Trupanion (TRUP -1.70%) is a pet insurance company with an incredible growth story that caught investors' attention late last year. Animals can have unexpected medical needs just like people do, and pet insurance helps their owners ensure that treatment doesn't get too expensive. Trupanion is a leader in the field, and therefore benefits from pet insurance's rising popularity.
Pet adoptions surged in 2020 as people found themselves stuck at home, and with that surge came significant growth for pet insurance policies. Trupanion was a big beneficiary -- its stock price more than tripled during 2020. This year, however, Trupanion has since seen its stock price decline 32% as of Monday's close.
Is this a good time for investors to buy the dip in Trupanion's stock?
Trupanion's financial results
When Trupanion reported its Q1 2021 earnings, it noted that total revenue grew 39% from the same period of 2020 to $154.7 million, although operating cash declined to a loss of $1.7 million from a gain of $2.9 million in the first quarter of the prior year.
The drivers behind this financial performance are fairly straightforward. The company saw a 37% increase in the total number of insured pets. As more pets are enrolled, the company collects more in monthly premiums. Furthermore, because the company's overhead expenses are largely fixed, it can earn higher profit margins with greater scale -- in other words, earnings and cash flow should grow faster than top-line sales.
Once a pet is enrolled in a Trupanion insurance plan, that pet tends to stay enrolled until the end of its life. This results in a subscription-like revenue stream for the company, which steadily grows each year as the number of pets covered increases. This is a very attractive business model. It's no wonder that investors love the stock.
However, it is worth pointing out that while Trupanion is growing quickly, it is not yet profitable by generally accepted accounting principles. For the full year 2020, the company reported a net loss of $5.8 million. The good news is that the company expects 2021 to be a profitable year.
Plenty of growth ahead
With one quarter in the bag, Trupanion's management team has provided some good indication of how it expects 2021 to shape up. The company expects revenue of at least $678 million, which implies revenue growth of 31%. On the bottom line, operating income for 2021 is guided to be around $75 million -- this will be the company's first profitable year on based on operating profits if the guidance comes to fruition. It's important to note that operating profits are not the same as net income but they should generally move in the same direction.
In other words, growth in 2021 is expected to keep pace with 2020, and the company is expected to generate a profit. This is seemingly great news that has been somewhat contradicted by the decline in the stock price.
The robust growth in Trupanion's business could be maintained for many years to come. More families choose to adopt pets every year around the world, which increases the potential total addressable market. Furthermore, only about 2% of pets in North America are covered by some form of pet insurance, which means the penetration rate still has a lot of room for growth.
Trupanion is a leader in a relatively immature market for pet insurance. As the market continues to expand, the company should continue to see strong revenue and earnings growth.
Should investors buy the dip?
There is one sticking point when it comes to assessing Trupanion as an investment -- its valuation. Trupanion trades for almost 6 times its 2020 revenue and is barely profitable on an EBITDA basis or on a metric of cash flow. The company may have a lot of growth potential, but as an investor, you still need to believe that Trupanion can turn that revenue growth into earnings and cash flow at some point.
If you are bullish on the long-term growth trends in the pet industry and you like Trupanion's business model, this may be a good time to pick up the stock; 30% declines in high-quality businesses don't happen every day, although recently the share prices of may high flyers have been hit to start off 2021. Long-term investors should take advantage of these periods of share price weakness for the companies they believe in.