I read an interesting interview recently with Clover Health’s (NASDAQ:CLOV) president and chief technology officer, Andrew Toy. The executive spoke about several subjects, including why he chose to join the health care startup in February 2018. But, unfortunately, he didn’t discuss CLOV stock and when it might get out of its funk.
As Toy points out, Clover is neither a health care plan nor a health care technology provider but a hybrid of the two. While that ultimately will play in the company’s favor, it’s made it difficult for investors to put a price tag on its valuation.
Here’s why.
CLOV Stock Is Stuck in the Middle
The company’s trailing 12-month sales are $280 million. That puts its price-sales ratio at 10.8. That seems pretty good for a relatively new company.
However, Microsoft (NASDAQ:MSFT) trades at 13.9x sales, and Shopify (NYSE:SHOP) trades at 44.5x sales. These are two examples of tech stocks getting premium valuations, while the technology Clover utilizes for its Clover Assistant tool gets left out of the equation.
“We can hold the medical risk, focus on collecting a lot of data, and build it into our tool, Clover Assistant, which is used by primary care physicians to give better, personalized data-driven care,” Toy told Healthleaders finance editor Jack O’Brien.
If Clover is given a P/S multiple halfway between MSFT and SHOP at 29.2x sales, it would have a share price of $34.66 [$280 million x 29.2 x 235.9 million shares outstanding], or about 5x its current value.
In the health insurance industry, UnitedHealth Group (NYSE:UNH), which I wrote about in September while discussing Clover, has approximately 1% of UNH’s Medicare Advantage customers. UNH trades at 1.6x sales.
Do you see what I’m getting at?
This argument is a double-edged sword. If the markets applied a multiple similar to UNH, CLOV stock would be worth less than $2 [$280 million x 1.6 x 235.9 million shares outstanding], not $7.55, where it currently trades.
So, it could always be worse.
It Suddenly Dawned on Me
As I was thinking about what to talk about in my latest commentary – there will be plenty to discuss once it reports Q3 2021 earnings on Nov. 8 after the close – I began thinking about the company’s second-largest shareholder, GreenOaks Capital Partners.
It owned 50.1 million shares, or 16.5% of its stock at the end of September. That was down from 74.9 million shares, or 30.6% at the end of July and 96.3 million shares, or 35% at the end of June.
So, in four months, GreenOaks lowered its share count by almost 50%. However, the reductions were in-kind distributions of Class A stock to its investors.
The only other shareholder that comes close is founder and CEO Vivek Garipalli, who owns 83.6 million shares, or 36.8% of the company.
GreenOaks led Clover Health’s Series C funding round in May 2016 when the company raised $160 million. It led the subsequent Series D for $130 million and Series E for $500 million.
“We are excited to back Vivek, Kris, and the team at Clover as they continue to build on what is already the best value proposition and member experience in Medicare Advantage,” Benny Peretz, partner, GreenOaks Capital, stated in Clover’s 2016 news release announcing the funding.
“By combining a data-driven approach to improving health outcomes and a genuine desire to delight its members, Clover offers a Medicare Advantage plan that creates a truly positive impact on member health, while delivering a superior member experience and value that continues to get better and better at a rapid pace.”
The Bottom Line
Even with the significant decline in Clover’s share price – it’s down 28% over the past six months – GreenOaks is likely sitting on a positive return on its investment.
I would expect it to hang on to the remainder of its shares until the share price moves back into double digits. However, as a focused investor, GreenOaks doesn’t seem like the kind of hedge fund that gets impatient.
For the long term, if GreenOaks stays in the game, I think that’s a reason for optimism for small retail investors. However, this isn’t the kind of stock you should be investing in for your retirement.
CLOV stock still is not a slam-dunk investment.
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.
