Trupanion: Cautiously bullish on this pet insurance stock (NASDAQ: TRUP)


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Investment Thesis: Trupanion (NASDAQ: TRUP) may experience further growth due to the increasing demand for pet insurance in the future.

Trupanion is a pet insurance company that has seen strong growth due to the increase in pet ownership, especially during the COVID-19 pandemic.

Looking at the turnover by quarter since 2010, we can see that there has been strong growth over this period:

Trupanion: fourth quarter and full year 2021 results

Trupanion: fourth quarter and full year 2021 results

The purpose of this article is to determine the future growth potential of this stock in the future.

Recent performances

When looking at the price in isolation, one can see that while the stock had a strong rally in 2020, there have been strong price swings since then, with the stock having traded between $80 and $150.

For one thing, pet ownership has increased dramatically during the pandemic. For example, pet the possession rose from 67% of households to an all-time high of 70% in 2020 according to the American Pet Products Association. Compared to the ownership rate of 56% in 1988, the long-term growth was quite significant. This, in turn, has led to an increase in the demand for pet insurance, as owners seek to protect against accidents or other health issues for their pets.

However, as the effects of the pandemic begin to fade and mobility returns to pre-pandemic levels, it is reasonable to wonder whether growth in pet ownership could reach a saturation point. .

While it is reasonable to assume that growth in any market will eventually plateau, we can see that growth in the total number of registered pets for Trupanion has continued to see strong growth even until at the end of 2021 – when COVID-19 restrictions had diminished in severity.

Trupanion: fourth quarter and full year 2021 results

Trupanion: fourth quarter and full year 2021 results

Based on the above, the quarterly growth of enrolled pets from March to June 2020 was 8.33%, while the growth was 6.56% from September to December 2021. Additionally, the average monthly retention rose slightly while the average monthly income per animal rose from $58.96. at the beginning of the period to $63.89 at the end of the period.

According to the North American Pet Health Insurance Association, dogs accounted for 83% of gross written premiums in 2020, while they make up 69% of all US households that own a pet.

American Pet Products Association

American Pet Products Association’s 2021-2022 National Pet Ownership Survey

That said, given the costs of running a subscription business model, the cost of revenue has also increased significantly alongside actual revenue growth over the past year:

Trupanion: fourth quarter and full year 2021 results

Trupanion: fourth quarter and full year 2021 results

From a balance sheet point of view, it can be seen that cash and cash equivalents recorded a significant drop while current liabilities increased at the same time:

Trupanion: fourth quarter and full year 2021 results

Trupanion: fourth quarter and full year 2021 results

Looking forward to

Macroeconomic concerns about the potential impacts of inflation in the future, this could be a risk factor that could lead to lower demand for pets in the worst case. The cost of keeping a pet is significant, and if households are forced to be more frugal due to rising prices, owning a pet could become less attractive.

That being said, even though inflation rates have climbed to more than 5% As of mid-2021, the growth of the company’s subscription business hasn’t particularly shown signs of slowing down. In this regard, while higher inflation may be of concern, demand for pet insurance is unlikely to experience a sharp decline.

Also, owning a pet without insurance can be quite Dear when it comes to emergency vet bills – which in turn outweigh the costs of taking out pet insurance. For this reason, insurance will remain an attractive option for pet owners who wish to protect themselves against it.

That said, as the demand for pet insurance has increased, competition in the pet insurance industry has also increased. Trupanion is ranked among the top ten pet insurance companies in February 2022 by money.com. That said, the company is cited as having high premium rates compared to its competitors. Of course, this is somewhat of a general statement and depends on the policy being offered in the first place. However, it is a risk factor that greater competition in the industry could put pressure on these premium rates and hamper revenue growth in the future.

Conclusion

The pet insurance market remains strong and I believe Trupanion could see further growth from here. However, inflation and increasing competition in the pet insurance market remain risk factors.

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