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HomeLive StreamAt £1.1 billion, should you buy into the Trustpilot IPO?

At £1.1 billion, should you buy into the Trustpilot IPO?


Trustpilot today became the latest tech company to IPO with an eyewatering valuation.

It floated with a stock market capitalisation of £1.1 billion, which was the very top end of the range it indicated as it was touring potential corporate investors.

In conditional dealings today, it initally gained but that petered out for it to end broadly flat by the close of play.

Anyone who’s bought anything online has probably read its reviews of products because it’s by far the biggest such company around.

How it makes money is fairly straightforward. Companies get a limited service for free, then can buy additional services on top. These extra services are largely analytic tools that enable them to figure out how better to serve their customers.

It currently has 420,000 businesses on the free subscription service, and 26,000 paying an average of $5600, it says, generating revenues in 2020 of $119 million and “adjusted EBITDA” profit of $6.1 million.

So, should you jump in, or leave well alone?

Trustpilot pitches itself as a “software as a service” company, meaning it provides its IT service to companies in return for a regular and dependable subscription fee. SaaS businesses in the US have commanded extremely high valuations, with the poster child being Snowflake.

Trustpilot is by far the biggest brand in its market, which makes it difficult for any rivals to eat into its customer base – arguably unlike Deliveroo, which operates in a very competitive field.

While it doesn’t make a “clean” pre-tax profit – only making a surplus when you strip out interest, depreciation, amortisation and under nasties, it doesn’t lose anything like as much as other tech IPOs. It is investing heavily primarily in sales and marketing to build its commanding market position. When it dialled that down during the Covid crisis, it says it did actually make a profit for a couple of months.

Many profitable SaaS businesses trade at 20 times sales but Trustpilot is more like 10 times, reflecting its lossmaking status and the early stage in its plan for world domination. This could be read as suggesting buying in now will get you into bigger share price growth to come.

Trustpilot will become more valuable the faster it grows, because as more people review companies, the more companies will want to subscribe to its services. Every year, it grows rapidly, suggesting that evolution is happening.

Even companies not paying for the service are potentially increasing the value of the business because they are boosting the ecosystem and brand recognition around it. A “network effect” in the jargon.

It is building additional services to bring in more revenues and hook customers into its services for longer, such as product reviews, location reviews and, for retailers, store reviews.

Online sales are only going to get bigger.

Big, savvy investors Fidelity, Blackrock, Capital and Janus Henderson bought into the float.

We are in a season of extremely high valuations for tech IPOs with a flurry of floats hitting the market. Tech shares have risen dramatically through 2020 but have lost a lot of those gains recently.

Snowflake IPO’d at $120 a share, climbed to $390 last August and has now crashed to $222. And Snowflake’s software service seems far more sophisticated, wide-ranging and valuable to its clients than Trustpilot’s.

Many Trustpilot customers will simply stick with the free model, refusing to buy the company’s paid-for services.

Some customers complain that the Trustpilot sales operation is too pushy which could backfire against it when it comes to renewals.

Ironically, there are negative Trustpilot reviews on its own website around such issues. Trustpilot denies this is a widespread issue and that the complaints are a tiny minority of cases.

Trustpilot’s reviews have been criticised for being too easy to fake. It says it has invested in sophisticated anti-faker AI but the suspicion will be hard to overcome and could pose legal and regulatory challenges to the company.

Several senior executives left the company in the year or so before the IPO which is unusual, although Trustpilot says that was no more than is normal for a company of its size, particularly as it had cut some staff during the Covid downturn.

There are potential rivals such as Yelp and Tripadvisor which could move into Trustpilot’s space of more generic reviews of online companies, but Trustpilot has a big lead which gets more unassailable by the day.

Trustpilot’s market is huge, and growing. The company is an impressive sales machine and is a clever business proposition.

I have no doubt that it will grow rapidly and will throw off cash and profit in the coming years.

However, I am concerned that we are at a risky part of the cycle for tech companies and was disappointed to see Trustpilot go for the very top end of its valuation range. I do not see its software as totally critical to a company as other SaaS companies’.

I would have rather seen it price the stock lower and leave more in the tank for investors.

Valuing tech stocks is so often more to do with gut feel and sentiment, and I’m really torn on Trustpilot – more than on Deliveroo, which I would avoid because of its tough competition and high valuation.

As a patriot, I’m delighted its Danish founder chose the London Stock Exchange over Amsterdam or New York.

But I’m afraid at this price I’m not giving it a five star rating.


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