Pet insurance provider, Trupanion, has beaten the market over the last five years and is up 100% year-to-date, but is its stock a good buy?
Trupanion (NASDAQ: TRUP) was founded in 1999 by current CEO Darryl Rawlings, 15 years after coming up with the idea following the death of his dog. Rawlings’ goal was to “create a company that was valuable to pet owners, their pets, and veterinarians,” and that company is now Trupanion. But are there enough people willing to insure their pooches and feline friends to make Trupanion a compelling investment?
The bull case for Trupanion
Trupanion estimates that its total addressable market is $32.7 billion and the number of pets with insurance in the U.S. and Canada is under-penetrated at roughly 1% and 2% respectively. Comparing this to 40% in Sweden, there is a large runway for growth, with the number of pets enrolled by Trupanion currently standing at 804,251. According to a report by the North American Pet Health Insurance Association, since 2015, the annual growth rate of insured pets has been 15.8%, demonstrating the ever-growing market.
Trupanion has reported revenue growth of above 20% for over ten years. In the most recent quarter, Q3, Trupanion increased revenue by 31% YoY to $130.1 million. This growth was driven by a 15% increase in enrolled pets and a 20% increase in subscription revenue. It also boasts an impressive monthly retention rate of 98.6%. Trupanion continues to invest internally with 45% internal return in the last quarter, and management expects these high rates of return to continue.
Trupanion has partnered with over 2,300 veterinary hospitals and over 10,000 veterinarians, which is vital as this helps to increase referrals. Trupanion also has software in many veterinary clinics which allows for claims to be paid in minutes and minimizes friction, differing from traditional insurance companies where claims would be reimbursed at a later date. In clinics where there is software installed veterinarians may be more inclined to push the product and recommend it. Increased referrals, coupled with growing average revenue per-user, will help to fuel growth in the coming years.
The bear case for Trupanion
Larger insurance companies could be considered the greatest threat to Trupanion, and if the pet insurance market continues to expand, it’s likely more of the larger players will enter the space. However, Trupanion has managed to navigate this threat thus far and is the market leader in the space with a sole focus on pet insurance. One could argue that its brand name and integration with veterinary hospitals differentiate itself from competitors, and acts as a competitive advantage.
Another risk that investors must take into account is whether or not the penetration rates in the U.S. will reach the levels of other markets. The worst-case scenario is that the penetration rates will stagnate or decline. If the opposite occurs, we could be looking at a company with room to grow many times over. However, it reported a net loss of $2.6 million compared to a net income of $0.8 million a year prior. The ability to consistently produce a profit remains a question mark that investors should keep an eye on but must take into account that it continues to invest heavily.
So, should I buy Trupanion stock?
Investors need to weigh up the potential for growth with the risk that insurance penetration in the U.S. and Canada may not reach the same level as other countries. This company does appear to have many of the attributes that we look for, such as a founding CEO and significant market opportunity, among others. Trupanion could be a great addition to a diversified portfolio and could provide outstanding returns if it continues to grow at the pace that management is targeting.
When did Trupanion IPO?
Trupanion went public in 2014.
What is its market cap?
Its market cap is approximately $3 billion
Does Trupanion pay dividends?
Trupanion doesn’t pay dividends and is unlikely to in the future.