Categorizing The Trupanion Bull And Bear Cases (Podcast)

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About: Trupanion, Inc. (TRUP)
by: Behind The Idea
Summary

We're getting close to home by looking at pet insurance company Trupanion.

The company has revolutionized an industry and has been accorded with a category killer multiple - should those phrases go together?

We try to understand the bull case and the fundamental issues around a growing pet insurance industry and what it means for our best friends and us.

By Daniel Shvartsman

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Investing seems like it would be all about the numbers. You can even make that case without conceding that the computers will do better with the numbers than we will - it's hard to predict what the finances will be in the future, after all.

But as a friend of Behind the Idea, Professor Aswath Damodaran, often says, what we invest in is a story. Or as he put it in his recent post on Lyft, "When valuing young companies, it is the story that drives your numbers and valuation, not historical data or current financials."

Consider Trupanion (TRUP). The company is fairly young - founded in 2000. It is growing at a fairly fast rate - ~25% last year and nearly 30% CAGR over the last 5. And its story - of a pet-lover who wants to help pets live longer - tugs on a lot of people's heartstrings, whether they would like to admit it or not. The Tesla (NASDAQ:TSLA) crowd may be attached to their cars, but as a cat owner, I feel reasonably comfortable saying the attachment to pets is a little more visceral.

And as you probably know, TRUP is a fairly heated topic in the stock market. Bears are not buying the continuance of the growth story, have concerns over the regulatory climate and the rules TRUP may be bending (or worse), and can't accept the multiple the market places on the stock (that's a 9.3x tangible book value, with a 9). Bulls point to the company's professionalizing of the industry, the problems it solves for customers (both vets and pet owners), and the technological edge it has amidst a growing sector.

Simple But Not Easy wrote their first article for Seeking Alpha on this stock. They were bearish about the company, but took the bull case as a starting point and then walked backwards to show why it wouldn't play out that way. We took their work as the starting point for our own analysis, as we tried to understand the significance of the insurance vs. software as a service (SAAS) distinction, the fundamental effect of financializing pet care, and what the right model is for thinking about Trupanion. Click play above to have a listen.

Topics covered

  • 5:45 - The right way to categorize Trupanion
  • 16:00 - The emotional resonance of Trupanion's business and whether that leads to inflation, and the value of pet insurance
  • 23:45 - Does pet spending become a bubble and trying to break out the numbers on the bull case
  • 31:00 - The ultimate outcomes of the pet insurance business and our Peter Lynch hat
  • 36:00 - Getting to the fundamentals - industry, company, stock price, does it all work?
  • 40:30 - A few contextual and bear treat elements - regulatory issues, the headquarters

Since we dwelled on the event a bit and since Mike posted photos of himself pulling G's in a small plane Friday, I'm taking the indulgence to share a couple photos of my cat Kupina, who a year ago this week survived a 15-story fall. As discussed on the podcast, we are long nets to prevent further incidents and have increased our netting portfolio as of yesterday.

The case for pet insurance After jaw surgery

The end result of successful pet care And a few months later - all better.

Anyway, what do you make of the Trupanion case? Is there a way to back into the bull case, or something we missed in our discussion? Is there a catalyst for the short thesis that is not 'the market turning over and growth stocks getting smashed?' Let us know.

Disclosure: I am/we are long BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Neither Mike nor I have any positions in any stocks directly discussed, though Berkshire Hathaway came up in passing and I am long BRK.B. Mike has a dog, I have two cats. Nothing on this podcast should be taken as investment advice.