Shares of pet insurer Trupanion (TRUP -2.51%) have fallen 19% in the past month since the company reported its second-quarter results on Aug. 5.
But was such a steep decline in the company's share price warranted? And could that potentially make Trupanion a buy for growth investors?
We'll take a look at Trupanion's second-quarter earnings report, as well as its valuation, to answer these questions.
Image source: Getty Images.
Growth shows little sign of slowing down
One of the key takeaways from Trupanion's second-quarter earnings was a surge in total pets enrolled; that metric was up 37.5%, from 745,000 pets in Q2 2020 to 1.024 million in Q2 2021.
This serves as a reminder of the tremendous long-term growth runway that Trupanion boasts in the global pet insurance industry. To this point, market research company Global Market Insights anticipates the global pet insurance market will grow at 7.7% annually, from $6.9 billion in 2020 revenue to $11.7 billion by 2027.
And the company is certainly on a roll; Q2 2021 emphatically extended its record of consecutive quarters of 20%-plus revenue growth, bringing that number to 55.
Trupanion has named industry veteran Simon Wheeler to its newly created international business vice president position, and management hopes that this will open up new markets to generate strong future growth.
The company's second-quarter revenue of $168.3 million beat analyst estimates of $164.9 million by 2.1%. Trupanion's second-quarter sales represented a 42.7% year-over-year growth rate compared with the $117.9 million generated in Q2 2020. This growth was driven largely by the underlying increase in Trupanion's total enrolled pets.
Trupanion's net loss of $9.2 million or $0.23 in diluted earnings per share (EPS) missed analyst estimates of an $0.12 net loss. While this may sound disappointing, CFO Tricia Plouf noted in her opening remarks in the Q2 2021 earnings call that there were two factors behind the earnings miss -- an $0.11-per-share increase in stock-based compensation, and increased depreciation and amortization to the tune of $0.04 per share.
The arguably more accurate way to interpret Trupanion's profitability is by looking at its adjusted operating income, which Founder and CEO Darryl Rawlings explained in the earnings call as "profits generated from our existing book of business." This is because Trupanion is consistently reinvesting in its business to expand its enrolled pets and grow its market share.
Adjusted operating income was up 32% year over year, from $14.1 million in Q2 2020 to $18.5 million in Q2 2021, which is an indication that its existing customers remain engaged and that its growth strategy is paying off.
A flawless balance sheet to fund growth
An equally important piece of Trupanion's growth puzzle can be found in its balance sheet, which I would argue also positions the company well for the future.
As of the end of Q2 2021, Trupanion maintained a combination of $219.4 million between cash and cash equivalents ($117.3 million) and short-term investments ($102.1 million). For context, this equates to approximately 6% of Trupanion's $3.77 billion market capitalization.
And not only is Trupanion's balance sheet flooded with liquidity to fund its growth ambitions, the company also has no long-term debt obligations to consume its cash and short-term investments balance.
Is Trupanion a buy?
Trupanion is trading at about 5.5 times this year's analyst revenue forecast of $688.2 million and only 4.3 times next year's analyst revenue forecast of $871.3 million.
Conservatively factoring in average annual revenue growth of 25% on Trupanion's 2020 revenue base of $502 million over the next five years (which is notably less than the actual 27.8% compound annual growth rate from 2015 to 2020), Trupanion's price-to-sales ratio would fall to 2.5 ($3.77 billion market cap/$1.53 billion in 2025 revenue).
Overall, Trupanion's correction from a pre-earnings-report market cap of roughly $4.6 billion to less than $3.8 billion provides growth investors with an even better buying opportunity than just a few weeks ago. The market's overreaction to Trupanion's earnings miss appears to be a gift to long-term growth investors.
