Two steady compounders with large market opportunities

January 31, 2021

This week I discuss two companies that are steadily compounding their growth. Investors often want to see explosive growth, but I’ve found it is the steady consistent performers that pleasantly surprise investors. They have the habit of capturing less headlines but delivering the results.

Trupanion

Thesis - Trupanion is a leader in providing medical pet insurance. The pet industry in the US is now a $99bn market and over the last 25 years has increased in size every year. This highlights the size and strength of this tailwind. Over lockdown, there was a further step change in pet ownership as many households sought extra companionship. Within the broader pet market, pet insurance is a particularly interesting vertical. In the US and Canada, only 1% or 2% of pets are insured for medical emergencies. In Europe, this number is much higher; 25% of pets in the UK are insured and around 40% of pets in Sweden. With Trupanion, a pet owner can pay a fixed monthly premium (think subscription) to make sure in the event of an emergency their pet can receive treatment. The service enables pet owners to budget more effectively and smooth their spending over a long period of time, ultimately buying peace of mind. Trupanion is a pure-play investment in the increased penetration of pet insurance across its key markets.

Financials & Performance - Trupanion has been executing strong and consistent growth for several years, with over 646,000 enrolled pets. Over the last 8 quarters, revenue growth has been between 25-30% and showed a slight acceleration in the second half of 2020. In 2019, the overall industry grew $330m, of which 29% was contributed by Trupanion, the leader. They have average monthly retention of 98.69%, highlighting its stickiness. Whilst still not profitable, the unit economics are healthy, acquiring a pet customer for $261 with an expected value of $570.

Leadership - The founder and CEO is Darryl Rawlings, who has led the company since its inception in 1998. He still owns a significant amount of shares and has an approval rating of 78% on Glassdoor.com, which is not very high in comparison too many other leading companies.

Risks - The primary risk here is that penetration of pet insurance remains low in primary markets. If that were to be the case, the total addressable market for Trupanion would be smaller than hoped. More recently, further competitive challenges have emerged. Lemonade, the popular new insurance brand announced they would be expanding their product lines to include pet insurance. On the one hand, existing Lemonade customers can easily add pet insurance to their overall package. On the other hand, Trupanion is a specialist in the area, building technical capability in its own underwriting, as well as relationships with veterinary practices. In any case, if penetration does increase, the market should be big enough to sustain multiple players.

trupanion market opportunity

BlackLine

Thesis - BlackLine is a Saas company focused on the financial close process. Their software helps companies gain greater control, accuracy, visibility, automation and speed in their accounting processes. This in turn helps finance leaders to be more strategic with how they spend their time, rather than completing low-value, repetitive tasks. BlackLine’s revenue in 2019 was $336m and they estimate the total addressable market to be $28b annually, highlighting the market opportunity remaining. Without going into specific use-cases, you can get a broad stroke feel of the company’s value by looking at it’s customer list, which includes the likes of PepsiCo, Nike, Expedia, Roku and Nasqaq. BlackLine has been in Gartner’s Magic Quadrant for Cloud Financial Close solutions for 4 years in a row.

Leadership - Therese Tucker is the founder of BlackLine and led the company from it’s inception in 2001. She is a pioneer in the space, building the company with no external funding until it took $200m in private equity in 2013. She recently announced she would be stepping down from the CEO role into an executive chair role. In her place, Marc Huffman will be stepping up from role of COO. This is part of a steady and planned transition. Huffman is a seasoned exec in the space, having spent 14 years at Netsuite. He worked alongside Tucker for 2 years in the build up, leading the sales, marketing and customer-facing organisation.

Financials & Performance - As of Q3 2020, BlackLine announced 3,226 total customers, adding 88 during the quarter. The company grows its revenues consistently, achieving between 20-30% revenue growth over the last 9 quarters. The company has an attractive margin profile, increasing from 78% to 81% in the last 2 years. They use direct sales to attract enterprise customers and continue to see expansion in large accounts (> $250k), up from 73 in 2015 to 301 in 2019. They have net dollar expansion of 107%, meaning they grow revenues from existing customers. Their renewal rate of 97% shows customers typically stay around.

blackline customers


Written by Stevan Popovic, growth investor, web developer and founder of this site.