Shares in Trustpilot (LSE: TRST), which went public last year, are having a terrible run in 2022. Year to date, the share price is down about 50%.
The last time I covered Trustpilot, in October, I had issues with the stock’s high valuation. However, since then, this has come right down. Is this a buying opportunity for me? Let’s take a look.
Is now the time to buy the shares?
A recent trading update from Trustpilot, posted on 12 January, showed that the growth story here is still intact. For the year ended 31 December, total revenue came in at $131m, up 24% year-on-year on a constant-currency basis. According to CEO Peter Holten Muhlmann, this was ahead of expectations. Meanwhile, annual recurring revenue (ARR) amounted to $144m, up 26% at constant currency.
Looking ahead, City analysts expect Trustpilot to generate revenue of $165m for 2022. If the group can achieve this, it would represent top-line growth of around 26%.
These numbers suggest to me that Trustpilot is still enjoying a healthy level of growth. However, I’ll point out there’s no guarantee the company will continue growing at this rate. If rivals were to steal market share (‘barriers to entry’ here seem quite low, to my mind), growth could slow.
Is it making any money?
Of course, just because Trustpilot is growing at a healthy rate doesn’t mean the company is a good investment. One thing we also need to look at is profitability. Is Trustpilot making any money? Because if it’s not, it’s going to be a higher-risk investment. One reason the share price has tanked recently is that investor sentiment towards unprofitable software companies has really deteriorated.
Looking at analysts’ forecasts, Trustpilot is not expected to generate a profit in the near term. For 2021, they expect a net loss of $14.5m. And for 2022, a net loss of $7.3m is pencilled in.
This lack of profitability is a bit of an issue for me. That’s because the stocks of unprofitable companies tend to be both highly volatile and highly unpredictable. I prefer to invest in companies that are already profitable.
Is the Trustpilot share price too low?
We also need to look at the stock’s valuation. Is there value on offer here after the recent share price fall Well, Trustpilot doesn’t have a price-to-earnings ratio because it’s unprofitable. But it does have a price-to-sales ratio and that’s about 5.5 on a forward-looking basis.
That valuation is not that high, to my mind, given that Trustpilot has a strong level of recurring revenues. At that valuation, I do see a little bit of value on offer.
My view now
Putting this all together, I can see some appeal in Trustpilot after the recent share price fall. The company is still growing and the valuation doesn’t seem that high.
However, given the risks, Trustpilot isn’t a buy for me right now. Ultimately, it doesn’t make my ‘best stocks to buy’ list.
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Edward Sheldon 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.
