Markets hate uncertainty, and that is precisely what Trupanion, Inc. (NASDAQ:TRUP) delivered when it reported its fourth-quarter earnings last week. The company announced better-than-anticipated results but issued a warning that it “expects to report two material weaknesses in internal controls” when it files the 2023 Annual Report on Form 10-K. The market’s reaction was quick and negative, as the stock immediately shed roughly a third of its value. Investors’ and analysts’ reactions indicate that the stock could be volatile in the days ahead due to the company’s surprise disclosure.
Gaining Clarity on TRUP’s Results
Seattle-based Trupanion provides medical insurance for cats and dogs throughout the United States, Canada, Europe, Puerto Rico, and Australia. The company generates revenue from the subscription fees for medical insurance plans and has over 990,000 pets enrolled (subscription).
The company’s Q4 earnings per share (EPS) exceeded consensus estimates by 72% (-$0.05 vs. an estimate of -$0.18). Meanwhile, revenue grew more than 20% to $295.86 million, surpassing Wall Street’s expectation of $289.84 million. Trupanion reported that revenue from its subscription business grew 21% to $191.5 million, largely due to a 14% increase in enrolled pets to 991,426.
Trupanion also signaled that efforts to reduce costs helped improve its profit margin. The firm generated a positive free cash flow of $13.5 million during the quarter, reflecting a significant improvement over the negative free cash flow of $4.5 million in Q4 2022.
Analysts’ Reactions
Those positive results played a role in Lake Street’s Mark Argento reiterating a Buy rating on TRUP stock in the immediate aftermath of the earnings report. Argento believes the company will work through the material weakness issues and file its 10-K with minimal impact.
Others aren’t so sure. Stifel analyst Jonathan Block maintained a Hold rating, as did analysts from three other firms.
Trupanion stated that one material weakness relates to information technology controls and systems, while the second refers to internal controls over financial reporting for an “other” business segment. It claims it’s working with its auditors to remediate these material weaknesses and provide additional details in its Form-10-K filing.
Until the market gains further clarity, near-term volatility in the shares is likely.
What is The Price Target for TRUP?
TRUP’s Moderate Buy consensus rating is based on the recommendations from the six Wall Street analysts who have given a rating in the past three months. The average TRUP stock price target is $36.33, with a high forecast of $50 and a low forecast of $28. The average price target represents about 49% upside potential from Tuesday’s closing price of $24.39.
Closing Thoughts
Trupanion’s unexpected announcement of material weaknesses in internal controls during the delivery of Q4 2023 financial results sparked a dramatic market reaction. Yet, the company has shown successful cost-reduction efforts and consistent revenue growth.
Given its track record and ongoing remediation efforts, it’s possible that Trupanion could navigate this challenging period and reassure investors of its operational strength. However, time will reveal how well the company overcomes these internal issues, and investors should remain observant of the upcoming Form 10-K filing and Trupanion’s next steps.
