If November Is Any Indication, Clover Health Is on Life Support

The calendar flipped to December this week, as Clover Health (NASDAQ:CLOV) stock polished off an absolutely horrid month.

a photo of a stethoscope laying atop medical papers
Source: Shutterstock

Clover, which had already lost 55% of its value in the first 10 months of 2021, delivered a November return on CLOV stock of -34%, pouring salt on a terrible wound. 

The last time I wrote about the healthcare hybrid – it’s part healthcare plan provider, part healthcare technology company – I suggested that GreenOaks Capital Partners, the company’s second-largest shareholder, would likely hang tight enduring the tough times experienced by Clover for most of 2021. 

But after November’s bloodbath, I’m not so sure. I mean, would you have the stomach to endure a year-to-day loss of 73% in the value of your shareholdings?

I sure couldn’t. 

So, if November is any indication, Clover Health looks ready for last rites. If you’re an aggressive investor, this could be the time to buy.

Here’s why.

CLOV Stock Post Earnings

CNBC contributor Bertha Coombs discussed three things to look for when Clover Health reported Q3 2021 earnings on Nov. 8, after the markets closed. 

Medical costs: Coombs pointed out that the company’s medical cost ratio (MCR) in Q2 2021 was 111%, suggesting it paid out $1.11 in medical costs but only took in $1 in premiums. That’s a losing proposition. The author also pointed out that Clover Health expects its MCR to stabilize, finishing 2021 at 95.5%, the midpoint of its projections for the year. 

How did it do on this front? Its GAAP Medicare Advantage MCR was 102.5%, considerably higher than the 86.7% ratio in Q3 2020, but 850 basis points lower than in the second quarter. However, its MCR was 94.8% on a normalized basis, 160 basis points lower than a year earlier and 220 basis points less than in Q2 2021.

So, on a non-GAAP basis, for the first nine months of 2021, its normalized MCR was 94.2%, right around its projection for the year. But, more importantly, it suggests Clover Health is keeping its costs in check. 

However, for all of 2021, it expects to generate $1.45 billion, losing approximately $240 million on a normalized adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) basis. 

In 2020, it had top-line revenue of $672.9 million with an adjusted EBITDA loss of $74.4 million. Its Q4 2020 press release estimated it would deliver revenues and adjusted EBITDA losses of $835 million and $170 million, respectively, at the midpoint of its guidance. 

So, its revenues for the year were much higher than it was expecting back in March. More importantly, it thought its adjusted EBITDA loss would be 20.4% of revenues. It turns out it should be 380 basis points lower at approximately 16.6%.

That’s good news.         

Membership and revenue growth: As Coombs pointed out, Clover Health ended the second quarter with 66,000 Medicare Advantage members – the actual number was 66,566 – well within reach of the company’s full-year projection of 69,000 members at the midpoint of its guidance. 

At the end of September’s quarter, it had 67,281 Medicare Advantage members. It expects membership to be 67,650 for all of 2021 (midpoint of guidance), 16.5% higher than 2020. In 2022, it expects a 20% increase to 82,000, thanks, in part, to a doubling of the number of members from Georgia. 

So, it’s had to dial back its 2021 guidance, pushing that growth into 2022. Investors will have to wait until at least the first quarter to know if this projection has any chance of being correct. 

Where the significant contribution could come from in 2022 is through its direct contracting business, which will contribute approximately 46% of its revenue in 2021, up from nothing a year ago. 

If it figures out how to make money from direct contracting, its pathway to profitability will become abundantly clear.   

Stock reaction: The simple answer is it didn’t react well to the third-quarter results. Since its Nov. 8 close at $8.03, it’s lost 40% of its value. I’d say that’s a big rebuke of its business model.

However, as I said in early November, GreenOaks Capital Partners owned 49.7 million shares of CLOV stock at the end of September, worth $367 million at the time. As I write this, if held, those shares are worth $239 million. 

Of the 11 companies it owned at the end of September – its holdings were valued at $7.45 billion – CLOV was its third-biggest holding behind Robinhood Markets (NASDAQ:HOOD) and Coupang (NYSE:CPNG).

On Nov. 22, GreenOaks filed a Form 4, indicating it distributed a little less than half the 49.7 million shares to the limited partners of the various funds holding the shares. The remaining 25.8 million shares are worth $124 million at current prices.

I suspect GreenOaks decided it was prudent to put the decision whether to continue holding in the hands of its limited partners while avoiding any applicable gains from the investment. It’s not an outright sell signal, but it’s still something to consider before you buy on the big dip.

The Bottom Line

If I had money to burn, I would be buying at these levels regardless of what GreenOaks ultimately does. The upside is too tempting. 

However, unless you have ice in your veins, it’s tough to recommend CLOV as a suitable investment at the moment. Only the most speculative investors ought to be anywhere near this healthcare stock.

With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.

Read More: Penny Stocks — How to Profit Without Getting Scammed

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. 


Article printed from InvestorPlace Media, https://investorplace.com/2021/12/if-november-is-any-indication-clov-stock-is-on-life-support/.

©2022 InvestorPlace Media, LLC