Medicare tech company Clover Health (NASDAQ:CLOV) provides a unique service that fills a void in the medical industry. It has used its technological prowess to cut healthcare costs and provide a complete service. Hence, top-line growth for CLOV stock has been impressive in the past few quarters.
However, that growth has come at a cost. Massive operating expenses, capital investments and stock-based compensation have pushed Clover’s balance sheet into the red. Hence, the risk-reward ratio for CLOV stock is skewed against the equity investor.
Clover Health is among the laundry list of companies caught up in the retail trading frenzy. Retail investors bid up shares earlier in the year, which led to a massive run-up in the stock’s price during the second quarter. Nevertheless, CLOV stock has dropped by nearly 71% year-to-date (YTD).
The stock is attractively priced at less than two times forward sales, which is considerably lower than the sector average. However, dilution fears and insufficient cash are concerning elements that will weigh down its stock price. Investors would be better off buying small chunks of CLOV stock over time and taking advantage of any drop in price.
The Relevance of Clover’s Solution
The medical industry needed a disruptor that could streamline the issues faced by patients and doctors. In a 2018 survey, 80% of doctors reported being overextended. The same survey found nearly 50% of doctors were skeptical about the future of medicine.
On top of that, medicine is incredibly expensive. Just last year, the industry saw more than $100 billion in unpaid medical bills.
Clover’s solution is estimated to be 41% more cost-effective than conventional Medicare. On top of that, the platform enables doctors to make more informed decisions, which ultimately lead to fewer ER trips and hospital admissions.
Moreover, from the company’s latest quarterly results, we see the program is gaining a lot of traction. In Q2 2021, total revenues rose 140% to $412.5 million from the prior-year period. The bulk of the revenues are from direct contracting (DC), which involves agreements that last for at least five years and involve monthly payments. Clover Health expects full-year 2021 revenue of $1.4 billion to $1.5 billion.
Challenges Lie Ahead for CLOV Stock
Clover has a product that solves a pertinent problem. However, it faces multiple challenges which fuel its bear case.
Firstly, its product isn’t available in most counties across the United States. It has plans to add 101 new counties next year, but it’s just scratching the surface with more than 3,000 counties in the country. Moreover, it significantly limits the total addressable market for Clover, as only a small fraction of the country has the option to use its services.
Furthermore, the company’s cash burn rate has been rising aggressively despite healthy top-line growth. Hence, Clover Health will have to issue more shares, resulting in more dilution.
Its cash burn is likely to be approximately 15% of its current market capitalization. Therefore, this is likely to be a major issue for CLOV stock, especially with profitability so far down the line.
The Final Word on CLOV Stock
There are plenty of reasons to be positive about Clover Health. It provides an excellent solution the healthcare sector was in dire need of. The company continues to add new members to its platform as it expands its offerings.
However, its dwindling cash balance and an unclear path to profitability are matters of grave concern. Nevertheless, CLOV stock has a strong long-term case if it can become more financially flexible and expand its outreach across the country.
On the date of publication, Muslim Farooque 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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.