Description

We believe Trustpilot is among the ‘babies thrown out with the bathwater’ in unprofitable the tech rout of the past year. After going public at 265GBp/share in March 2021 the shares initially rallied to 460GBp in September and have since declined 85% to 70p. This has left a unique, mission critical business with a massive growth runway and prospective EBITDA margins of >30% trading at just 1.4x revenue. If we apply 20x forward EBITDA to the UK business alone (in line with rating agencies  despite significantly higher growth prospects) we get the rest of the business (i.e. the entire EU and US) for free. We believe Trustpilot will be a multi-bagger over the next 5 years.

What is Trustpilot:

Trustpilot is an independent consumer reviews platform that seeks to become the global symbol of trust. In the UK it already is. In many other countries it is well on its way to getting there. Trustpilot has already accumulated more than 167m reviews from 21m people in over 200 countries. Close to 800k domains are already being reviewed on Trustpilot.

Like the rating agencies, it gets paid by the business being reviewed, however the reviews are from the consumers. It helps other consumers make informed purchases and it helps companies improve their services and products and benefit from a positive customer experience through positive reviews. Trustpilot’s key role as the platform is to ensure trust, transparency and authenticity of the reviews. It also increasingly provides data driven insights for the companies reviewed.

Why we like the business:

Ø  Strong network effects: more reviews lead to more businesses looking to claim their domain and eventually invite customer reviews which in turn leads to more reviews. As the Trustpilot brand grows in prominence businesses increasingly choose (pay) to display their Trustpilot ratings in advertising campaigns leading to further brand recognition (for free), more reviews, etc

Ø  Pricing power: As consumer adoption of Trustpilot grows, having the ability to interact with customers reviewing you becomes a mission critical part of your business. This enables strong pricing power. Like the rating agencies, Trustpilot has been raising prices MSD % annually. In addition, they gain a few % per year from upselling modules so that its customers spend ~10% more every year on average (in 2021 it was 14%, in 2020 in was +8%)

Ø  Recurring revenue: SaaS model with customer retention of ~85% and revenue retention of >100% (customer retention+pricing/upsell). Most of the churn happens with first time customers who either sign up but don’t end up using the product or aren’t using it efficiently. Client retention rates for customers of >1 year is >90%.

Ø  High prospective margins: This is largely a fixed cost business. Over the long-term the company targets EBITDA margins of >30% which is probably conservative for this kind of business. In its recent investor day management disclosed regional contribution margins for the past 4 years. In 2021, the UK, with just $53m in revenue already achieved a contribution margin of 57%. The average marginal profitability in the UK in 2018-2021 was 83% demonstrating the fixed nature of the cost base and where margins can get to over time.

Ø  Very long growth runway: of the close to 800k domains being reviewed on Trustpilot, 549k have been claimed, 84k have started interacting with their customers through Trustpilot’s free basic module and only 23k are currently paying customers. This shows the huge growth runway that exists within its current reach in terms consumer adoption. In addition, the company estimates there are 13m websites that are relevant for Trustpilot reviews so even consumer adoption has only reached ~3% of prospective websites to review. Overall, the company sees an addressable of market of $1.7bn in the UK (current bookings of $61m), $7.4bn in the rest of Europe ($55m in bookings currently) and $9.7bn in north America ($33m in bookings currently). In aggregate Trustpilot’s current bookings of ~$150m represents <1% of its addressable market. In Europe alone, the company’s top 6 markets (Denmark, France, Holland, Italy, Sweden and Germany) which have an aggregate GDP of $10trn (4x the UK) represent only $38m in bookings which is half the level earned in the UK, despite having a similar level of reviews (UK has 65m reviews compared to 54m in those 6 European markets).

Why we believe the model will be successful long-term:

Ø  The success achieved in the UK shows the model works. The brand is displayed everywhere (by companies showing off their consumer ratings), positive reviews are crucial for driving online sales, consumers get invited to write-reviews after almost every online purchase.

Ø  The high levels of retention with existing customers despite price increases demonstrates businesses are seeing the value and the critical need to engage through the platform

Ø  Consistent 30-50% growth in consumer adoption (measured by number of reviews and domains reviewed) and commensurate growth in claimed domains shows adoption is continuing to grow rapidly

Ø  Anecdotal evidence (e.g. TV commercials) in the US shows businesses are starting to see the value of showing off their Trustpilot rating which is a crucial part of the flywheel

Ø  In the global nature of e-commerce it is mission critical for small businesses to gain trust with prospective customers. Trustpilot is key tool to achieving this

Ø  We are starting to see businesses bridging the online world with brick&mortar by displaying their Trustpilot reviews on physical store fronts to drive B&M traffic into stores

Source of the opportunity

As mentioned in the intro, Trustpilot shares have crashed and valuation is now highly attractive. The sell-off started as bookings growth slowed in the early stages of the pandemic, particularly in the key growth market of the US. While people thought Trustpilot would benefit from the shift to online during lockdown, bookings growth slowed which led to disappointing results and a falling share price. Then the shares collapsed further as part of the broader sell-off in unprofitable tech.

However, the slowdown during the pandemic was entirely self-inflicted. In the early stages of the pandemic, out of fear of the macro consequences, Trustpilot stopped hiring and cut down on its marketing spend. As a result, the business turned profitable, but bookings in nascent markets slowed. Interestingly, KPIs accelerated. Total reviews grew 48% in 2020 vs 44% in 2019, the number of domains reviewed grew 41% in 2020 vs 34% in 2019 and the number of active domains accelerated to +50% vs +45% in the prior year. This shows that the reason for the slowdown in North American bookings was purely due to the lack of a sales force working to actively convert all this activity into paying customers. In the more mature UK market and in the rest of Europe bookings growth continued at broadly the same pace (Mid-20%) despite the marketing pullback because the flywheel and network effects are more established. Since then growth across markets has reaccelerated and the company is currently investing in various new brand building campaigns highlighted at the investor day which should accelerate growth in the coming years.

Valuation and upside

If we attribute proportional (to bookings) Tech and G&A costs to the UK business and apply the contribution margins disclosed at the investor day, we estimate the UK business alone will generate $12-15m in EBITDA next year. This is a business that is an established, monopolistic, mission critical, SaaS business with a long runway of 20%+ revenue growth and fixed costs. Trustpilot’s current EV is c.$270m i.e. 20x UK EBITDA. We believe that’s inexpensive for this kind of business. If you agree, you are getting the other >$100m+ in bookings as a free option.

In our view, bookings will exceed $500m in the next 5 years and by then they will achieve an adj. EBITDA margin of >20%. Applying the 20x multiple we get an EV of $2bn vs the current $270m (we’ve assumed 100% of CF is reinvested over the 5 years). 

Catalyst

• Growth reaccelerates in North America
• Margins imporve