I may have called it one ahead of time. But now, after it’s slipped below $5 per share, Clover Health (NASDAQ:CLOV) is officially a penny stock. Sure, this label says little about the prospects for CLOV stock, or its underlying business. Yet there is one key takeaway. The hope and hype surrounding this online-based provider of Medicare Advantage plans is officially gone.
As you likely recall, there have been several waves of enthusiasm surrounding this stock over the past year. First, after this special purpose acquisition company (SPAC) deSPACed in late 2020, investors bid it up. Given the success of other blank-check companies backed by Chamath Palihapitiya, this made sense.
This time, as a meme stock/short-squeeze play going parabolic and hitting new highs, Clover almost seemed set to join the ranks of AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME). But it didn’t. After June, it steadily became less of a squeeze play. Over the past six months, its short interest has gone from off-the-charts, to just 7.6% of outstanding float.
Today, with conversation about it on Reddit’s r/WallStreetsBets subreddit well subdued fro what it once was, there’s only one path for shares out of their current penny stock status. Unfortunately, it’s a long one.
Why CLOV Stock Fell Below $5 Per Share
You can try to argue that Clover Health’s move to below $5 per share is due solely to market volatility. News of Covid-19’s Omicron variant, plus hawkish remarks from the Federal Reserve, have caused stocks across-the-board to move lower.
But even before the latest overall dip in the market, CLOV stock was already heading south. Blame that on its latest quarterly earnings report, and sell side’s pessimism about its profitability timeline. Plus, as my InvestorPlace colleague Joel Baglole discussed on Nov. 18, there’s its recent dilutive $300 million secondary offering.
On top of this, news of a shareholder lawsuit, due to Clover allegedly not disclosing the open Department of Justice (DOJ) investigation of it, which was one of the key bombshells from the above-mentioned short report. This grab bag of company-specific developments came on top of another key negative for the stock. That would be its waning appeal among the meme crowd. After several failed attempts to send it “to the moon” once more, Reddit traders have moved on.
Put all these factors together, and it is clear why Clover now finds itself in the bargain basement.
Yet, there is a silver lining. If it can get its operating costs under control, it will then start moving again in the right direction. The problem? For now, there’s little to suggest that’s soon set to happen.
Only Cheap if You Assume Profitability Is Imminent
Yes, at the current CLOV stock price (around $4.47 per share), it’s obviously not as pricey as it was at $10, $15, $20 or even $28.85 per share. Trading for less than 1x projected sales for 2022, this “disruptor” now trades at a forward valuation more in-line with its old-school peers.
Furthermore, as my InvestorPlace colleague Dana Blankenhorn recently argued, if Clover managed to bring its margins up on par with UnitedHealth Group (NYSE:UNH) by next year, shares would be selling for just 15x forward earnings. Unfortunately, bringing up margins is easier said than done.
To achieve this, several things need to play out. First, Clover’s thesis that its very high medical cost ratio (MCR) is “transitory,” and a product of increased healthcare usage due to the pandemic recovery, needs to prove true. If a few quarters from now, when things have normalized post-Covid, the company is still paying out more in claims than it’s taking in as premiums? It’s going to be much harder for it to blame the virus for its problems.
Second, even if it brings its MCR down to 85% (the bare minimum it needs to spend each year), it will need to really ramp up sales to cover its fixed overhead costs. Based on its SG&A expenses last quarter ($119.1 million), its annual overhead is around $476.4 million. If it managed to achieve gross margins of 15%, it would need to generate at least $3.17 billion in revenue next year. Sell-side projections call for between $2.48 billion and $2.92 billion in revenue next year.
Bottom Line on Clover
I concede that it’s not impossible for Clover to one day become profitable. Assuming it continues to grow its revenues by high double-digits. The issue is with the timeline. Between now and when it gets out of the red, it could stay stuck at present levels, as more dilutive secondary offerings (to cover cash burn/fund growth) impact its ability to bounce back.
Likely to languish at or below $5 per share for a while, skip out for now with CLOV stock.
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Read More: Penny Stocks — How to Profit Without Gettting Scammed
On the date of publication, Thomas Niel 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.