Trupanion: A Regulatory Icarus With 75% Potential Downside

Summary

• Trupanion is a pet insurance company that offers policy holders (or beneficiaries) catastrophic coverage for their domestic pets (cats and dogs only).
• The sales funnel is spearheaded by the Territory Partners who generate referrals for Trupanion insurance and, therefore, must be licensed if their compensation is dependent on the sale of insurance.
• 100% of Territory Partner and Veterinarian compensation is dependent on the successful sale of insurance, but virtually none of them are licensed.
• The Analysts covering the stock have no background in Insurance and have pushed a valuation that's well in excess of the peer universe.
• Regulatory action seems likely, and the result could be very high churn in Territory Partners, the resulting stall in growth could cause 75% downside in the stock.

[Update 8/20/2018: Please see the company's response at the end of the article.]

[Update 8/21/2018: For further updates please see this article.]

Trupanion is an insurance company that the market is pricing as a tech innovator. The market is, therefore, failing to properly value the company relative to its book value and the regulatory risks it faces. I submit that Trupanion (NASDAQ:TRUP) is worth no more than 3x book value, which implies a ~$330M market cap and a share price of roughly ~$10/share. 3x book value gives the company ample credit for growth as its peer universe of HC insurance companies trade at 1.8x book value. However, all the companies in that peer universe generate massive amounts of free cash flow so there may be an argument for a lower price considering the lack of free cash flow produced by TRUP.

Trupanion is an insurance company that offers policy holders coverage for catastrophic care for their dogs and cats. The company uses the insurance business to build out users of its veterinarian billing software solution "Trupanion Express". It has shown impressive revenue growth over the past five years, more than doubling from 2014 to 2017. That kind of growth can lead executives to push too hard and fly a bit too high in order to keep up with the expectations of Wall St. In the case of Trupanion, I think there are several salient points that need to be considered:

1. The sales channel consists of Territory Partners - converting veterinary clinics to Trupanion Express - and the Veterinarians then converting their patients into insurance policy holders. Very few of the Territory Partners (15), and none of the Veterinarians, are licensed insurance agents.
2. The valuation is stratospheric. At roughly ~11x book value the share price needs to fall over 80% to reach the avg

Analyst’s Disclosure:I am/we are short TRUP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am/we are short TRUP. All information for this article was derived from publicly available information. Investors are encouraged to conduct their own due diligence into these factors. Additional disclosure: This article represents the opinion of the author as of the date of this article. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article contains certain "forward-looking statements," which may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "potential," "outlook," "forecast," "plan" and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents. The author may also cover his/her short position at any point in time without providing notice. The author encourages all readers to do their own due diligence.