Depending on an investor's reaction, market volatility can be your best friend or worst enemy. Assuming a stock's fundamentals are intact, the smartest thing an investor can do when a stock drops at the whim of equity markets is to buy the dip.
One example of a stock that, in my opinion, has been unjustifiably punished as of late is the pet health insurer Trupanion (TRUP -1.39%). Let's take a look at the stock's fundamentals and valuation to better understand why the stock is a buy despite its recent plunge.
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The business continues to grow rapidly
Trupanion reported solid operating results in 2021. Once again, this was due to impressive growth in the number of pets enrolled in its health insurance plans. Trupanion's enrolled pets figure soared 36.4% higher year over year to just shy of 1.2 million at the end of 2021. What was behind this tremendous growth?
It's estimated that pet owners in North America spend more than $62 billion each year caring for their 180 million dogs and cats. With household pet ownership steadily increasing and inflation at play, this figure should only go higher in the years ahead. This should prompt more pet owners to turn to pet health insurance to cover rising veterinary costs, which is exactly what has played out in recent years.
This explains how Trupanion has been able to record 57 consecutive quarters of 20%-plus revenue growth. The company's revenue rocketed 39.2% higher to $699 million in 2021. This was the result of its higher enrolled pet base and a 5.3% year-over-year increase in monthly average revenue per pet to $63.56 in 2021.
Trupanion recorded a diluted net loss per share of $0.89 in 2021. However, the company is focused on growth in adjusted operating income. CEO Darryl Rawlings explained in a recent earnings call that he views this as the most important metric for evaluating the company's performance, because it represents the funds generated from its existing pet business in a given period. Thanks to Trupanion's 98.74% average monthly retention rate and pet growth, its adjusted operating income advanced 35% higher year over year to $22.4 million in 2021.
As a result of Trupanion's industry leadership and a promising outlook for the pet health insurance field, Trupanion's healthy growth looks set to continue in the years to come.
An immaculate balance sheet
Trupanion's growth prospects are just one attractive characteristic of the stock. A flawless balance sheet is yet another strength. Trupanion boasted a cash and short-term investments balance of $213 million in the year ended 2021. This is equivalent to 5.5% of the stock's $3.9 billion market capitalization. And it gets even better: Trupanion had virtually no long-term debt.
Based on the company's $287 average pet acquisition cost in 2021 and current liquidity, this could expand its membership base by nearly 750,000 pets. Simply put, Trupanion has both the expertise and capital to execute on its growth targets.
A cheaply valued growth stock
Trupanion's fundamentals still appear strong. And at the current $96 share price, it is trading at a price-to-sales ratio of 4.4. For a stock that has a track record of consistently producing 20%-plus revenue growth, this is a discounted valuation. That's why Trupanion is such a compelling growth stock under $100 to buy right now.
