Meme-Fave Clover Health Stock Carries Too-High Fundamentals Risk

Clover Health Investments (NASDAQ:CLOV) stock has recently become one of the leading meme stocks Reddit traders are eyeing. On June 9, CLOV stock saw an all-time-high of $28.85 at the peak of its meme stock trading frenzy. The shares currently hover around $9.25, down 44.7% year-to-date (YTD). The market capitalization stands at $3.78 billion.

A close-up of a clipboard that is labeled "Medicare Advantage."
Source: Shutterstock

Initially founded in 2013, the company came public in January, after a reverse-merger with Social Capital Hedosophia Holdings Corp III, a special purpose acquisition company (SPAC). Clover Health sells Medicare-backed insurance plans and uses its platform to collect and analyze health data.

To be sure, 2020 saw SPAC mergers become the darlings of Wall Street. However, 2021 has so far been another story. In a matter of weeks following the IPO, on March 5, CLOV shares fell to a low of $6.31 per share. Around the same time, the meme-stock frenzy was getting hotter, as GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) stocks made the headlines. Their eye-popping returns have been about 950% and 2,400%, respectively.

In June, as the short-squeeze momentum spilled over to CLOV stock, the shares had a spectacular increase. Current, the company still has over 36% of its float sold short. In other words, more volatility in the shares is to be expected.

Today’s article looks at what might be next for CLOV stock, especially in light of its first-quarter numbers and fundamental metrics. Unless social-media traders can sustain the rally in Clover Health, even the current deflated price may not easily have staying power. Therefore, investing in CLOV stock is a high risk / high return bet, not appropriate for all portfolios.

Some CLOV Stock Analysts Debate Model Viability

Clover Health released first-quarter 2021 results in mid-May. Total revenue came at $200.3 million, a 21% year-over-year increase from $165.5 million in Q1 2020. The net loss jumped from $28.2 million in the prior-year quarter to $48.4 million. Cash on hand was $720 million.

On the results, CEO Vivek Garipalli cited, “In the first quarter, we delivered a record-setting $200 million in revenue, which was quickly followed by the launch of our Direct Contracting Entity. Notably, the Clover Assistant continues to power improved financial outcomes.”

Management now expects revenue to reach $820 million for 2021, up by 22% YoY. Yet analysts debate how sustainable the business model is, whereby Clover wants to make Medicare Advantage plans cheaper for consumers and at the same time more profitable for physicians.

To retain customers, Clover Health pays out 96% – 108% of revenue in medical care expenses. Thus, the healthcare startup can provide the plan of choice in a competitive market only by paying out expenses at a loss.

It hasn’t yet made a name for itself across the nation; Most of the current members are based within New Jersey. The insurance provider has to increase the number of investors as Clover gets paid per person from the government. The amount it does not pay in insurance claims, the group gets to keep on the books. As a result, it benefits when the health of its members improves and costs decrease.

The Bottom Line on CLOV Stock

InvestorPlace.com readers would be well familiar with how important and large Medicare is as a federal program. And the aging population of our nation has become a major driver of growth in the demand for good healthcare.

As a result, shares of businesses that can offer disruptive products and services in healthcare and insurance segments will likely become winners. Nonetheless, Clover Health is not yet profitable and does not have a competitive moat. So far, its growth rate has been subdued.

The recent run-up in price has happened thanks to the concentrated efforts of Reddit traders. In other words, CLOV stock has been trading way above the price level justified by its fundamentals. The second-half of the year will show whether this rally is truly sustainable.

Potential investors should realize that CLOV shares will likely remain volatile thru the summer. Buy-and hold investors who have a two- to three- year time horizon could regard a potential drop toward the $10 level or even below was a better entry point.

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

Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.


Article printed from InvestorPlace Media, https://investorplace.com/2021/07/meme-fave-clover-health-stock-carries-too-high-fundamentals-risk/.

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