Shares of Clover Health (NASDAQ:CLOV) are down 10% in today’s pre-market session after announcing that it is issuing an additional $300 million of common stock, further diluting the holdings of existing shareholders.
Clover Health is a Tennessee-based healthcare insurance company that aims to improve costs for senior citizens and give consumers who use private versions of Medicare a less expensive option. CLOV stock has been a favorite of retail investors who congregate on r/WallStreetBets. As a result, it has been treated as a meme stock at various times this year.
Currently, CLOV stock is down nearly 60% in the year to date at $6.43 per share. However, the stock was as high as $28.85 in June after retail traders executed a short squeeze. Today’s news of the additional stock offering is putting renewed pressure on the share price at a time when the Reddit crowd appears to have abandoned Clover Health.
What Happened With CLOV Stock
In a news release, Clover Health said that it is issuing 52,173,913 shares of its Class A common stock at a price of $5.75 per share. The stock offering closes on Nov. 22 and is expected to raise $300 million for the company. The company said that it intends to use the money raised for “working capital” and to fund “general corporate purposes.”
The stock offering comes as Clover Health’s losses mount. The health insurer has forecast a loss of at least $230 million for all of this year. Clover Health did report $600 million in cash on its balance sheet at the end of this year’s third quarter, making the current stock offering a bit of a surprise.
Why It Matters
Investors view secondary stock offerings as a bad thing because they increase the number of available shares and dilute the value of the stock. Essentially, selling more shares destroys value for shareholders that already own the stock. This is the main reason that Clover Health’s share price is down 10%, and why it could fall even further.
Additionally, secondary stock offerings are viewed as an attempt by troubled companies to raise much-needed cash to fund their ongoing operations or to manage high levels of debt. More established and profitable companies tend to engage in share buybacks, where they repurchase their own stock to increase the value for existing shareholders. Share buybacks are viewed positively by investors large and small.
What’s Next for Clover Health
More pain is ahead for shareholders of Clover Health. Immediately, the company’s stock is going to get hammered today as investors digest news of the secondary stock offering. More long term, the stock offering intensifies questions around Clover Health. With losses growing, investors should approach CLOV stock wearily.
On the date of publication, Joel Baglole 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.
