All Bets Are Off Whether Clover Health Stock Surges or Sinks From Here

  • Clover Health (CLOV) has given back its gains from the late March growth stock rally.
  • There’s still a lot of uncertainty around its ability to make a comeback, whether in the near-term or long-term.
  • Even if you accept its moonshot nature, today’s prices may not be a worthwhile entry point.
Clover Health logo on a phone screen in front of a computer screen showing a map where their services reach. CLOV stock.
Source: Wirestock Creators / Shutterstock

In my last article on Clover Health (NASDAQ:CLOV), published on April 5, I argued that there was a high chance CLOV stock would give back its gains from the late March growth stock rally. Not to toot my own horn, but that’s what has happened over the past few weeks.

As is the case with other growth stocks hit hard in April, chalk most of this up to increased fears related to rising interest rates, and a potential economic slowdown. An upcoming event (its latest earnings report) could drive another spike for the stock, yet it’s far from certain. Over a longer timeframe, there’s also a lot of uncertainty.

So, then, following its slide back to under $3 per share, what’s the best move? Even if you have the risk appetite for it, it may not be worth diving in at today’s prices.

CLOV Clover Health $2.71

CLOV Stock and Upcoming Earnings

It’s not a mystery why Clover Health has again been under pressure. The Federal Reserve continues to get serious about rate hikes and other monetary tightening measures. Economic growth may be in for a significant slowdown. In turn, growth stocks are again losing their appeal.

However, while the market is turning unfavorable to growth plays like CLOV stock, perhaps the company’s report (after the close May 9) will fuel another double-digit move higher.

Or will it? According to Seeking Alpha, analysts are divided when it comes to the numbers it will report for the quarter.

Out of five sell-side analysts, two have upped their earnings per share (EPS) forecasts. Three have revised their estimates lower. With its results for the fourth quarter 2021, it appeared as if Clover was making progress getting its Medical Cost Ratio (MCR), or claims as a percentage of premiums, to a sustainable level. A high MCR has outweighed its impressive level of revenue growth.

But it was still over 100% during Q4 2021, the company has its work cut out for it when it comes to bringing it down. If it failed to make more progress doing so last quarter? We may see a post-earnings drop, instead of a spike.

Long-Term Also Remains Murky

A disappointing earnings report could mean double-digit losses for investors buying CLOV stock today. Bad numbers may be enough to send it back to, or even below, its 52-week low of $1.95 per share. You may think that its potential to re-hit past price levels makes stomaching such volatility worthwhile.

Yet there’s also high uncertainty when it comes to it making even a partial-recovery over a longer timeframe. Getting its MCR to below 100% is only the first step. Really, it needs to get its MCR to a level where net premiums more than cover overhead costs.

Based on its full-year outlook, management doesn’t expect this to happen this year. Even as it stands to more than double its revenue this year. In the “best case scenario” ($3.4 billion in revenue, 95% MCR, overhead costs of $330 million), it would still report an operating loss in the hundreds of millions. Granted, Clover has enough cash on hand to absorb these losses this year.

Even so, growth is set to slow down starting next year. Without a big drop in MCR, it’s hard to see it getting out of the red in 2023, either.

The Takeaway

Besides the uncertainty as to when it reaches profitability, there’s also the matter of its potential valuation, in the event it becomes consistently profitable. Peers in the managed healthcare space, like Centene Corporation (NYSE:CNC) and Molina Healthcare (NYSE:MOH) sport price-to-earnings (P/E) ratios in the 15x – 20x range.

With a $1.36 billion market capitalization, this implies Clover needs to eventually generate earnings of between $68 million and $90 million. Although its growth may slow down in the coming years, getting to this point may be achievable. Getting earnings significantly above this amount, however? That may prove challenging.

In short, forget about a return to its high-water mark ($28.85 per share). Even an eventual return to $10 per share may be out of reach. Considering what may be more limited upside than it seems at first glance, along with high uncertainty as to its timeline to profitability, it’s best to hold off on CLOV stock at today’s prices.

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, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


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