Shares of Trupanion Inc (NASDAQ: TRUP), an online pet insurance firm, climbed 9.3% as the company announced two acquisitions. Should long-term investors have a look at the stock?
Tim’s Take:
The pet market occupies a rather obscure space in the investment market. But it shouldn’t.
Pet care is big business. The market for pet care in the US was valued at US$223 billion in 2019 and it’s forecast to grow at a compound annual growth rate (CAGR) of 5.9% from 2020 through 2026.
And for anyone who has a pet, peace of mind for those hefty medical bills is something that is increasingly in demand.
For those who want to buy pet insurance in North America, Trupanion is the leader in the market. Admittedly, it’s a small but fast-growing market.
Only around 1-2% of the 180 million pets in the US and Canada are covered by pet insurance. Compare this to somewhere like the UK (25%) and Sweden (40%) and it’s clear what the market opportunity is like over the long term.
As for Trupanion’s latest acquisitions, there wasn’t much disclosed to investors by the company besides the fact that there are two deals totaling around US$48.2 million. One is of an unaffiliated software company and the other was a purchase of assets.
This was most likely due to competitive concerns but investors can probably expect more details when the company reports its fourth-quarter earnings early next year.
Pets and subscription
Trupanion has done so well because its offerings are highly competitive and also reduces friction for customers.
This is because reimbursements for Trupanion policies can be immediate via the firm’s direct integration with a large majority of veterinary doctors and their payment systems.
What’s more, the firm has an impressive track record of revenue growth having expanded its top line by at least 20% for 52 quarters in a row.
Add this to its subscription model, which provides highly consistent and predictable revenue streams, and investors can tap into a multi-year growth trend.
Source: Trupanion Q3 2020 earnings presentation
Trupanion’s latest quarterly earnings was a continuation of this trend. Revenue was up 31% year-on-year to US$130.1 million.
Even better, the company was operating cash flow and free cash flow positive in the third quarter – notching up figures of US$9.8 million and US$8.5 million, respectively.
With a market cap of just US$2.8 billion, Trupanion has the potential to generate significant long-term returns for patient investors who believe in the growth of the “recession-resistant” pet care market.
Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.
