The Trustpilot (LSE: TRST) share price has just dropped by a staggering 15% after the firm released its earnings results earlier today. Here, I look into the reasons as to why the share price has crashed, and whether I will be buying the shares for my portfolio anytime soon.

A lack of rev

One of the reasons the Trustpilot share price has taken a tumble today is due to the slow down in revenue growth. Despite reporting an increase in revenue, its growth rate is decelerating. Full-year revenue growth came in at 29% compared to 31% in the same period in 2021. Additionally, hopes that the company would be more aggressive in its push to expand in the US were deflated. Trustpilot only managed to secure a measly 9% revenue growth there. The company’s record of delivering 30% compound annual revenue growth since 2015 was also missed, showing underperformance. Further, the platform’s cumulative number of reviews and number of reviewed domains also displayed a slow down in growth.

Not a full night

Bookings are usually a key metric I seek comfort in when revenue disappoints, as it acts as an indicator for future cash flow. However, Trustpilot’s bookings growth for the year also disappointed. It slowed to 27%, just below the 28% reported in H1 2021. On the flip side, bookings growth was at generally healthy levels for the UK (36%) and Europe/rest of the world (40%). This shows me that the company actually has potential, but is not maximising it in the world’s largest economy, as bookings growth only came in at a discouraging 15% for the US.

Turbulence ahead

Trustpilot finished the year with a loss of $26m, doubling the losses of 2020. Although the bigger loss this year was attributed to the firm’s IPO, it still shows that Trustpilot is not anywhere near achieving profitability. Moreover, headwinds from a high interest rate environment do not improve the outlook for the company as both merchants and consumers will be looking to save on costs if the retail sector cools down.

Trust the process?

Despite the negatives, Trustpilot still remains the market leader of the reviews space in the UK and most of Europe. Its net dollar retention rate came in at 99% which shows that merchants enjoy the services provided by the platform. The company also ended the year with $93m in cash and zero debt on its balance sheet. This gives it dry powder to grow more in a market that is still largely untapped. This sentiment was echoed on the earnings call as the board strives to accelerate investment in 2022 to secure more growth, particularly in the second half of the year.

In spite of that, I am still bearish on the stock due to the recent results and the economic headwinds for the year ahead. Quite simply, the figures reported for 2021 are not satisfactory for a growth company. Until guidance and return on investments come to fruition, I foresee the Trustpilot share price continuing to suffer. I won’t be buying the shares for my portfolio.

The post Why did the Trustpilot share price just crash? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. 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.

Successful investing is as much about avoiding duds or taking on too much risk as it is picking winners. It’s why Warren Buffett and his business partner Charlie Munger are two of the wealthiest individuals on the planet.

As the latter once remarked: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.“

Today, I’m going to focus on two UK growth stocks that, thanks to the ‘Sage of Omaha’ and his colleague’s advice, I thankfully never fancied and still don’t. 

70% down!

I was sceptical about global review platform Trustpilot (LSE: TRST) when I first looked at it last September. At the time, the share price had soared 70% or so since its IPO earlier in the year.

Despite such impressive gains, I just couldn’t shake the feeling that it lacked an ‘economic moat‘. This is a term coined by Buffett to describe a business with sufficient competitive advantages to consistently fight off rivals. Might it be possible to copy what Trustpilot has done with sufficient capital and eventually steal its crown? I believe it is. 

But this wasn’t the only red flag for me. As well as being concerned about the potential for Trustpilot’s review system to be abused by bad actors, I was wary that the company was not making a penny in profit. 

Since then, the shares in this growth stock have tumbled almost 70%!  

Trustpilot isn’t without promise. Back in January, the company announced it expected FY21 annual recurring revenue to hit $144m. That’s a sizeable jump from the $119m achieved in the previous year. Based on this, investors might suggest the stock is a potentially lucrative contrarian pick.

With the rotation into value showing no sign of abating just yet, however, the outlook for the share price looks pretty bleak. Like Warren Buffett, I’d prefer to stick to proven quality stocks rather than take on the additional risk here.  

Another struggling growth stock

A second company I’m steering clear of is furnishings and homewares retailer Made.com (LSE: MADE). Just the fact that I’ve never looked at this growth stock until now speaks volumes.

While investors in Trustpilot enjoyed early gains, anyone backing this other relatively new stock will only have seen their stake sink in value. From a 52-week high of 214p, Made.com’s shares are now languishing at 73p a pop.

Again, the lack of economic moat strikes again. With so much competition, is there anything that will compel me to only shop with Made? Not at all. Contrast this with Buffett’s huge holding in Coca-Cola. The owns so much of the beverage titan because he knows a lot of people refuse to drink any other brand. This advantage arguably makes it far less risky. 

On top of this, the rise in the cost of living can’t be good for business. The boom in home improvement we’ve seen since the pandemic arguably peaked long ago too. Yesterday’s news that CEO Philippe Chainieux is stepping down is another unfortunate development.

With a market-cap now below £300m, perhaps the fall has been overdone. The website certainly looks slick and Made appears savvy when it comes to social media. For me however, this mostly presents as another unprofitable story stock that was opportunistically listed. 

The post I’m listening to Warren Buffett and avoiding these growth stocks like the plague! appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers 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.

Trustpilot: what’s it all about?

While relatively new to the stock market, Trustpilot has actually been around for 14 years. Its aim is to “foster trust and inspire collaboration“. It does this by allowing shoppers to submit reviews of businesses, thereby allowing other consumers to gain an understanding of whether it’s worth dealing with them. It also gives the businesses an opportunity to improve operations based on customer feedback. 

As a consumer, I can’t deny that I’m influenced by online reviews. If I know something I need works well based on what other people have to say about it, I’m more likely to buy. It’s a form of ‘social proof’ — the tendency for us to copy what others do if we can see that whatever decision they’ve made has benefited them. With 120 million reviews on its site by the end of last year, Trustpilot is perfectly set up to take advantage of this powerful psychological urge.

So, business is good?

Yes, it seems so. In its most recent update, the company said that it had grown revenues by roughly 31% over the first six months of 2021 compared to the previous year. It now expects these to be $62m when it officially confirms interim numbers on 15 September.

The fact that a lot of revenue is also recurring is something I really like since it gives the company a good degree of visibility. Throw in a market that only looks likely to grow in the years ahead due to the huge rise of e-commerce and Trustpilot’s recent performance makes sense.

And the risks?

One rather obvious thing to highlight is that Trustpilot doesn’t make a profit. So, I do wonder what might happen to the share price when the next market correction or crash arrives. I know I’d probably want to be holding some more established companies when it does.

It’s also apparent that Trustpilot’s platform has the potential to be abused through the proliferation of fake reviews. Earlier this year, the company said that it had removed more than 2 million dodgy entries over the previous year. Sure, most of this was done via automated software. However, this does send a message to me that I can’t be absolutely sure that what I’m reading is genuine. And if I can’t completely trust what I see on Trustpilot, would I want to own a slice of it?

Third, I’m questioning how strong the economic moat (if any) is here. Trustpilot is a giant in this space. However, most successful companies eventually attract competition. 

On the sidelines

TRST is certainly an interesting proposition. Is it one of the best shares to buy right now though? As good as its performance has been, I can’t say I’m desperate to own the stock yet. A valuation of almost £2bn looks full enough to me.

Whether I get it or not, I’m content to sit on the sidelines for a better opportunity to buy.

The post Up 70% since its IPO, is this one of the best shares to buy now? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers 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.