Clover Health Can Still See a Downdraft Despite Growing Revenue

Clover Health Investments Corp (NASDAQ:CLOV), a Medicare Advantage insurer in eight states in the U.S., is still producing huge losses. This was shown in its recent second-quarter results, which I discussed in my last article on Aug. 16. At the time I suggested that CLOV stock was overvalued and likely to fall. Since then it has declined from $8.49 to $7.97. But I still think it could fall further.

CLOV stock has already had a fairly volatile history since going public via a reverse merge with a SPAC (special purpose acquisition company). The deal closed in early January when the stock was around $15 and $16 per share.

Since then it spiked once to a high of $22.15 on June 8. But lately, as investors realize that it will continue to incur losses, CLOV stock has drifted down to $8.10 at closing price.

Medical Care Ratio Issues

Keep in mind that the insurer only focuses on Medicare patients. It does not have a balanced portfolio of young and old people like many health insurers. As a result, the company has a very high and worsening medical care ratio (MCR).

This is the ratio of all its total net medical claims incurred divided by net premiums earned. So the higher the ratio the worse the situation. Any ratio over 100% means that revenue does not cover its losses. On page 35 of Clover Health’s latest 10-Q filing, it shows the progression of its MCR Loss ratio.

For example, for the quarter ending June 30, the company had earned premiums of $195.4 million. But the net medical claims that it incurred during the quarter were higher at $216.8 million. So the MCR ratio of $216.8m divided by $195.4m works out to 111%. Remember any ratio over 100% indicates that its premiums can’t cover the medical claims.

And of course, there are huge operating costs, management costs, overhead and public company costs that the company also has to bear. So, for all intents and purposes, a healthy company needs to have an MCR ratio of 80% to 90% in order to bear all these other costs.

Page 35 of the latest 10-Q shows that in the prior quarter its MCR ratio was lower at 107.6%. The ratio also progressively worsened last year as well. For example, in Q1 2020, it was at 89.4% but by Q4 it had deteriorated to 109.3% by the end of Q4 2020.

Where This Leaves Clover Health

I don’t see this trend improving any time soon. This is the guts of the company’s business. Higher revenue simply means that it is going to incur higher medical claims and higher losses.

That is not a good business model. In the next several years, as Clover Health builds out its Medicare Advantage business (and hopefully doesn’t incur such huge adverse selection issues), its losses will climb.

Analysts are not that exuberant about the stock. For example, TipRanks.com shows that three analysts have an average target price of just $8.67. That is just 7% over today’s price.

In addition, Yahoo! Finance, which uses Refinitiv analyst survey data, reports that the average price target of five analysts is just $9.00 per share. However, this may be a bit misleading. The latest recommendations are all negative. For example, Cowen & Co initiated coverage on CLOV stock on Sept. 10. It rated the stock as an “Underperform.” Moreover, both JPMorgan and Bank of America analysts have downgraded their recommendations in the last three months.

What to Do With CLOV Stock

Most investors will probably wait before taking a stake in CLOV stock. Right now it appears to be too high. For example, its price-to-sales (P/S) ratio stands at 2.52 times for revenue forecast this year, according to Seeking Alpha. Even with its expected rise in revenue for next year, the forward P/S ratio is still high at 1.4 times.

Given that the company is still making huge losses, the more appropriate ratio is probably well below a 1.0 times P/S ratio. That could mean that CLOV could still fall further. As revenue rises its $3.47 billion market value probably won’t reach a 1.0x multiple until 2023 or 2024.

Bottom line: don’t expect to make much money buying CLOV stock any time soon. The company needs to show when it will become profitable before investors will likely bid the stock higher.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.