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Clover Health Stock Cannot Create Shareholder Value Without Profits

Clover Health (NASDAQ:CLOV) stock started trading on Jan. 8, after it became public through a reverse merger via a special purpose acquisition company (SPAC) owned by famous investor Chamath Palihapitiya. After it opened the price hovered around $15.

A health insurance claim form with a stethoscope, a calculator, and several hundred dollar bills resting on top.
Source: Valeri Potapova /

But by early March, Clover Health shares were down to $6.31. Then in recent weeks, the company found itself in the meme-stock frenzy fueled by Reddit’s WallStreetBets forum.

On June 9, retail investors’ attempt to trigger a short squeeze pushed CLOV stock to a record high of $28.85.

Since then, the rally has faded away, and now the shares are back around $8. Year-to-date (YTD) Clover stock is down about 55%.

As a side note, the percentage of CLOV shares sorted is about 7.5%. A few months ago, it was over 30%. Put another way, the company might be losing its meme-stock status among Reddit traders.

In early August, Clover Health issued unimpressive Q2 financials. Let’s now take a look at what investors could expect from CLOV stock in the months ahead.

A High-Tech Platform for Healthcare Delivery

Clover Health is a health insurer focused on Medicare Advantage, a program that offers plans with lower costs compared to its original version.

Patients agree to pay Clover Health monthly premiums in exchange for a more extensive network and broader coverage of services than what their standard Medicare plan provides.

Around 25 million people are currently enrolled in Medicare Advantage, accounting for $343 billion in spending. Enrollment is forecasted to exceed 50% of total Medicare enrollment by 2030.

Thanks to its Clover Assistant platform, Clover aims to offer coverage cheaper than its rivals while also reimbursing healthcare companies faster. It additionally plans to pay back providers at twice the industry’s standard rate.

Many on Wall Street believe this business model sounds too good to be true. The platform essentially allows a patient’s physician to access clinically essential information, such as past diagnoses, medications, and clinical recommendations, through the power of machine learning.

The platform is designed to hold down healthcare costs and prevent unnecessary hospital visits.

During the second quarter, the company launched its Medicare Direct Contracting program, allowing doctors to use its Clover Assistant health analytics software directly for their patients.

While this may be cheaper than running an insurance program, the company projects new member enrollment for this program to remain flat for the rest of this year.

In addition, the company has developed Clover Homecare, a Clover Assistant-powered tool that facilitates home-based care for patients who are not healthy enough to visit a doctor’s office. The company claims that the Clover Homecare tool reduces hospitalizations, emergency room visits, and skilled nursing facility stays.

How Q2 Results Came

Management aims to disrupt the market for Medicare Advantage plans by reducing healthcare costs and offering a better value for patients. However, the speculation around CLOV stock has shown that the company does not have a clear path to profitability.

While management is taking steps to fuel business performance, it is struggling to grow sales fast enough to cover its soaring expenses.

During the second quarter, Clover Health grew its sales by 140% year-over-year (YOY) to $412.5 million. But its medical care ratio surged from 70% to 111%, which implies it is paying out more than it receives in federal reimbursements.

The Clover Assistant platform is on track to managing over $1 billion in annualized revenues. Clover spent $108 million on salaries, benefits, and general and administrative expenses during the second quarter. Hence, the bottom line deteriorated significantly.

The group reported a net loss of $318 million, compared to a small profit of $5 million in the prior-year quarter. Moreover, the company burned through $135 million in cash over the trailing 12 months, with $160 million cash remaining on its balance sheet.

Many on Wall Street noted that if the Clover Assistant software platform fails to deliver its promise to cut the cost of providing healthcare, the company could simply not create any real shareholder value.

Until Clover can convince investors that it has devised a clear path to profitability, it does not look reasonable to pay 12 times current sales for CLOV stock.

Competitors such as Cigna (NYSE:CI) and Humana (NYSE:HUM) currently trade at only 0.4 and 0.7 times current sales, respectively.

The Bottom Line on CLOV Stock

The aging U.S. population has increasingly become a key driver of growth in the demand for good healthcare. Therefore, shares of successful businesses that offer disruptive products and services in the healthcare and insurance segments are poised to generate lucrative returns.

However, it currently looks difficult for Clover Health to turn a profit. The company continues to attract patients with its better coverage, leading to significant top-line growth.

However, premium coverage costs extra money, leading to accelerating losses as well. Hence, Clover Health seems to be stuck in a catch-22. As Clover is in its infancy, it needs to spend to continue attracting customers.

Unless meme stock investors return for a second round, Clover’s future relies entirely on its fundamentals. The company has only a year of cash runway. Its weak balance sheet, significant losses, and lack of widespread availability seem to outweigh the bullish aspects of its technology-based business model.

As CLOV stock does have the potential for significant upside, it remains a risky investment. Investors might want to put their money into other robust stocks.

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.

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