Woof Woof Long Trupanion Inc

Woof Woof – Long Trupanion Inc. (TRUP)

Trupanion Inc. (TRUP) is a momentum play breaking out of a 19-week ascending triangle.

Trupanion Inc

TRUP sells insurance, but not for humans. They sell it for pets. And by pets I mean cats and dogs. It’s sort of tough to get a policy on a gerbil or iguana…

Customers pay a monthly subscription fee, and in turn receive coverage for 90% of their veterinary costs for unexpected accidents and illnesses. And it’s all done without a payment cap.

TRUP has taken a business model already proven in Europe and brought it to North America (U.S., Canada, and Puerto Rico). Depending on the specific area, between 5% and 25% of people in Western Europe have some form of pet insurance. In North America that number is only 1%, meaning there’s a lot of market share up for grabs.

Each percentage point increase in the North American pet insurance market is equal to about a billion dollars in revenue for the industry. TRUP is in a position to steal a lot of that pie. They do have competitors, but TRUP is the only pure play on this market. All they do is pet insurance, nothing else.

As of June 30, 2016 TRUP had 320,896 pets enrolled in their insurance program. That’s a small percentage of the potential 177 million household dogs and cats that exist in the United States and Canada. And each quarter TRUP captures more and more of the market.
You can also see in the graph above how strong their retention is. Once an owner takes out a pet policy, they tend to keep it all the way until the pet’s death. This results in high monthly recurring revenue growth.

Trupanion Revenue Graph

The pet insurance market is huge and TRUP has consistently grown its top line, but investors haven’t bought into the narrative until recently. Why? In classic tech company fashion, TRUP was buying its growth with high sales and marketing expenditures, only to lose money on their bottom line.

But that’s changed in the last year as management has made a push to become cash flow neutral by 3rd quarter 2016. So far the initiative has worked, hence the rally in the stock. Operating margins have been trending higher and are very close to coming out of the red.

 Trupanion Operating Margin Graph

Management has kept its promises and destroyed the bearish thesis that they couldn’t sustain revenue growth while cutting costs. You can see from the graph below that the bears were just plain wrong. Sales and marketing expenses have been slashed without affecting revenue at all. TRUP has enough recurring revenue now to survive without aggressively buying new business.

Trupanion Revenue by Ycharts

Now that all the uncertainty surrounding profitability has been quieted, the next round of investors are eager to hop on a new growth narrative than can actually print cash too.

Trupanion is an attractive small cap in the high growth niche with positive price momentum. Surrounded by a risk-on macro environment, TRUP has the potential to be the next hot small cap.