However, it simply hasn’t happened. CLOV stock did spike up to the mid-$20s at one point, but that rally quickly faded.
Clover shares find themselves back near their all-time lows. The stock trades at just above $7.70 and mostly has moved sideways with the exception of the occasional spike.
While there’s still a lot of energy around CLOV stock, that could rapidly diminish given the weaknesses in the bullish thesis.
For one, the float is increasing.
A recent distribution of 24.6 million shares of CLOV stock increases the float markedly, reducing the short interest in tradable Clover shares even more.
As the short squeeze loses potency, the actual insurance business continues to sputter. Add it all up, and CLOV stock faces an unhealthy outlook heading into year-end.
Cano Health Is Diverting Some Trader Interest
For quite a while, Clover Health was the hottest SPAC in the health care management space. Now, however, its spot is being disrupted. Cano Health (NYSE:CANO) is a newly-traded public company. It recently merged with special purpose acquisition company (SPAC) Jaws Acquisition, and has gained 45% in value from the opening $10 SPAC price.
Cano focuses on providing health care services to seniors, particularly in the Medicare Advantage. Cano believes that its superior technology platform will allow it to deliver and more cost-efficient care than existing options.
Clover and Cano aren’t direct rivals. Cano provides medical services, rather than insurance. However, both have an investment proposition in part based around superior technology and came public via SPACs.
Additionally, Cano has a key insurance partnership with Humana (NYSE:HUM), which is one of Clover’s primary rivals in the Medicare Advantage space.
Clover’s Core Business Is Struggling
The main problem with Clover isn’t necessarily competition, however. It’s more fundamental. Clover hasn’t proven to be very good at insurance. Which is quite a problem for a company that is supposed to be disrupting the insurance industry.
One simple metric bears this out. Clover’s Medical Care Ratio (MCR) ratio in Q2 was 111%. This means that it spent 111% of its earned premiums on providing medical coverage.
Insurance companies, as a baseline, are supposed to have MCRs under 100% to earn a profit. Ideally, they’d be significantly below 100%, as is the case at most major health insurers. Instead, Clover is losing money just operating its essential insurance business.
Bulls love to point to fast revenue growth, but when you’re losing money on each policy, growth isn’t necessarily a good thing.
Clover has blamed some of its costs on temporary disruptions from Covid-19. However, Covid-19 clearly isn’t going away overnight, so these expenses could continue piling up for quarters to come.
Meanwhile, other health insurers haven’t spiraled into deeply unprofitable territory from the pandemic.
Dilution and Downside Ahead
My colleague Tom Kerr makes a compelling bearish argument for CLOV stock.
Based on a review of the company’s operating losses, cash burn, and current balance sheet, Kerr says Clover is going to have to issue stock to get by.
“It’s somewhat pointless to attempt to derive a fair value calculation for CLOV stock because it is highly likely they will have to access the capital markets next year sometime,” Kerr wrote. “So it may be best to wait to see what type of dilution occurs when that happens.”
Kerr warns that CLOV stock could end up virtually worthless if the company is unable to raise additional capital on acceptable terms. I’m not quite that bearish. Clover Health has prominent backers and a passionate shareholder base. I imagine that it will be able to issue more stock and raise needed funds that way.
Still, given how badly the operating business is running, Clover may have to issue shares at a lower price to garner any institutional interest. As it stands now, analysts see the company generating massive operating losses through at least the end of 2023.
CLOV Stock Verdict
It’s not hard to see why CLOV stock keeps dropping, given its disastrous MCR. Simply put, an insurance company that’s not good at underwriting insurance tends to be a poor investment.
There’s this idea that Silicon Valley can disrupt any industry simply by throwing a few software engineers at it. However, in practice, it can be more complicated than that.
You can sprinkle in all the buzzwords you want about disruptive technology and artificial intelligence. But Clover lost 11 cents on every dollar of insurance premium it underwrote last quarter. That’s unacceptable for an insurance company.
Traders can keep talking up who owns the stock, the potential for a short squeeze, and so on. The meme trading community remains excited for CLOV stock, there’s no disputing that. But until Clover actually starts earning money, Clover shares will be stuck in the mud.
On the date of publication, Ian Bezek 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.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.