When selecting growth stocks, there are several characteristics to look for. The first is a business model that clearly meets a need in the market. Another is a demonstrated track record of growth. And a third trait is plenty of room to grow.
The pet insurer Trupanion (TRUP 0.25%) appears to meet all of these criteria. Let's look at why I believe it's a solid growth stock to consider for your portfolio, as well as whether the stock is a buy at its current valuation.
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Over 1 million pets enrolled
The biggest takeaway from the third-quarter results, reported in early November, was the continued growth in its total enrolled pets. Since veterinary costs are consistently rising, this is leading more pet owners to purchase insurance for their animals. As a leading pet insurer, Trupanion saw a 37.3% surge in pets enrolled year over year in the third quarter, for a total of more than 1.1 million.
With that larger base of enrolled pets and a 4.5% year-over-year increase in average monthly revenue per pet, revenue soared 39.6% year over year to $181.7 million in the third quarter.
Trupanion has grown its revenue by more than 20% for 56 consecutive quarters, a clear sign of its growth potential.
And while the company posted a diluted net loss of $0.17 per share in the third quarter, it was narrower than the $0.18 per share loss analysts had expected. But because Trupanion is focused on growing its portfolio of new pets rather than turning a profit, the metric of adjusted operating income can give investors a more complete idea of how the company is doing. As CEO Darryl Rawlings said in his opening remarks for the third-quarter earnings call, "adjusted operating income represents the cash generated from our existing pets in a given period."
With its high monthly pet retention rate of 98.72% (the average pet stays with Trupanion for over six years), CFO Drew Wolff noted during his opening remarks that Trupanion's adjusted operating income grew 44% year over year to $20.8 million in the third quarter.
Growth is just getting started
Trupanion is growing rapidly, but is it sustainable?
Since market research firm Global Market Insights is forecasting the pet insurance market will grow at a 7.7% annual rate from $6.9 billion last year to $11.7 billion by 2027, I firmly believe the answer is yes.
Despite the company's status as a leading pet insurer, it currently only has operations in the U.S., Canada, and Australia. But that will change because industry expert Simon Wheeler was brought on as the company's first executive vice president of international business. He is tasked with launching operations in markets throughout the world. Increasing adoption of pet insurance as veterinary care becomes more expensive and a larger international presence are likely to greatly extend Trupanion's growth story.
A debt-free balance sheet loaded with liquidity
Trupanion also looks to have the resources necessary to execute on its plans, based on its balance sheet.
As of the third quarter, it had a cash and short-term investments balance of $221.5 million against no long-term debt, which works out to nearly 5% of the stock's current $4.8 billion market capitalization.
Trupanion offers growth at a fair price
Because Trupanion is still in the early stages of growth, the company hasn't achieved consistent profitability. This renders the price-to-earnings ratio useless, so I'd argue that the most appropriate way to value the stock is based on its price-to-sales ratio and top-line growth that it is producing.
At its current share price around $127, Trupanion is trading at less than 8 times this year's sales estimates of approximately $650 million. In light of its annual sales growth in excess of 20% for more than a decade now, I believe this is a reasonable price to pay for the stock's potential.
