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Buy and Hold This Unstoppable Growth Stock for the Next Decade

By Alex Carchidi – Dec 27, 2021 at 7:30AM

Key Points

  • Trupanion is stridently growing its base of subscribers and revenue potential.
  • There's plenty of room in the market for the company to grow at its current rate for years.
  • Unprofitability isn't a major concern at the moment.

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When it comes to raking in recurring revenue, this company is a king.

Getting medical care is expensive regardless of the patient's species. People need health insurance for themselves, so why not for Fido? 

And that's the pitch for Trupanion (TRUP 5.39%), a health insurance company made just for pets. For growth investors who are looking for a stock to hold throughout its galloping ascent, Trupanion has a lot to offer. Let's analyze why. 

A veterinarian holds a serene small dog while preparing for a checkup.

Image source: Getty Images.

This stock is going places

The key factor in Trupanion's future prospects is that its business model is highly repeatable. As with health insurance for humans, subscribers pay a monthly fee in exchange for coverage that reduces the out-of-pocket cost of veterinary care. After rendering care, veterinarians then bill the insurer for reimbursement for their costs. When everything goes according to plan, the company makes money by betting that, on average, pets will be happier and healthier far more frequently than they are sick or injured. 

In more quantitative terms, 98.7% of enrolled pets remain enrolled each month, and the company estimates that it makes $63.30 in revenue and $8.29 in cash per month per pet. So, each additional subscriber means a significant amount of revenue down the line -- and as of the Q3 earnings report, the total number of enrolled pets has increased by 37% compared to the third quarter in 2020. 

Over the last three years, quarterly revenue has grown by nearly 120%, and with the ongoing rapid subscriber growth, it's easy to see how the good times could keep rolling. That's especially true when considering that the market for pet insurance in the U.S. is still largely untapped, with management citing research suggesting a penetration rate of only 1%. 

In other words, there's more smooth sailing to come, since there aren't any powerful competitors anywhere on the horizon. And, with the online pet goods company Chewy announcing earlier this month that it would be teaming up with Trupanion to offer pet insurance to its customers. This is yet another growth driver on the radar for next year and beyond. 

There aren't many headwinds to worry about either

In keeping with the success of its ongoing expansion into the pet insurance market, Trupanion doesn't have many issues that might give investors pause. 

Its total expenses as a percentage of quarterly revenue aren't rising sharply over time, and it is currently debtless. While consistently posting a profit remains a challenge, the company had some free cash flow (FCF) in 2019 and 2020 anyway. Although it is unprofitable, its net margin is within 5% of being positive, so it's entirely feasible for it to keep growing rapidly and worry about increasing efficiency once the market starts to get crowded.

The largest risk to shareholders may be dilution. Last year, Trupanion raised $192.3 million by issuing new stock, which was far more than it issued in the previous five years. Still, new stock hasn't been issued in 2021, and it might not be anytime soon. With more than $221.5 million in the bank, there's a long runway to figure out how to provide profitable coverage. 

In a nutshell, this is a solid business that's very much in the window of opportunity for newcomers to invest. As a bonus, most investors probably don't have direct exposure to the pet health insurance market in their portfolios, so Trupanion could also be considered a great way to diversify. At the end of the day, buying this stock is a bet that people will continue to love their pets and look out for their pets' health. To me, that's a slam dunk.

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool owns and recommends Chewy, Inc. and Trupanion. The Motley Fool has a disclosure policy.

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