Anyone who has followed the stock market for years will attest the market isn't always rational in the near term. At the drop of a hat, a stock can receive more praise and price appreciation than it is due, or plummet far beyond the realm of sensibility into cheap territory.
And the recent price action in Trupanion (TRUP -1.39%) is proof that the market can make cheap stocks much cheaper: The stock has taken a beating in 2023, down a staggering 53% year to date. The company is certainly facing a major challenge. But the market seems to be overlooking the company's promising long-term fundamentals.
Veterinary inflation is a headwind
As an insurer, Trupanion receives premiums paid by the owners of enrolled pets. And the goal is to pay less in claims and operating costs than what's generated in premiums and investment income from its insurance float.
It isn't a secret that high inflation has weighed on countless businesses in the past year and counting. And Trupanion has not been exempt from this challenging situation, either. The company saw a 15% increase in veterinary invoices in its first quarter ended March 31. For context, that is an acceleration from 12% in 2022 -- already double its historical rate of veterinary inflation over its 23-year operating history. And because management anticipates that veterinary invoices will remain around 15% through 2025, analysts are concerned that non-GAAP (adjusted) operating margin will remain compressed. This adverse development probably set back the company's journey to profitability by a few years, but its long-term fundamentals are arguably intact.
And CEO Darryl Rawlings pointed out a silver lining on the horizon for the company: There is an approximately 18-month lag between filing for, receiving approval, and implementing new pricing across the company's entire book of business. And as a well-managed insurance provider, Rawlings is confident that once the company's book of business is approved for repricing of its policies, the company's margins will be restored.
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Top-line growth remains high
In the meantime, Trupanion continued to put up tremendous growth figures for the first quarter. The company's total revenue surged 24.4% year over year to $256.3 million during the quarter, which marked the 62nd consecutive quarter of 20%-plus annualized revenue growth. This was largely driven by 27.6% growth over the year-ago period in total pets enrolled to 1.6 million.
There is reason to believe that this strong growth in its book of business will persist. For one, Trupanion has partnered with Aflac to offer pet insurance to the latter's tens of millions of customers in Japan. Not to mention the organic growth in demand for pet insurance that stems from more pet owners viewing pets as members of their family.
The company is financially robust
Aside from its steady top-line growth, Trupanion also has a respectable balance sheet going for it. The company's net cash and short-term investments come out to $140.4 million after considering long-term debt obligations. That would be enough for Trupanion to add nearly 600,000 pets to its book of business at the average pet acquisition cost of $247 in the first quarter.
A beaten-down valuation
Trupanion is a good company whose underlying stock can't seem to catch a break. As if the high interest rate environment that is unfriendly to growth stocks wasn't enough, veterinary inflation is causing turmoil. But these headwinds have arguably created an even better buying opportunity.
Trupanion's trailing-12-month price-to-sales (P/S) ratio of 0.9 is considerably below its 10-year median trailing-12-month P/S ratio of 3. If the company rebounds as management believes, significant upside could lie ahead, and at the current $22 share price, growth investors with at least a five-year holding period in mind should see significant opportunity here.
