Morgan Stanley Bumps Trustpilot to Overweight After Sharp Price Drop

Morgan Stanley has shifted its stance on Trustpilot (LON:TRST), lifting its rating to "overweight" after the stock plunged by more than half this year. Despite cutting the price target from 315p to 275p, the firm highlights a notable valuation reset amid robust operational improvements.The shares of Trustpilot have dropped roughly 57% year to date, closing at 129p recently, putting the stock at about 2.2 times its 2026 enterprise value-to-sales ratio and approximately 14 times EV/adjusted EBITDA. These multiples represent a significant discount, more than 60%, compared to peers in the high-growth software sector and sit well below the company's historical averages.Morgan Stanley analysts point out that the decline stems mainly from a valuation derating rather than any operational faltering. Profitability has actually improved, with adjusted EBITDA margins climbing to 12.2% in the latter half of 2024 and accelerating to 14.6% in early 2025-an impressive rise in margin efficiency.Free cash flow has also seen a healthy boost, with a 47% year-over-year increase in late 2024 and a surge of 160% in the first six months of 2025, pushing cash flow margins above 12%. Revenue figures are trending upward too, hitting $210.8 million in 2024-a 19.5% rise-and projected to reach $257.9 million in 2025, which marks a 22.4% increase.Looking further ahead, the broker forecasts revenues of $303.1 million for 2026 and anticipates an acceleration to $348.9 million by 2027. Organic growth rates are expected to moderate but remain strong, with projections hovering around 15% to 19% through 2027. Adjusted EBITDA is slated to grow steadily from $24.1 million in 2024 to $60.3 million by 2027.Interestingly, the focus seems to be shifting among investors from revenue multiples towards profitability metrics as Trustpilot's operating leverage becomes clearer. The company is still considered in the early stages of scaling, with adjusted EBITDA margins forecasted to hit 17.3% in 2027 and management eyeing long-term margins north of 30%.The breakdown of costs underscores the potential for margin expansion: in early 2025, sales and marketing consumed 27% of revenues, technology and content 24%, and general administration 17%, suggesting some room for improvement as the business scales.Trustpilot maintains a strong cash position, with $69 million in net cash reported in 2024 and estimates projecting $50 million to $65 million through 2026. Morgan Stanley has nudged up its discount rate to 9.5%, factoring in forex updates, but still considers the current valuation an appealing juncture if growth and profitability trends hold.While the stock hasn't kept pace with its operational progress over the past couple of years, the true test will be whether ongoing execution narrows the gap to comparable growth software names, or if the market's skepticism lingers.