Is Trupanion Stock A Buy?

Trupanion Inc (NASDAQ:TRUP) is a Seattle, Washington-based pet insurance company that serves the U.S., Canada, Australia, and Puerto Rico. The company was founded in 1999 by Darryl Rawlings, who still serves as the company’s chief executive officer (CEO). Its stock is worth more than double what it was prior to the pandemic, and that leaves one question for analysts.

Is Trupanion stock a buy?

TRUP’s services are rated top tier by consumers, and pet medical insurance is a growing market.

The company was one of the first to the market and is still a market leader today. The global animal health market size grew from $11.3 billion in 2002 to $33.5 billion by 2018. How much of the pie does TRUP claim?

Trupanion Market Share Opportunity Is Huge

Trupanion has a big opportunity to grow. Even though it’s a top pet insurance provider, it has a long way to go. There are 180 million dogs and cats in the U.S. and Canada, and only one percent in the U.S. and two percent in Canada are covered by medical insurance.

That’s a low number and illustrates just how much growth potential is available. More people than ever are buying pets because they’re staying home for work and school. Pet ownership continued growing when workers moved virtual, and over 11 million people adopted a new pet in the first year of COVID-19 quarantines.

Pet insurance has deeper penetration in the United Kingdom, where about 25 percent of cats and dogs have medical insurance. If Trupanion expands into the U.K. and Europe while also growing its customer base in existing territories, it could be a huge win for investors.

It has a 1.29 percent churn rate each month, a low number that helps sustain the subscriber base while the market grows. The deeper penetration it can get into the market and more animals it can expand to, the larger its market cap. Of course, it needs to insure competitors won’t eat its lunch.

Does Trupanion Stock Have A Moat?

Just because the pet health insurance market is growing doesn’t mean Trupanion is guaranteed to grow with it. However, it is currently ascending faster than rivals (we’ll dig more into growth rates in the sections below), and that could be due to its competitive advantage.

Trupanion isn’t a household name; no pet health insurance company is. But TRUP has partnered with Aflac (NYSE:AFL), which absolutely is.

Aflac is the leading supplemental insurance provider in the U.S., and it has a huge marketing blitz that runs across video services and TV everywhere. In fact, nine out of ten consumers are familiar with the brand. Just about everyone knows the Aflac duck, and that duck is the perfect spokesperson to upsell customers to pet insurance.

The partnership means Aflac offers Trupanion’s pet health insurance alongside its full array of supplemental insurance products. The partnership also makes it easier for both companies to expand horizontally into new insurance markets.

It also included Aflac investing $200 million in Trupanion, and that makes the company a sizeable investor in this over-$3 billion company. And the company was among the first pet insurance carriers to build technology that pays vet bills directly to avoid the reimbursement process.

With these tools at its disposal, bullish analysts believe the company should effectively grow its revenues. Here’s how it has done historically.

Are Trupanion Revenues Rising?

Trupanion covered 862,928 pets through its healthcare policies in 2020. That represents a 33 percent year-over-year increase from 2019. And revenue of $502 million from that represents a 31 percent year-over-year increase from 2019.

On average, the company earns $606 in revenue for each policy’s overall lifetime. The all-inclusive cost of that is $272 per pet, which yields a 35-percent return rate.

So long as the company continues growing its policies issued, it will continue growing revenues. The long-term potential of this tech-enhanced pet insurance company can’t be understated. There’s a potential $33 billion market in North America alone, and the pandemic added fuel to what was already a growing industry.

But there are associated costs that kept the company’s earnings flat while revenues grew.

What Rate Are Trupanion Earnings Growing?

Although Trupanion grew revenues from 2019 through the pandemic, net income was a different story. Subscription business revenue for 2020 was $387.7 million, a 21 percent increase from the prior year.

The company also increased subscription enrolled pets by 17 percent for the year.

Still, it reported a net loss of $5.8 million, or $0.16 per share. This is a big change in the wrong direction from the net loss of $1.8 million, or $0.05 per share, in 2019. However, the company did have operating cash flow of $21.5 million in 2020, with $14.1 million in free cash flow.

This is a big increase from the $16.2 million and $10.8 million, respectively, in 2019. Still, increasing revenues and a small churn rate gives the company great positioning to continue growing. The tech industry at large is pushing for subscription revenues, and Trupanion is in the right place at the right time.

Of course, the company’s management team will ultimately drive it, so let’s examine the C-suite.

Trupanion Management Quality

ACEO Darryl Rawlings has been at the helm of the company since he founded it over 20 years ago. He built the company to 1,000 people across four countries, but he didn’t do it alone. Business is a team effort, and he recruited a talented team of executives around him to build the company into what it is today.

Chief Strategy Officer Asher Bearman is responsible for the company’s strategic business development. He had over a decade of experience before joining the team and successfully steered the company through the Aflac partnership.

And Chantal Catteeuw heads the company’s veterinary systems, which is a crucial element in building the moat. Together, they’re ready to take on any problems that come up, and there are obstacles ahead.

Will Trupanion Nosedive In An Economic Bust?

The biggest obstacles facing Trupanion is if the countries it operates in face more economic turmoil. If the economy crashes, pets are often the first in the family to be left behind. We saw this happen during the 2007 foreclosure crisis and during other disasters in the past.

Although people are buying pets in increasing numbers during the pandemic, it could very easily swing the other way.

Besides this, it risks the market getting more crowded as other big-name insurance companies flood into the market. Should pet insurance creep toward 50 percent, you can be sure everyone else will get in.

Is Trupanion Stock A Buy? Conclusion

Trupanion is a pet insurance company with a growing customer base and a strong partnership with Aflac. These are fundamental ingredients fueling the company’s historic growth in 2020 as the pandemic sparked more people to get pets. By 2021, the company’s stock price dropped by nearly a third, providing a fresh opportunity to buy in.

Over the next decade, Trupanion can exponentially scale as pet insurance becomes more commonplace. But that future isn’t guaranteed – it’ll need to spend a lot of marketing money to increase market awareness. It’s not cheap, and it could stumble on the way.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.