Shares of popular meme stock Clover Health (NASDAQ:CLOV) have fallen off the wayside as of late. CLOV stock has shed over 65% of its value in the past nine months. This past month, the stock has been down over 44%.
Retail interest in the stock is fading away while the top institutional investors buy the dip. The business has shown promise and continues to grow at an impressive pace, but its underlying issues make it more of a speculative bet at this stage, attracting those who can stomach the risk.
CLOV stock traded between $17 and $14 at the start of 2021 and continued falling until June. The meme stock frenzy helped to lift the stock in June, but the sentiment leveled off quickly. The stock now trades at only a fraction of what it used to be worth at just $2.36 at the time of writing. A big positive out of all this is that it now trades at highly attractive multiples. Nevertheless, the risk/reward ratio for the stock isn’t too appealing, but its current prices make it an interesting bet this year.
Surging Top-Line Growth
One of the main reasons Clover is an exciting investment is that it is raking in revenues at a healthy pace. In its third quarter, it made $427.2 million, which equals a 153% increase in quarterly sales on a year-over-year basis. Moreover, premium revenues from its Medicare Advantage (MA) plans increased 20% while its member coverage increased by an incredible 17%. Lives under the company’s management stood at 129,100 at the end of the third quarter, representing a 125% increase from the prior-year period.
Looking ahead, the company forecasts that its lives under management will increase by roughly 60% to reach 200,000 by 2022. Most recently, the company estimates that its direct contracting aligned lives will double in 2022 from their current number.
Clover is flying so far this year as its MA membership has grown by 25% at the beginning of the year compared to last year’s same period. Moreover, the company believes its numbers have surpassed industry growth by a 10% average year-over-year basis. For the whole year, the company’s revenue growth amounts to a staggering 86%. Hence, Clover’s revenue has expanded at a spectacular base and will continue to exceed estimates in the upcoming quarters.
The Red Flags
Some red flags in the Clover Health story are likely to put most investors on guard. First and foremost, the company is unprofitable. It posted $149.2 million in losses during the third quarter alone, while its cost-cutting measures have proven to be unsustainable so far. Hence, there is a lot of pressure on the company to keep generating rapid top-line growth for the foreseeable future.
However, expecting the company to continue growing at such massive rates as it has in the past is futile. Moreover, with its mounting losses and just $588.6 million in cash, it will continue to get tougher for Clover Health to expand its revenue base. Its management’s recent decision to raise $300 million in equity isn’t reassuring either. It appears the management may be doubtful of the business’s ability to generate enough money to continue its expansion plans. Hence, investors should expect more dilution ahead and for the company’s debt load to rise substantially in the coming months.
Bottom Line on CLOV Stock
Clover Health has been growing its top-line aggressively in the past few quarters. However, its high costs remain a major problem that limits its attractiveness.
For Clover, it is imperative to reconcile its costs while expanding its network of providers. However, if profitability remains in the rear-view mirror, it will be forced to take out more debt and continue diluting its shares.
For those looking for a stock with sizeable risk which could potentially blow up over the coming years, CLOV stock could be an exciting proposition.
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Disclosure: 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.