Clover Health Investments (NASDAQ:CLOV) reports first-quarter results on May 17. Given what we know about its 2020 results, is CLOV stock a buy ahead of earnings?
Well, the fact that it’s trading under $10, the price Social Capital Hedosophia III, Clover’s special purpose acquisition company (SPAC) merger partner sold units for in April 2020, I’d say it’s at least worth considering if you’re at all interested in healthcare investments.
Clover Health’s Business Is Growing
Whenever you’re researching a growth company like Clover, the first thing you look at is top-line sales growth. You want it to be hot, but not too hot. In Clover’s case, it grew 2020 sales to $673 million, 46% higher than 2019.
On the bottom line, it stemmed the red ink slightly, reducing its non-GAAP adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) by 58% to $74.4 million.
The company attracted 58,056 members as of Dec. 31, 2020, with over 66,000 Medicare Advantage members as of February 2021. Meanwhile, it finished the year with 32,400 lives (56%) under its Clover Assistant technology platform.
However, the company’s newly launched Direct Contracting entity should accelerate the number of lives on its Clover Assistant platform. The company’s investor presentation from the merger announcement showed 200,000 lives being added from direct contracting with physicians in 2021 and rising to a total of 450,000 by 2023. That’s in addition to 139,000 lives under Medicare Advantage for a total of 589,000 by the end of 2023.
In 2021, Clover Health expects revenues of at least $820 million with as much as $50 million from direct contracting. That’s approximately 22% sales growth from 2020.
On the bottom line, it expects adjusted EBITDA losses of $190 million to as low as $150 million, in line with its 2019 results, but almost double the revenue.
Based on 498 million shares outstanding as of March 31 and a $9.60 share price, it has a current market capitalization of $4.78 billion and a price-to-sales ratio of 5.8.
That hardly seems outrageous. Teladoc (NYSE:TDOC) trades at almost 14 times sales, although I realize it’s an entirely different business.
The Ugly Underbelly of CLOV Stock
When I last wrote about Clover Health, I was under the impression that it was still under an investigation or inquiry by the Department of Justice (DOJ). My editors updated my article the very same day to say this investigation or inquiry had ended.
However, Lifshitz Law Firm, P.C. recently issued a press release that seems to suggest the DOJ matter has not been completely put to bed.
“Lifshitz Law Firm, P.C. announces an investigation into CLOV in connection with (a) its receipt of a Civil Investigative Demand from the Department of Justice; (b) whether CLOV adequately disclosed that its sales are driven by a major related party deal; (c) whether CLOV’s subsidiary, SEEK Insurance, adequately disclosed its relationship with CLOV; and (d) whether CLOV’s software was in fact rudimentary,” stated the firm’s May 2 press release.
I’ve searched high and low for confirmation from Clover or the DOJ that no such inquiry exists. Except for Clover Health’s response to the Hindenburg Research report that raised the possible investigation by the DOJ in early February, I’ve seen nothing since then that would clarify the situation.
While an investigation by a law firm that specializes in class action lawsuits is hardly a smoking gun, it does make you wonder if Clover’s original responses were 100% transparent.
For example, Clover Health stated on Feb. 5 that “Clover has not received any civil investigative demands or subpoenas from the Department of Justice.” It went on to say it had received a request for information from the DOJ, which it responded to voluntarily.
So, why would Lifshitz be looking into that very denial almost three months later if there wasn’t an ounce of truth in the allegations?
The law firm may be just fishing for information to find something more damning than a routine inquiry. We may never know the entire picture on this matter.
CLOV Stock: The Bottom Line
I don’t think there’s any doubt that if Clover Health is entirely on the level — and until there’s proof it’s not, I have no reason to doubt the veracity of its statements — it is trading at a very attractive share price given its growth profile.
Would I buy CLOV stock? Probably not.
However, if you’re speculative by nature, I think the risk/reward proposition is actually quite good. That said, if you could get some at its March lows in the $6s, your chances of success would grow exponentially.
Is it a buy ahead of earnings?
I think it is with a caveat. Buy half now and wait for May 17 to roll around. You might be able to get some more for less. Of course, they say market timing never works, so govern yourself accordingly.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.