Clover Health (NASDAQ:CLOV) is a Medicare Advantage insurer in the U.S. that has crashed more than 74% in 2021. CLOV stock was trading near $15 per share in early January, crashed until May, then rallied in June, attempting to move above January’s high level. Unfortunately, it failed to achieve this goal and has crashed since, closing at $3.86 on Dec. 15, 2021.
For investors who are passionate about momentum stocks, technical analysis or meme stocks, Clover Health has given lots of excitement and wild price swings. Have a look at its 52-week range of $3.92 – $28.85. Riding the wave up to the highs was too exciting, buying near the top was too painful. Joy and drama are daily parts of the stock market. What should you know now about CLOV stock?
Clover Health: a Look at Previous Analysis
In my previous articles about Clover Health: “After Checking Its Health, Things Do Not Look Good for CLOV Stock” and “Clover Health Has Serious Fundamental Flaws and Struggling Business Plan,” I argued that several negative factors made the stock risky, expensive and speculative.
These factors were the meme stock frenzy, a shareholder deficit, major stock dilution, and a business plan that I called “problematic.” I summarized that “with increased revenue and membership the company is still losing money. And the outlook for full-year 2021 according to Clover Health is that net loss is expected to be between $(210) – $(170) million. … I do not see any compelling fundamental reason to buy the stock.”
A few months later, there are three key factors that are worrisome and one that brings some hope. I will start with the positive news first.
Revenue and Membership Growth: Strong Momentum
Cover Health has been gaining momentum in generating revenue and increasing its memberships in 2021. In 2020’s fourth quarter, the company reported total revenue of $673 million, which was a 46% growth year-over-year. In fiscal year (FY) 2021 for Q1, Q2, and Q3 the revenue growth reported according to MarketWatch was 1,384,203.56%, -2.75%, and 95.11%, respectively. The figure for revenue for Q3 2021 was $427.2 million.
There is traction in revenue growth. In its Q3 2021 Financial Results, Clover Health announced that “lives under Clover Management increased 125% year-over-year.”
So what are the negative factors for Clover Health that investors should be aware of?
Net Losses Persist with CLOV Stock
Clover Health is a money-losing business. Despite its momentum in sales growth in 2021, net losses reported were $48.4 million for Q1, $317.6 million for Q2, and $34.53 million for Q3.
Another reason for concern related to profitability is that Clover Health reported a GAAP Medicare Advantage (MA) Medical Care Ratio (MCR) of 102.5% for Q3 2021. This is compared to a figure of 86.7% in Q3 2020. This ratio is calculated by dividing total medical expenses paid by the total insurance premiums an insurer collects. The ideal MCR should be in the range of 80%-85% for a small and large group of insurance companies accordingly. A lower ratio as close to the range mentioned is preferable and signals higher profitability for the insurer.
Clover Health should try to lower its MCR to achieve and sustain profitability over the next quarters.
Free Cash Flow: Burning Cash Continues
Free cash flow (FCF) is a very important financial metric both for financial performance and for the valuation of stocks. It is the cash a company has left after paying its operating expenses and capital expenditures. Cash is king for any business.
Clover Health has a negative trend related to FCF, burning cash in 2021 for the first three quarters. This is not a sustainable trend. Burning cash can lead to bankruptcy. In Q1 2021, Clover Health reported a FCF figure of $92.97 million, the highest number for the nine months of FY 2021. For these nine months, a total cash burn of $202.64 million is not a positive financial performance.
Clover Health announced a public offering of Class A common stock that will bring about $300 million of gross proceeds to be used mainly for working capital and general corporate purposes. This is making the intrinsic value of CLOV stock worse, which is bad news for investors. I estimate that unless Clover Health finds a way to make its business model work, its goal to reach profitability in 2022 is too ambitious and unrealistic.
Overall, I continue not to like CLOV stock. The negative factors are much more essential than the only positive factor. Until Clover Health turns profitable, it is better to avoid it.
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On the date of publication, Stavros Georgiadis, CFA, 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.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.