Once darlings of US markets, Netflix (US:NFLX), PayPal (US:PYPL), and Meta (US:FB) have all seen their stock prices crumble over the last six months. The tech market rout has now crossed the Atlantic to claim its latest victim, online reviews company Trustpilot (TRST), following hefty declines at fellow tech or tech-adjacent companies Wise (WISE) and Deliveroo (ROO).
Even as consumers are relying more than ever on online ratings systems, Trustpilot is now worth around half of its valuation at the time of its IPO, one year ago. The Denmark-founded business hosts customer reviews of companies, competing with Google owner Alphabet (US:GOOGL) and Yelp (US:YELP), and makes money through advertising and by selling software services to businesses.
The company’s shares slid by 19 per cent on news that spiralling costs from wage inflation and one-off listing expenses had pushed it further into negative territory, widening the loss for 2021 to $25.9mn (£19.5mn), from $12.3mn in 2020. Broker Peel Hunt predicts an adjusted pre-tax profit at the end of 2023, however, while noting the company will stay focused on growing the top line like many of its tech cohort.
Markets may have been a little overzealous in their punishment. Trustpilot’s sales rose by 24 per cent on a constant currency basis to $131mn in 2021, following lower bookings growth and investment in 2020, when clients tightened their budgets in response to the pandemic. Leading revenue indicators were also up in 2021, with bookings growing by 27 per cent to $150mn by the end of the year, faster than the 18 per cent growth seen in 2020, led by strong performance in Trustpilot’s largest market, the UK.
Over and above the broad tech downturn, Trustpilot’s thorniest issue is proving to be its war against fake reviews. Online commerce has taken off, and with it a grey market has sprung up with businesses paying third parties to write false positive reviews for them. Trustpilot said it purged 2.7mn fake reviews from its site in 2021, or 6 per cent of the reviews posted. Automatic detection software deleted most of these, but businesses and users can also manually flag suspicious content.
Founder and chief executive Peter Holten Mühlmann told Investors’ Chronicle that trust, in keeping with the company's name, is the company’s “differentiator” in its bid to become the “universal symbol of trust for consumers and businesses everywhere”. If consumers lose confidence in Trustpilot’s ratings, it will become harder to sell businesses related software such as invitations for customers to write reviews.
Little wonder then that Trustpilot is fighting to hold onto its intangible edge, with the percentage of revenue spent on tech and content costs, which includes protecting the platform's integrity, rising from 25 per cent to 27 per cent in 2021.
Mühlmann said that the company is “really stepping up enforcement on bad actors”, having recently opened a court case against UK-based immigration lawyers Global Migrate, over allegations of hundreds of fake reviews. He expected Trustpilot to launch more legal cases against companies attempting to game the system throughout the year, “partially because it’s morally right, and partially to deter other businesses from doing this”. Global Migrate declined to comment on the case.
However, Trustpilot could be in over its head here. The fake reviews crackdown so far appears to have done more to protect businesses from the harmful impact of illegitimate negative reviews, rather than shielding consumers from false-positive promotional ones.
The latest available data shows that in 2020, Trustpilot took down 62 per cent of the reviews that companies flagged as suspicious, most of which had the lowest 1-star rating. In the same period, only 12 per cent of reviews flagged by users were taken down, most of which were 5-star reviews. Mühlmann said that the trend towards removing more company-flagged reviews than user-flagged ones had continued during 2021.
Yelp said it removed 8 per cent of reviews posted in 2021, while another 21 per cent of reviews are 'not recommended' by other users, which means they are hidden.
Online reviewing's falsification problem is not going away, and regulators are starting to take a keener interest in the space. Trustpilot’s major rivals Amazon (US:AMZN) and Google are being investigated by the UK Competition and Markets Authority over concerns that they have not done enough to tackle the problem of fake reviews on their websites. Trustpilot is also entering the US market, where the Federal Trade Commission is also increasing its interventions in the world of online reviews.
Mühlmann said Trustpilot could "never do enough" to protect the trustworthiness of the platform. It does seem likely that higher investments will be needed to maintain Trustpilot's credibility with consumers as the company scales and enters new markets, and this spend is already on the rise with the firm opening a new research and development hub focused on tackling fraud in Edinburgh in 2020. Certainly these are moves in the right direction, but depending on the scale of the investment still needed to solve the problem of fake reviews, Trustpilot's path to profitability could be longer and more winding than expected.
