Pet insurance is big business and Trupanion is a popular insurance company for pet lovers. Over 1.1 million pets were enrolled in Trupanion at last count, up 37% year over year.
The pet insurer makes for an intriguing investment opportunity: a business model that has product-market fit, lots of room to grow, and a proven history of customer satisfaction.
Now might be the time for you to invest in this company, as stock prices are battered relative to valuation estimates.
What Is Trupanion and What Is Its Business Model?
Founded in 2000, Trupanion (NASDAQ:TRUP) is an industry-leading, direct-to-consumer pet insurance company. In North America alone, pet owners spend over $62 billion caring for their cats and dogs each year. Trupanion has created a consistent and resilient business model by offering a subscription-based model to customers.
This has created some confusion for investors. Is Trupanion an insurance company or a subscription business? The company’s business model categorization matters to valuation forecasts. This is because an insurance company will trade at different multiples to a subscription business. Technically speaking, Trupanion is an insurance company. However, the company has done a good job of communicating its unique approach to investors, and once you understand the business levers and financial metrics, you’ll see why its claims have legitimacy.
Each month, Trupanion takes payments from its subscribers. The company then deploys approximately 70% of revenues to pay medical care needed for insured pets. On average, Trupanion makes $62.45 per pet per month.
Moving forward, the company plans to grow using several growth levers. Trupanion recently launched low and medium ARPU products, pet health insurance direct and Furkin, in Canada. The goal here is to grow the company’s addressable market. By the end of 2025, the company plans to grow its TAM by 40%. This would be achieved by adding 10,000 international hospitals.
There has been strong growth in the number of pet owners joining Trupanion’s platform. Last quarter, Trupanion’s subscription enrolled pets hit 676,000, an increase of 22% year-over-year. Since pet owners will likely stick around for multiple years, growth in the number of pets enrolled is a good predictor of future revenue.
After the company released its results, shares of Trupanion increased 31.8%. The main reason for this jump is believed to be because of upgrades from multiple research analysts, including Bank of America and Piper Sandler — both of which rated Trupanion stock as a buy.
During the last earnings call, several representatives spoke on behalf of Trupanion, including the company’s Head of Investor Relations and Chief Executive Officer. Here are some of the major points and figures:
- Total revenue for the quarter was $181.7 million, an increase of 40% over the prior-year period
- Adjusted operating income increased 44%, representing the cash generated from existing pets — the majority of this money is then invested to grow the company’s portfolio of new pets
- Compared to the previous year, average monthly retention increased to 98.72%
- The average pet stays with the company for 78 months, up from 76 months in the prior-year period
Trupanion stock rose by over 430% in the past five years at its peak but has been beaten down in recent months by over 33%. The company’s consistent revenue growth and largely untapped market offer promise for a return to hold highs when sentiment shifts back positive. Currently, only around 2% of the pet in North America are covered by insurance.
With a price-to-gross profit ratio of 43 at its peak, Trupanion probably deserved to have its financial multiples deflate. The company’s solid business model and high growth, could well make for a good long-term investment — especially since the company has no debt.
So, What Are the Risks?
One consideration is Trupanion’s expenditures, which have been trending in the wrong direction over the last three years. When compared to its quarterly revenue, total quarterly operating expenses grew by 21.48%. However, revenue expanded by 103.6% within that same period.
It’s also important to note that TRUP does not yet pay a dividend.
Trupanion’s management team remains confident that the company’s cash flow and intrinsic value are more important than profitability at the moment, a strategy that has worked out fairly well historically for longer term investors.
Should You Buy Trupanion Stock?
If you’re a long-term investor, Trupanion is worth considering. Many analysts agree that based on Trupanion’s consistent revenue growth, it will be an top stock to own over the next decade.
There’s so much room for growth in the pet insurance market that competitive pressures are less an issue than scaling challenges. The bottom line is if you’re on the hunt for a long-term investment, TRUP is well worth your attention at current prices.