Medicare insurance technology company Clover Health Investments (NASDAQ:CLOV)stock has tanked since going public earlier this year.
A lot of the bearishness is due to a short seller, Hindenburg Research’s report, which criticized its business model and questioned its practices. An SEC probe followed soon after, but the matter appears to have died down.
At the same time, the medical insurer continues to grow its business at an impressive rate. With all the negativity surrounding CLOV, the stock now trades at a significant discount.
Clover Health is a Medicare Advantage insurance company, which uses its propriety platform called the Clover Assistant (CA) to improve outcomes for its members. It effectively stores and processes patient records and provides recommendations to enhance the quality of its services and control costs.
In the past year, the penetration of CA amongst existing members was at 56%, representing a whopping 43% increase on a year-over-year basis.
The company has a massive geographical reach across more than 100 markets in seven different states in the United States. As of February this year, its membership numbers were at an incredible 66,000.
Clover believes it has a colossal addressable market of roughly $270 billion in annual spending, which could rise to $590 billion by 2025. Hence, a solid moat and its ability to continually expand making it one of the fascinating plays in its sector.
Considering Clover’s Valuation
One of the criticisms of CLOV stock is that it is highly overvalued and has been since the outset. However, since its merger with Chamath Palihapitiya’s special purpose acquisition company (SPAC) it has only dropped in value. As a result, its price metrics are significantly lower than the sector median.
There’s a sizeable discrepancy in its price ratios and the sector median. Moreover, its mean price target is at $12.70, roughly 70% higher than its current price.
Additionally, even the lowest estimates for the stock are higher than its current value.
In terms of performance, it continues to amaze its investors with its revenue growth numbers. However, profitability appears to be way off, considering how it is investing heavily in expanding its presence across the country and beyond. Overall though, the stock is a bargain buy given its growth runway
Another Strong Quarter
Clover posted its first-quarter results on Monday, which came in ahead of analyst estimates again. It generated $200.3 million in revenues during the quarter, representing a 21% growth on a year-over-year basis.
However, it incurred a sizeable net loss for the quarter at $48.42 million. Looking ahead, it expects its membership numbers to fall between 68,000 and 70,000 by December this year, with a 17% to 21% growth rate. Moreover, it also expects its revenues to be in the range of $810 million and $830 million.
A key metric that the company uses to assess its profitability is the medical care ratio (MCR).
It describes it as the “total net medical claims expenses incurred divided by premiums earned.” For the fiscal year 2020, its normalized MCR was 90.5%, and it expects to fall between 89% and 91% this year, so don’t expect a lot of improvements in the company’s margins in the near term.
Clover Health is not targeting profitability at this stage as it looks to scale up into more segments. Moreover, it has also joined the Direct Contracting model to gain access to 200,000 ratable Medicare beneficiaries. In expanding its distribution channels and improving its technological edge, near-term profitability will remain elusive.
Bottom Line on CLOV Stock
Clover Health continues to grow its top line, despite being targeted by naysayers. Its strong revenue growth in the first quarter and last year is a testament to its potential to disrupt an insurance technology company.
First, however, it needs to focus on improving its margins and carving out a path to profitability in time. For now, though, it’s about building its business and taking it to the next level. Hence, CLOV stock is a buy.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.