (LSE:RCH), also oil services groups John Wood Group (LSE:WG.) and Petrofac Ltd (LSE:PFC). Housebuilders are joining in. 

Stock charts looked over-sold in the short term; then came a sentiment shift after massive UK government intervention was declared on energy prices. Russian soldiers fleeing parts of Ukraine helped too. 

Tuesday’s bad read for US inflation has trimmed most such rises as US investors sold equities across the board. 

It is vital therefore to look beyond stock volatility and ask whether such businesses can prosper under a stagflation scenario?   

Risk-lovers embrace prospect of operating leverage  

Buyers of Trustpilot appear to have taken a “glass half-full” view on key extracts from the results statement: 

It says: “While we have not seen any significant changes in overall customer demand in our end markets, we continue to monitor the uncertain macroeconomic environment closely and we think it is prudent to take a more cautious approach to our assumptions for new business growth and retention near-term.” 

Yet management teases with: 

“However, we benefit from a flexible operating model and expect to see significantly more operating leverage in the second half of the year than previously anticipated.”  

The sense is that revenue changes get magnified at the profits level, although that can work both ways. 

Consensus revenue forecasts – probably guidance to Trustpilot’s broker – look for a 17% increase this year to $153 million, then 23% to $188 million in 2023.  

But unless tweaked in due course, the net loss and earnings per share (EPS) loss are projected to edge up to around $27 million and 7 cents respectively, then a $17 million loss and negative EPS around 6 cents in 2023. 

A context of historic losses adds to uncertainty with projections: 

Trustpilot Group - financial summary
Year-end 31 Dec2018201920202021
Turnover ($ million)64.381.9102131
Operating margin (%)-40.4-28.0-8.9-18.4
Operating profit ($m)-26.0-23.0-9.1-24.2
Net profit ($m)-26.0-22.7-12.3-25.9
Reported EPS (cents)-6.4-5.5-3.0-6.5
Normalised EPS (cents)-6.4-5.5-2.9-6.4
Operating cash flow/share (cents)-4.7-2.41.8-1.4
Capex/share (cents)0.10.81.21.1
Free cash flow/share (cents)-4.8-3.20.6-2.5
Cash ($m)8.335.050.493.2
Net debt ($m)5.1-30.4-20.8-80.1
Net assets ($m)-16.614.57.059.5
Net assets/share (cents)-4.13.61.714.4
Source: flotation prospectus and published accounts

Might Google tighten its grip on reviewing? 

On a marketing angle, my chief concern is whether Google Customer Reviews compromise Trustpilot sufficiently to hinder a transition to profit. 

If people set Google Chrome as their default web browser for searching (like I do, within Microsoft Edge as my main browser), Google showcases its own Customer Reviews whenever you look up a business.  

Personally, I have consulted Trustpilot less in recent years, unless doing a detailed search of a business’s reputation. 

For domestic services, in the UK there is Checkatrade.com (a subsidiary of mid-cap Homeserve (LSE:HSV)) and trustatrader.com which advertises quite intensively.    

I tend to regard Google Reviews as relatively more objective, and doubt that if US anti-trust measures came about versus Alphabet Inc Class A (NASDAQ:GOOGL), the owner of Google, it would present much risk to reviewing.  

Review sites may not reflect normal distribution of customer experiences 

The tendency of review sites is to skew towards good and bad reviews. 

For example, even the best restaurants do not meet everyone’s expectations, and broadband providers upset some customers eventually. In business, someone will always have grounds to complain and online reviews are a swift go-to. 

Positive reviews often arise when a business subscribing to Trustpilot swiftly prompts a customer to review, either upon receipt of an item, or straight after a service is performed. 

Insurance is a good example, where experience of the salesperson may have no relation to what happens when you make a claim. 

Reading review sites, you therefore have to mentally adjust for extra elements of complaining and “boosterism”.    

Subscription model aids forward visibility of revenues 

It is easy to assume Trustpilot’s reference to “bookings” in its results implies some kind of transaction fee from reservations made at hotels or restaurants via its website.  

But a note on “Operating metrics” within the interim statement defines bookings as “the annual value of contracts signed or renewed in a given month” – the duration typically being12 months.  

The geographic break-down of bookings and revenue reflects a firm link.

Underlying dynamics look healthy, with interim group bookings up 22% to $87 million, supporting revenue up 25% to $74 million (both at constant currency).  

Yet after existing for 15 years, Trustpilot estimates its annual recurring revenue is only around £130 million equivalent. 

Despite concerns about discretionary consumer spending in the UK, bookings here rose 27% at constant currency; likewise in rest-of-world, although the US grew only 8%, affected by “a challenging recruitment market” plus organisational change. 

Can Trustpilot become cash generative without another fundraising? 

A $9 million interim loss is down from $17 million like-for-like, and end-June cash was $73 million cash, down from $91 million like-for-like, after an $8 million negative currency translation effect.  

Quite how realities of a recession will affect Trustpilot seems a guess. At least there is no debt to support, beyond $14 million lease liabilities. 

Bulls of consumer-related equities argue it will be a relatively mild recession because unemployment (so far) remains low. But this reflects many over-50s and others leaving the workforce. Despite energy bailouts, mid-to-low-income households will face higher bills and see spending power compromised. 

A Russian capitulation in Ukraine – say in the event of Russian regime change – would change all this, they say. I would agree, if it actually happens. 

Respecting facts as they currently stand, I maintain a circa two-year stagflation scenario in which Trustpilot will need to show exactly what it means by “operational gearing”, and demonstrate an ability to turn deep losses around. 

What opportunity cost of buying the likes of Trustpilot? 

With profit warnings likely to gather pace from this autumn, a genuine investor would wait for falls in stocks which offer established earning power and pay-outs. 

I would be wary of buying loss-makers now, when the extent of downturn ahead remains unknown. 

But if more Trustpilot directors buy, sentiment usually twitches where a stock is highly speculative. If you have already bought Trustpilot, you probably understand its risks. Hold.  

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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