There are two ways to read my headline about Medicare insurance technology company Clover Health (NASDAQ:CLOV). The first is to think I’m suggesting Clover Health will never be profitable. That’s certainly a possibility, but it’s not what I meant. The second way to interpret my headline — and the way it was intended — is that if you hold CLOV stock you need to forget about profits and focus on revenue growth and lives under management.
Like it or not, Clover Health is in scaling mode at the moment. So, while its vision of reducing costs throughout the healthcare system using technology to help medical practitioners produce better patient outcomes at a lower cost is admirable, it still needs economies of scale to make things really hum.
With that in mind, let’s take a closer look at Clover Health and CLOV stock.
Clover Health Reports Loss Despite Revenue Beat
Before we get into the company’s most recent quarterly results, I’ll admit, I’m not really enthusiastic about Clover Health — the business or the shares. In my most recent article about the company in July, I tried to get any interested buyers of CLOV stock to put their hard-earned capital into an ETF that owned the health tech company as a safer alternative. In the article before that, in June, I said CLOV stock was simply too darn speculative for my liking.
However, in mid-August, the company delivered second-quarter results that were better than expected, prompting renewed interest from the WallStreetBets crowd.
While Clover Health posted a quarterly loss of $317.6 million, revenue shot up 140% from a year ago to $412.5 million, smashing through analyst expectations. What’s more, lives under management nearly doubled from the first-quarter figure to 129,000.
Management also upped its guidance for the second half of 2021, coming in well above analyst estimates. Clover Health now expects full fiscal year revenue of between $1.4 billion and $1.5 billion, up from 672.9 million in fiscal 2020.
Some, including my InvestorPlace colleague Thomas Niel, have chosen to focus on the losses Clover Health is generating. “For the time being, concerns about its eventual profitability will continue to outweigh strong revenue growth,” Niel wrote on Sept. 1.
I too am a big believer in investing in profitable businesses. After all, the price you pay for a company’s shares is the future earnings it will generate discounted to the present. In theory, no profits mean no price to pay.
But the same philosophy can’t possibly hold for disruptive innovators. That’s because the whole premise of disruptive innovation is reaching outside your comfort zone to create something life-altering rather than something that’s just good enough.
Innovation Always Cost More
Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) remain two of the best examples of why disruptive innovation investors like Cathie Wood can’t focus on profits. To do so would kill the drive for innovation.
Now, I’m not saying Clover Health is the greatest thing since sliced bread, but you’ve got to forget about profits until the scale is met. And for every company, Clover Health included, the inflection point for meeting scale is different.
In Q2 2021, UnitedHealth Group (NYSE:UNH) served nearly 6.4 million Medicare Advantage customers, up 14% from Q2 2020. Clover Health had just 66,566 Medicare Advantage customers in the second quarter, or 1% of UnitedHealth’s comparable customer base.
So, if you’re buying CLOV stock based on some ridiculous idea it’s going to be profitable next quarter or next year, you’re way off base in your thinking.
Innovation, unfortunately, always costs more.
The Bottom Line on CLOV Stock
I don’t know the U.S. healthcare industry well enough to be confident the risk-to-reward in CLOV stock is acceptable. All I know is that I wouldn’t bet on shares in a million years.
However, if you have a high risk tolerance and a penchant for high-volatility stocks (CLOV stock shot up 22% Tuesday on no news), you may be interested in owning shares. Just be willing to forget about profits in the short and mid term.
On the date of publication, Will Ashworth 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.
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.