Growth shares typically have higher volatility than more mature large-cap firms. This is because investors are trying to keep up with the expectations of how well the company could do in the future. Given that this can change significantly as a growth business gets larger, the stock can take large swings both up and down. Here’s one such case.
Details moving the share price
So far today (20 March), the largest faller in the FTSE 250 index is Trustpilot Group (LSE:TRST). It’s down 9.8% following a share placement announcement.
In short, private placements are when the company sells new shares to a group of investors. This is often done as a way to raise quick capital, which the firm can then use to pursue growth goals.
This is fine, however, when new shares are made, it does dilute the value of existing shares. As a result, the usual reaction to a private placement is that the share price falls to compensate somewhat.
However, in the long term, the expectation is that if the company makes good use of the money raised, the share price should rally higher.
For Trustpilot, 15.5m shares were placed at 200p each, raising a good chunk of money for the business.
Focusing on growth
Even though new investors will focus on the sharp drop today, it’s not really anything I see to worry about. Of course, maybe it would have been received better if the firm had used retained earnings to fuel growth instead. However, Trustpilot has been running at a loss for several years. In fact, it only flipped to making a profit in the last year.
As a result, raising capital from the market is a logical way to help keep growth going. Although I don’t know exactly how it will be used, there are signs from the latest annual report. It spoke of how the firm “continued to invest in innovation to improve our platform. By doing so, we drove retention, new
business, upsell, and further consumer engagement”.
I think further investment into tech, artificial intelligence, and development will be key areas to put more money towards in 2024 and beyond.
Given the solid set of financial results, I think the business will be able to use it’s own funds in the future for new investment. Although this might mean investors looking for dividends could be disappointed, I think it should help to boost the share price going forward.
One for the future
The main risk I see with the business is that it’s quite concentrated in the offering. Aside from being a review platform, it doesn’t really have any meaningful other operations that can help to grow revenue. Right now that might not be a huge problem, but I think it will have to think outside the box for spinoff ideas as it gets larger.
Putting it all together, the 123% share price gain over the past year certainly puts the business on the map. I’m not worried about the blip today, and am considering buying the stock for further growth.
The post Down 10% today but up 123% in a year, what’s up with this growth share? appeared first on The Motley Fool UK.
Should you invest £1,000 in Trustpilot Group Plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Trustpilot Group Plc made the list?
See the 6 stocks
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
This former penny stock has almost quadrupled in a year! Why?
The FTSE stocks with free-cash-flow magic
These cheap shares look 33% undervalued with good future growth to me
Bank of Georgia is paying £2.31 per share in dividends: time to buy the income stock?
The Rolls-Royce share price just hit £4! Can it hit £5 next?
Jon Smith 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.
