It's not every day that you find a financial company with explosive medium- and long-term growth potential. Then again, there is a healthy debate over whether pet insurer Trupanion (NASDAQ:TRUP) should be thought of as an insurance company in the first place.
Regardless of how you classify Trupanion's business, the growth in the pet insurance industry is undeniable and is only expected to intensify as consumer awareness grows.
The growing pet insurance market
The prospect of massive growth in the pet insurance market is the most important reason Trupanion investors are bullish. But investing in Trupanion definitely requires believing that more pet owners will opt to use the product.
Only 2% of pet owners in North America currently pay for pet insurance. This is a low level of market penetration, but that level is rising quickly. According to the North American Pet Health Insurance Association, the number of insured pets grew 17.1% in 2018 and has grown at a 14.5% rate since 2015.
There are plenty of reasons to expect the use of pet insurance to rise in North America. The cost of veterinary care is on the rise, and in a world in which many people do not have the necessary savings to pay for large unexpected bills, pet insurance could literally be a lifesaver for many animals.
There is also a trend known as the "humanization of pets," which has pet owners increasingly seeing their pets as members of their family. This changing sentiment toward pets has led to people being more willing to spend money on their furry friends. Spending on pets hit $70 billion in the United States in 2017 and is rising at a 5% clip.
It is also worth noting that pet insurance has a much higher penetration rate in other developed countries. More than 5% of pet owners have medical insurance in France, Denmark, Norway, Japan, and Australia. Impressively, 25% of pet owners in the United Kingdom have pet insurance.
Trupanion's roadmap to quadrupling revenue
Over the last 12 months ending in June 2019, Trupanion generated $340 million in total revenue. Nearly 90% of this revenue came from the company's branded Trupanion pet insurance product, but the company also generated some revenue by underwriting pet insurance policies for other providers.
One simply needs to make three fairly conservative assumptions to believe Trupanion can quadruple its revenue over the next decade.
- The number of insured pets grows at a 10% rate.
- Policy prices continue to rise at a 5% rate.
- Trupanion maintains its market share in the industry.
These assumptions are defensible because the industry has grown at much higher rates over the past decade, policy rate increases have consistently come in at 5% to 6% per year to reflect rising veterinary costs, and Trupanion has seen its market share in the industry grow over time.
You can check the math: Growing anything at a 15% rate over 10 years equates to quadrupling. If this were to materialize, Trupanion could see its sales jump to $1.4 billion by 2029.
Better yet for investors is that Trupanion is expected to show profits once it achieves scale. The company is currently unprofitable but estimates that it can show a 15% adjusted operating profit margin at maturity. That would make Trupanion's stock look dirt cheap at today's price.
A leap of faith
Let's be clear: No one has a crystal ball that can accurately make predictions 2 years out, let alone 10 years out. The point of this exercise isn't to show precision but to demonstrate the potential trajectory of a promising growth stock.
Trupanion's bulls have taken a leap of faith in underwriting the company's prospects for the long term. That leap of faith requires believing several things to be true, including that Trupanion will be able to sustainably compete and win against rival insurance companies with much greater financial resources. However, if Trupanion succeeds and the industry continues to show the expected level of growth, the company's stock would be a nice thing to own -- just like its insurance.