In an effort to curb inflation, the Federal Reserve just announced its final interest rate hike of 2022: 50 basis points, or half a percentage point. With more investors worried that the Federal Reserve won't be able to avoid a recession in its quest to tame inflation, markets have had a downright awful year.
The Nasdaq Composite has plunged 29% year to date. And shares of the pet health insurer Trupanion (TRUP 4.70%) have fared even worse, nosediving 59% so far in 2022. But the good news for investors who are able to look beyond the near horizon is that a bear market is always eventually replaced by a bull market.
Here's why Trupanion's bear market troubles could be a great buying opportunity.
Revenue growth is set to continue
Pets are increasingly becoming accepted by residents of the United States as members of the family. In fact, 76% of cat owners and 85% of dog owners in the country count their pets as family members, according to the American Veterinary Medical Association.
With pets held in such high regard by their human companions, it should be no surprise that the idea of health insurance for pets is gaining traction. This is why the market research firm Grand View Research anticipates that the global pet insurance market will grow from $8.3 billion in 2021 to $32.7 billion by 2030.
Since its founding in 2000, Trupanion has grown its total base of enrolled pets to more than 1.4 million. This is how revenue has grown at a 20% annual rate for 60 consecutive quarters.
And aside from the promising industry forecast, Trupanion appears to be making all the right decisions to keep this streak going. The company announced a joint venture last month with Aflac (AFL 0.65%) to provide high-value pet insurance in Japan.
Combining Aflac's customer base of tens of millions of people with Trupanion's leadership in the industry has success potential written all over it. Once the two companies clear the required regulatory approvals, Aflac Pet Insurance should be up and running in the second half of 2023. Over time, this could add hundreds of thousands or even millions of pets to Trupanion's base.
So it's not a surprise that analysts are expecting $1.1 billion in revenue for 2023. For perspective, this would be a 22.2% spike on top of the $901.3 million in revenue that is being projected for 2022, a 28.9% growth rate itself.
Image source: Getty Images.
A financially robust business
Trupanion is operating in an industry with encouraging growth prospects, and it's making the right calls. The company also has solid financials. As of Sept. 30, Trupanion had a balance of $128.8 million net cash and short-term investments. Based on its average pet acquisition cost of $291 for the nine months ended Sept. 30, this would be enough capital to add over 440,000 pets to its base business.
This financial strength is especially important when interest rates are elevated and Trupanion's stock price is beaten down. The company can avoid taking out debt on unfavorable terms or issuing dilutive shares to fund its growth ambitions.
A good value considering the fundamentals
Trupanion has been excessively punished in 2022. And this has arguably made the stock very attractive to growth investors at the current $53 share price.
It trades at a trailing-12-month price-to-sales ratio of 2.5, which is well below its 10-year median of of 3.1. With the company's fundamentals looking intact, analysts have an average 12-month price target of $67. This means that Trupanion's shares have the potential to deliver about 25% upside over the next year alone.
