Pets are family, and we care for their health and happiness as such. But it's difficult for pet owners to accurately budget for the health expenses of their pets when they get sick or injured. Trupanion (TRUP -0.45%), a leading medical insurance provider for pets, helps pet owners eliminate the uncertainty around the cost of pet healthcare. As the company keeps growing rapidly, investors have three key reasons to take a closer look.
Pet insurance is in its early days
When Darryl Rawlings was 14, his family couldn't afford surgery for his pet dog Mitzi. Inspired by this experience, Rawlings founded Trupanion in 2000 with the mission of making the best possible medical care more affordable and accessible to pet owners.
Pet insurance has grown in popularity over the past two decades, yet owners of less than 3% of the 180 million pet dogs and cats in North America have enrolled for insurance. The US and Canada are lagging behind some European counterparts such as the UK and Sweden, where 25% and 40% of pets are covered by insurance, respectively. Considering that 120 million of the pets in North America visit the vets every year, the potential market opportunity for Trupanion can be very compelling if North America's pet insurance adoption can reach even a fraction of what we see in Europe.
Image source: Getty Images.
Trupanion has built strong moat with two decades of learnings
Insurance companies succeed in part by being able to reasonably accurately forecast payouts to their customers. As an early entrant in the industry, Trupanion has a natural edge over its competition from its two decades of data on pets of different breeds, pet care expenses, and pet owners. Insights from this data help Trupanion assess the risk of each policy more precisely, and price its policies to avoid losing money.
The company, with its growing understanding of pet care, is also offering more and more value to customers. Trupanion believes it offers the broadest coverage in the industry with comprehensive lifetime coverage for pets, encompassing hereditary and congenital conditions without payout limits. More and more customers are choosing Trupanion, sticking with their insurance plans, and paying more.
| Customer Metrics | 2016 | 2017 | 2018 | 2019 | 2020 | 2021* |
|---|---|---|---|---|---|---|
| Total pets enrolled (thousands) | 344 | 423 | 521 | 647 | 863 | 1,104 |
| Average monthly retention | 98.60% | 98.63% | 98.60% | 98.58% | 98.71% | - |
| Monthly avg. revenue per pet | $47.82 | $52.07 | $54.34 | $57.52 | $60.37 | - |
SOURCE: Company earnings release. (*2021 numbers are from Jan thru Sep 2021)
The company has developed strong relationships with veterinarians, whose credibility makes customers likelier to enroll when vets recommend Trupanion's services. Trupanion has a dedicated sales staff working with vets, and offers those vets a patented software platform to the vets that streamlines the financial aspects of pet healthcare for vets and owners alike. The software can send vets offices direct insurance payments right when customers check out, eliminating extra paperwork and saving everyone time and effort. It also provides vets all the relevant information about the pet in question and its past treatments, claims, and preexisting conditions. Vets and owners can review various treatment options, and make an informed decision for the next course of action. These benefits have helped Trupanion establish a strong competitive moat.
Trupanion has translated its early lead and large market opportunity into rapid revenue growth. At the end of the third quarter, Trupanion reached 1.1 million total enrolled pets, up 37% year over year. Over the first nine months of 2021, the company grew revenue 40% year over year, reaching $504.6 million. Trupanion has now grown revenue more than 20% for 56 consecutive quarters.
Long-term vision and efficient execution for continued success
Trupanion has a leading position in its industry, but it faces growing competition. There are established competitors such as Nationwide Insurance and Allstate, emerging competitors such as Lemonade, and specialized smaller pet insurance providers such as Healthy Paws.
Trupanion will have to keep reinventing its business and execute with a clearly defined long-term strategy to fend off the competition. Founder-CEO Rawlings has laid out a five-year plan that aims for $1.5 billion in annual revenue by 2025. To attain this goal, Trupanion plans to expand its partnerships, enter international markets, develop additional types of pet insurance more suitable to different segments of customers, and also introduce new product categories such as pet food and GPS devices for locating pets. The company recently partnered with the popular online pet food and services company Chewy, letting Chewy's 20 million customers buy Trupanion's insurance plans on Chewy's website. Although the two companies haven't disclosed the details of the partnership, it gives Trupanion access to a very large cohort of potential customers.
Investors should remember that Trupanion is not profitable yet as the company continues to invest in technology, sales, and marketing to drive growth. For the first nine months of 2021, Trupanion spent 20.4% of its revenue in operating expenses, compared to 16.7% for the same period last year. As a result, the net loss margin worsened to about 6% from less than 1%, and the company burned $6.2 million in cash, after posting $13.2 million in free cash flow in the year-ago period. Although its losses are fairly low at this moment, investors should keep a close eye on Trupanion's operating expenses and move toward profitability.
The current pullback may be an opportunity
Similar to many high-flying growth stocks, Trupanion's shares have taken a beating as part of the larger market sell-off, down about 50% from their highs in November 2021. Even so, shares are trading at a price-to-sales valuation of around 5.6, still at the high end of its previous trading range. However, Trupanion's record of growth, its position in the industry, and the long runway in front of it likely justify that premium. Now may be a good time for long-term investors to add this strong business to their portfolio.
TRUP PS Ratio data by YCharts
