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Clover Health Has Serious Fundamental Flaws and Struggling Business Plan

Clover Health Investments (NASDAQ:CLOV) stock has had a very volatile year so far in 2021, hitting a 52-week high of $28.85 per share in June and then having a strong selloff that led its current price to be $7.75 — or 73% off its highs.

CLOV stock: stethoscope laying atop medical papers

Source: Shutterstock

Is this selloff justified? Was that rally justified too? And is Clover Health an attractive stock to investors now? I will mention some key points that will build my arguments for CLOV stock. But first, a reminder of what my previous article on Clover Health back in May 2021 was about.

Things Do Not Look Good for CLOV Stock

My article titled “After Checking Its Health, Things Do Not Look Good for CLOV Stock” main highlights were:

  • CLOV Stock: What Goes Up Must Come Down
  • Short Selling Caused the Selloff
  • What About CLOV Stock’s Fundamentals?
  • Is It Time to Be Defensive in Investing?

My conclusion was “While healthcare is a defensive sector, not all stocks in the space are considered defensive due to their qualitative fundamentals. Unfortunately for CLOV stock, it cannot be considered defensive. Instead, it is speculative and plagued with issues.

So, until earnings show a lot of progress here, I would avoid CLOV completely for now.”

Could it be within 2-3 months my opinion on CLOV stock to have changed? Unless a series of important catalysts have occurred, the answer is no. That said, let me elaborate more on this.

Business Plan: A Problematic One

Interestingly enough, a report from short-seller firm Hindenburg Research mentioned called Clover Health a “broken business.” But Clover Health responded to the serious allegations by “calling the report ‘rife with ad hominem attacks, sweeping inaccuracies, and gross mischaracterizations.’”

Moreover, “Clover Health disclosed that it had received notice from the [U.S. Securities and Exchange Commission] that it was under investigation. It offered no other explanation about the investigation, only adding, ‘We believe this inquiry is based on the short-selling report….'”

Now, to me, the response by the company to severe allegations and this further investigation is simply not adequate. I could wait to see how the company would reply with evidence to the Hindenburg report. But to the official investigation, the reply from Clover Health according to the article leaves me with many questions and a gap to fill.

Where is the data as evidence that should officially end the investigation? Does it exist? Clover Health disclosed that the U.S. Securities and Exchange Commission has opened an investigation that believes is related to Hindenburg’s allegations. Really? Where are the real and plausible data that could put an end to this investigation? I searched the press releases section on the company’s website and did not find any press release mentioning the investigation was over.

This is a very large red flag to me.

Moreover, the question to ask is does Clover Health has a business plan that is working and delivering positive results related to growth, revenue and profitability? Even the company CEO Vivek Garipalli expressed some concern about the future and present business operations:

“I always find it fascinating when folks root against Clover, because it’s like, well if we’re successful, look who benefits. Why is that bad? Why would you want to root against us? So it’s just always kind of bizarre to me. I get it if we’re a coal-fired plant or something, maybe you should bet against us. But it never made sense to me what anyone gets out of Clover’s demise. Now, we still have yet to prove whether our business model’s going to work. But our intent is pretty clear … (and it does) lead to business value, long-term.”

Well, as we will see very shortly, the business model is highly problematic and far from delivering business value.

Financials: Why They Make CLOV Stock a Goodbye and Not a Good Buy

Additionally, financials are also an issue when it comes to Clover Health. Let us start with fiscal year 2020 financial results first:

Key points worth mentioning:

  • Total revenue for 2019 was $462.3 million and in 2020 was $672.9 million
  • Net loss was $(363.7) million in 2019 and $(91.6) million in 2020
  • Membership was 58,056 as of December 31, 2020, a 36.3% increase from December 31, 2019.

With increased revenue and membership the company is still losing money. And the outlook for full-year 2021 according to Clover Health is that net loss is expected to be between $(210) – $(170) million.

Is this progress to financials according to the business plan? I do not think so.

What About Q1 2021 Financial Results?

Fast forward to the first quarter of FY2021, and the quarterly results are quite mixed. That said, some of the key points to mention are:

  • Total revenue was $200.3 million in the first quarter of 2021, a 21% increase compared to $165.5 million in the first quarter of 2020. This growth was primarily due to an increase in membership.
  • GAAP net loss for the quarter was $(48.4) million compared to $(28.2) million for the first quarter of 2020.
  • “Our first quarter 2021 results were impacted by the application of updated guidance from the SEC related to our accounting for public and private placement warrants assumed by the Company in connection with the Merger. Applying the updated guidance, we recognized a gain of $85.5 million in the first quarter related to the change in fair value of the warrant liability.”

In turn, I would like to see if this guidance by the SEC will prove to be a one-time negative event or not for Clover Health.

FOMO Trading and Short-Squeeze

The FOMO trading that took the stock to a price of $28.85 hitting a 52-week high proved that it was an artificial one and was supported by the short-squeeze and the enthusiasm on social media which rarely has any strong reasons based on fundamentals to support the meteoric rise of the stock price. So, do not rely on any such social media frenzy. It is too dangerous and does not have investment depth behind its reasoning, only speculation and short-term momentum that soon fades completely.

Overall, my opinion on CLOV stock remains the same as my article posted in May 2021. I do not see any compelling fundamental reason to buy the stock. However, let’s give Clover Health time to see if it can change dramatically its business plan that does not deliver what the management is claiming now. Because value is not net losses.

On the date of publication, Stavros Georgiadis, CFA  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.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.


Article printed from InvestorPlace Media, https://investorplace.com/2021/08/clover-health-has-serious-fundamental-flaws-and-struggling-business-plan-clov-stock/.

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