Clover Health Is Risky But Offers a Healthy Upside Ahead

  • Clover Health’s (CLOV) better-than-expected results show improvements in profitability
  • Upbeat guidance points to better pastures
  • Despite the risk, CLOV stock has healthy upside potential ahead
a photo of a stethoscope laying atop medical papers

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Clover Health  (NASDAQ:CLOV) stock’s post-earnings rally is finally over. Shares of the Medicare Advantage (MA) insurer are up 35% in the past month, reversing some of the losses endured in the past few months. CLOV stock trades at just 0.5 times forward sales despite upbeat guidance, strong sales, and improving profitability.

Last year, the meme stock mania took CLOV stock to record highs of $28.85 per share in June. Since then, retail trading interest in the stock has fizzled out, as its price has cratered over 80% from its all-time highs. Investors remain concerned about the company’s path to profitability and have doubts about its business model.

Moreover, with the enterprise’s status as a tech disruptor, they feel it could continue operating its unprofitable operations like other tech companies. However, the recent results prove otherwise and point to healthy upside potential for the business.

Encouraging Results

Clover Health’s fourth-quarter revenue came in ahead of expectations. Its revenues shot up again, and it saw a healthy improvement in its Medical Cost Ratio (MCR). The pandemic had weighed down profits and resulted in volatile MCR rates. However, there was a marked improvement across core metrics and was a major confidence booster for its investors in the fourth quarter.

Revenues for the quarter came in at $432 million, which was a comfortable $24 million beat. Moreover, the top-line grew 160% from the prior-year period during the fourth quarter. Additionally, the total lives covered by the business increased by a massive 124% from 2020.

All eyes were on Clover’s MCR, a core concern since its inception. MCR decreased 6.5% during the fourth quarter, coming as a relief for those believing that the company will continue to run a loss-making entity for the foreseeable future. Clover is looking at a brighter 2022, where it expects a profitable MCR of 95% to 99%.

Moreover, it expects its MA members to rise 26% to 27%, which amounts to the hefty addition of new enrollees; given its expansion plans in several new states, that number seems to be achievable. Also, the company expects a healthy bump in Direct Contracting (DC) members. With a whopping 150% increase in DC members, Clover is looking at at least 97,000 new members.

Outlook

The doom and gloom brought about by Covid-19 clouded Clover’s profitability metrics in the past couple of years. However, the fourth-quarter earnings were a big relief for investors concerned about the company’s profitability. Net loss as a percentage of sales was down considerably during the quarter, indicating strong operating improvements.

Furthermore, the company has big expansion plans this year, resulting in meaningful growth in its revenue base. It plans to enter 101 new counties this year, resulting in another spectacular showing. Moreover, it earned half a star as part of the CMS star rating system, which carries reputational benefits. Higher star ratings improve the perception of the service, resulting in more enrollees down the line.

Furthermore, Clover operates a lean balance sheet with zero debt. It will continue using equity offerings to raise the capital it needs for expansion. In November, the company raised $300 million, accumulating substantial liquidity for its growth plans. It ended the year with a robust cash balance of $791 million and a promising 2022 guidance that could reverse its stock market fortunes.

Final Word On CLOV Stock

Clover Health finished the year off with a bang, uplifting fourth-quarter results. Revenues are up substantially while its costs as a percentage of sales decrease.

Moreover, to further sweeten the deal for its investors, it has offered encouraging guidance for its top and bottom lines this year. Hence, there’s plenty to look forward to with the stock as it looks to claw back to the highs it achieved during the pandemic.

However, it needs to continue performing well in the upcoming quarters to keep investors invested in its growth story. CLOV stock trades at an attractive valuation at this time, and given its risks, the current price offers a significantly better risk/reward opportunity.

Therefore, CLOV stock is a buy for investors looking to the stomach risk for a potential winner down the line.

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.


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