Clover Health, Far From a Lucky Charm, Faces Tough Scrutiny

Clover Health (NASDAQ:CLOV)has become embattled following its recent IPO. The allegations made against the company by short-selling firm Hindenburg Research over a month ago will continue to hang around until an official judgment has been made about them. Investors must consider that before deciding to take any position in CLOV stock. 

A close-up shot of a hand choosing wooden blocks with emoticons on little wooden tiles symbolizing types of health insurance

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More recently, Clover Health released its full-year results. I will dive into some of the numbers underpinning the company first, and I’ll discuss the allegations afterwards. 

An Inauspicious Start

Clover Health officially became publicly listed on Jan. 8. The company’s stock went public as a result of Clover’s merger with a SPAC called Social Capital Hedosophia Holdings.  

Clover has been on a downhill ride ever since. Its shares began trading for $15.90 and have subsequently steadily dropped. The only exception was a few brief retracements. CLOV stock closed yesterday at $7.82. 

As former Goldman Sachs CEO Lloyd Blankenfein notes, SPACs don’t undergo the same rigorous vetting that companies undergoing traditional IPOs do. Perhaps a traditional IPO would have unearthed some of the red flags about Clover before the transaction was completed or perhaps not.

But I’d be willing to bet that less money would flow into SPACs if their merger partners were vetted as much as companies undergoing the IPO process. Further, the returns of post-IPO stocks are higher, on average, than the shares of companies that have merged with SPACs. 

Clover’s Earnings 

The company’s financial results did indicate that its business had improved.

In 2020, its revenue increased to $672.9 million from $462.3 million in 2019. Clover Health’s 2020 net loss came in at $91.6 million, way down from $363.7 million in 2019. And its EBITDA (earnings before interest, tax, depreciation, and amortization), excluding some items, went from -$175.5 million in 2019 to -$74.4 million last year. 

Clover Health reported that it had 58,056 members on Dec. 31, 2020. The company expects that metric to reach 68,000-70,000 by the end of 2021. This year, Clover anticipates that its top line will be $820 million-$850 million, versus $672.9 million in 2020. 

Yet the company still anticipates that its adjusted EBITDA will be in the red this year, coming in between -$190 and -$150 million. 

Clover’s EBITDA Outlook Hasn’t Improved Much

Back in October, Clover reported that its 2018 and 2019 adjusted EBITDA losses had been $177 million and $175 million, respectively. It is predicting now that its 2021 adjusted EBITDA loss  at best, will be slightly above those levels and at worse will be lower.

In October, Clover Health said that it expected its adjusted EBITDA margin to become positive in 2023. But perhaps the recent allegations against it will delay that milestone. 

It’s hard to understand why investors would want to buy CLOV stock when the insurer won’t be profitable for some time. In my opinion, Medicare Advantage health plans aren’t exactly the most appealing product.

That was true before all the allegations against Clover were made recently, and it is doubly true now that Clover Health has had to combat all of these charges. Another InvestorPlace columnist, Larry Ramer, did a good job of summarizing the main charges against the company. 

The Verdict on CLOV Stock

Investors should remain highly skeptical of SPACs. The truth is that they warrant extra scrutiny and that many investors who bought their shares are losing a great deal of money on them.

I don’t know what will happen to Clover Health as a result of the allegations against it. But some damage looks to already have been done. And there’s no logical reason to buy CLOV stock now, given Clover Health’s profitability issues and its tarnished image.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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