I must admit I have a love-hate relationship with Clover Health Investments (NASDAQ:CLOV) stock.
On the one hand, I do love disruptive technology. I’m a sucker for anything that upends the apple cart of corporate America.
On the other hand, despite gaining 34% over the past six months, I know it could lose those gains in a heartbeat.
For this reason, I’m on record saying I personally wouldn’t own this stock, but I believe it deserves a place in the portfolios of aggressive investors. Unfortunately, big rewards often come with big risks. That’s why investing isn’t for everyone.
Earlier this summer, Clover’s stock briefly traded at $28.85, an all-time high. It was only the second time in its short history as a public company that it traded over $15.
Now that it’s gone on a run since mid-August, the Reddit crowd is probably starting to ponder a $20 stock.
It’s okay. Dream big dreams but also manage your expectations. To get past $20, and stay past $20, will require a Herculean effort from the company.
CLOV Stock and a $10 Bugaboo
Back in June, just before Clover’s brief surge to $28.85, I suggested that investors who figured they’d missed out on buying CLOV stock in the $6s would likely get another chance. The closest it came was $7.41 on Aug. 19.
As I write this, CLOV is trading at a little more than $8.50. Yet, I get the feeling any whiff of bad news would send its stock scurrying back, maybe not the $6s, but quite possibly in the $7s.
Clover seems to be struggling to gain traction because few analysts have jumped on board despite having a $3.6 billion market capitalization.
According to MarketWatch, a total of four analysts cover Clover with a consensus “Underweight” rating and a median price target of $9.50.
It’s my experience that analysts are usually late to the party when upping a target price. In other words, the good news happens, the stock rises and then the analyst ups the target price after the fact, rendering the increase virtually useless.
But I digress.
Analysts Do Signal a Trend
Despite my skepticism regarding analysts, they do tend to foreshadow a stock’s future direction. As they pile in, investors take that as a sign that the company in question is worthy of investor interest. So they follow along.
Wall Street can’t be bothered to cover Clover. So why should retail investors care about it?
Well, the short answer is they probably shouldn’t.
Sure, some believe the best buys are the stocks with little or no coverage from Wall Street. In this instance, however, the aversion to covering the stock suggests professional investors and analysts don’t believe its disruptive business model is truly that.
And that’s a problem.
The Bottom Line
InvestorPlace’s David Moadel recently pointed out that Clover is putting up respectable revenue through its Medicare Advantage customers and the Direct Contracting business. It’s on track to generate $1.6 billion in annual revenue.
In Moadel’s view, Clover is the real deal and not just some meme stock. I would agree.
That’s why I recently wrote that investors should forget about Clover’s profits and focus on revenue growth and economies of scale.
“In Q2 2021, UnitedHealth Group 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,” I wrote on Aug. 8. “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.”
As long as Clover continues to grow sequentially, both in terms of revenue and lives under management, it’s got a shot at becoming a healthcare superstar.
However, it’s not going to happen without shareholders being exposed to a significant amount of risk. This is not a stock for the faint of heart.
Getting to $20 will take continued growth for at least the next four quarters. As I’ve already said, it’s a Herculean task, but one that Clover can achieve with a little patience.
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. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.