Despite widespread fears that the COVID-19 pandemic would cut consumer spending, Trupanion (NASDAQ:TRUP) has maintained its consumer retention rates as more and more pet owners deem medical coverage on their pets essential. Here's why it is a good time to buy the stock at its currently depressed price.

Trupanion provides monthly subscriptions to its medical insurance plans for cats and dogs throughout the U.S. and Canada. In addition, the company offers its Trupanion Express software to facilitate the transaction of invoices between veterinary clinics and customers. Shares have sold off by about 25% year to date, but have the potential to appreciate significantly once investors discover just how resilient its business model is. 

A beagle reaches up to shake a person's hand.

Image Source: Getty Images.

What are the risks involved?

Skeptics will point out that premiums for Trupanion's health insurance could be pricey. At a time when nearly one in five Americans is unemployed, some would argue maintaining a healthcare plan for pets can be quite an upkeep.

Moreover, Trupanion's profitability metric isn't really up to par compared with insurance companies covering humans. For starters, the company is barely breaking even, when insurers of people have operating and net margins of up to 23% and 9%, respectively. In addition, Trupanion's gross profits account for only 17% of revenue, which is only about half of the medical insurance sector's average. 

Why these concerns aren't material

First of all, it is important to note that cancellations of Trupanion's insurance plans did not dramatically increase in the second quarter as the coronavirus took hold. In fact, monthly customer retention rates stood at 98.59%, compared with 98.58% a year ago. There are now more than 687,000 total pets enrolled under the company's coverage, with more than 10,000 active veterinary hospital partners. 

Second, the company actually grew its revenue during the first quarter by 28% year over year to $111.3 million. Management has guided for $474.5 million in revenue and $55 million in adjusted operating income by the end of 2020. 

Lastly, the company isn't profitable because, unlike saturated medical insurance companies for humans, it is devoting a large portion of its cash flow to growth. There are nearly 174 million dogs and cats in the U.S., and the vast majority of them do not have medical coverage, presenting a huge opportunity for pet insurance companies such as Trupanion. Last year, the company made $44 million in terms of adjusted operating income, but spent at least $33 million to bring even more pets under its banner. 

Takeaways for investors

Historically, pet ownership has increased during recessions, as was the case during the 2008 downturn; perhaps more and more people witness the importance of stress relief via bonding with pets in dark times. 

Meanwhile, Trupanion's financial health is excellent, which should allow it to survive economic pitfalls and grow its pet coverage base. The company has more than $103 million in cash and investments, compared with about $52.6 million in long-term debt and invoice liabilities. It is also worth noting that the company's market cap is only slightly north of $900 million. This means Trupanion is trading for merely 2 times sales and 17.6 times adjusted operating earnings (the company has negligible financial expenses) -- which is a fantastic price to pay for a high-growth stock. 

In all, for healthcare investors who are interested in purchasing stock in a company providing an essential service (as deemed by pet owners), with the capacity to survive this recession and a substantially growing user base year over year, then Trupanion looks like the ideal stock to buy.