With inflation hovering near multi-decade highs, financial markets are in turmoil. Market traders are worried several more Fed Fund rate hikes from the Federal Reserve will be needed to get inflation back under control. Interest rate hikes aren't good news for growth stocks that benefit from lower rates. There's also real worry that rising interest rates will harm the U.S. economy enough to send it into a full-blown recession.
Given this unfortunate news, it's not terribly surprising that the growth stock-oriented Nasdaq Composite is down 30% from its all-time high (set last November). Nor is it surprising that the stock of the pet health insurer Trupanion (TRUP -1.39%) is also taking a hit for many of the same reasons.
What some investors are wondering though is whether Trupanion stock's 60% price drop from its all-time high is an overreaction, considering the financial metrics for the company. More importantly, has this recent weakness in Trupanion's stock made it a buy for growth investors? Let's take a closer look and see if we can come up with an answer.
Tremendous growth in enrolled pets
Trupanion's revenue jumped 30.4% year over year to $219.4 million during its second quarter. This was Trupanion's 59th consecutive quarter with a revenue growth rate topping 20%. What factors contributed to such consistently high growth rates? For starters, a 31.6% year-over-year jump in total pets enrolled (now topping 1.3 million) was a factor.
Interest in Trupanion's services is clearly growing. Trupanion's services include coverage of the costs of members' veterinary care for the year for those paying the monthly premium. As veterinary care grows more costly and pet ownership rates rise, this demand for pet insurance is expected to continue rising. And with an average monthly retention rate of 98.7% for Trupanion, the demand also appears to be steady. Trupanion's solid reputation in the industry helps in this regard.
Another growth contributor relates to Trupanion's monthly average revenue per pet edging 0.9% higher year over year. Being able to raise rates without losing customers shows that the company has a certain level of pricing power. That will be necessary for future revenue growth as well.
Trupanion is not yet turning a profit and it recorded a net loss per share of $0.33 in Q2. But given that the company is still focused on growth as relates to its capital allocation, it might be better to evaluate using the adjusted operating income metric. This figure surged 13% over the year-ago period to $20.8 million, a measure of the funds that were produced from its existing portfolio of pets, which accounts for its emphasis on growth.
Something else investors need to consider is that only 2% of pets in the U.S. and Canada are currently covered by medical insurance. In Great Britain, pet insurance covers 25% of the pet populace. This suggests there is a large addressable market still available for Trupanion to serve. This metric is why analysts anticipate 20%-plus annual revenue growth to persist in 2022 and 2023.
Image source: Getty Images.
Trupanion's liquidity is strong
Trupanion has demonstrated it can keep generating robust revenue growth thanks to higher veterinary costs and increasing pet ownership. But the company also has a balance sheet that should allow it to capitalize on these trends.
It had $243 million in cash and short-term investments as of June 30. With $54.2 million in long-term debt, this is a net liquidity position of $188.8 million. For context, this would be enough to add 619,000 pets to its membership base (using the $305 average pet acquisition cost) without incurring any additional debt.
The valuation makes Trupanion a buy
Trupanion is a fundamentally attractive company and the stock looks to be sensibly valued at the current price hovering around $60 a share. The company's trailing-12-month price-to-sales ratio of 3 is not far off its 10-year median P/S ratio of 3.1. Since the company (which famed investor Warren Buffett owns a stake in through his Berkshire Hathaway holding company) has fundamentals that are arguably as compelling as ever, this is a more than fair valuation for long-term growth investors to pay for the stock.
