Clover Health (CLOV) Analysis – Monthly Patron Pick
Company Profile
“The fast growing and sexy industry of Medicare” – said no one ever
But that is the industry that Clover Health operates in as it offers software to assist physicians with patient data to improve health outcomes and save money.
They turn around and use those savings to provide Medicare advantage plans at lower costs to eligible people (anyone that qualifies for basic Medicare).
Medicare Advantage bundles your Part A, Part B, and usually Part D coverage into one plan. Plans may offer some extra benefits that Original Medicare doesn’t cover — like vision, hearing, and dental services.
You join a plan offered by Medicare-approved private companies that follow rules set by Medicare (clover being one of those companies). Each plan can have different rules for how you get services, like needing referrals to see a specialist. Costs for monthly premiums and services you get vary depending on which plan you join.
They make money for more members that sign up through clover and get their revenue from the Centers for Medicare & Medicaid Services (CMS). The government agency also recently announced a new payment model known as direct contracting which enabled some additional growth for Clover Health.
Link for more information on DC: https://carejourney.com/understanding-the-direct-contracting-dc-payment-model/
They also make some money from direct payments from members but it is a small amount.
Stock Profile
This company has gone through a little bit of drama since it has become a publicly traded company. It didn’t go through a traditional IPO route, but instead decided to become public via a SPAC deal.
The SPAC was led by Chamath Palihapitiya “SPAC King” of Social Capital Hedosophia Holdings Corp. III.
I would classify this stock as a growing volatile mid-cap meme stock. As most people focus on their revenue growth along with it’s high short interest.
The stock itself has seen some volatile times from both accusations of fraud by short sellers to being targeted as a high short interest play from our friends over at the wallstreetbets subreddit.
Short seller report: https://hindenburgresearch.com/clover/
Obviously, it isn’t great to deal with dumps from short sellers accusing of the company not revealing that they had been under investigation from the department of justice (DOJ) for coding reimbursement, shady sales tactics, and kickbacks.
But the company has gotten some nice short term pumps as well which have offered some upsized short term profits for swing traders.
As you know, I don’t target investing in companies only because there is a possible short squeeze because figuring the timing of one is basically impossible. If you can time short squeezes then you should never tell anyone how and become a trillionaire in no time.
Also some companies deserve to be shorted as they are awful businesses.
Now if I like the fundamentals of the business and the company has a high short interest and then that is fantastic news, as it can add some nice fuel to up moves!
Macro Environment
As stated this is labeled as a fast growing stock. But is the industry of Medicare advantaged plans a high growing industry? I mean unless the pool of Medicare members (old people) is really exploding I don’t see how it could be a fast growth industry.
Now other companies in the industry with analyst coverage, which are forecast to grow their revenues (in aggregate) 7.6% per year over the coming years.
From a boston consulting group publication:
“According to our analysis, Medicare Advantage enrollment will increase at an annual rate of 4% to 6% from 2017 to 2023, and revenue will grow at a rate of 7% to 9% annually. It’s a vast market—projected to reach more than $360 billion a year by 2023 “
So this growth rate of revenue seems to align with the enrollment growth.
The total market share also seems gigantic, but a lot of that market share is eaten up by big players like Aetna/Humana/United. These are the companies that clover has to continue to out innovate to gain market share and grow in the competitive space.
Who can win that sweet sweet government money!
As for growth for Clover Health, they have been growing at a lightning quick pace compared to the industry (62% 2018 to 2019, 52% 2019 to 2020)
The question is whether or not they can keep up that pace going forward.
Financials
The company despite showing revenue growth is losing a lot of money. Although Q2-21 was their highest revenue quarter ever that was pair with the highest net loss of around $317 million.
Part of their issue is that the Medical Cost Ratio (MCR) of the company has gotten worse from last year.
If you aren’t familiar with that ratio it is cost of medical expense paid out divided by premiums collected. Their MCR for Q2 was 111%, so higher costs than premiums collected. So more revenues leads to larger losses! Not the best business model 🙂
The company had comments on the higher MCR mostly due to covid-19 and it should come back down. But regardless of one time effects, the MCR being 97% still isn’t great as that leaves very little room for profitability.
According to Chamath when they went public is that they would reach profitablity by 2023. I see that as either they get way more enrollments to the point where their fixed cost isn’t scaling as fast as their gross profits are growing, or they really reduce the MCR. My guess is the former based on the companies guidance.
The company does have some cash on the balance sheet around $630 million, but they can’t keep having quarters where they are burning through serious cash.
Cleary the financials aren’t the best and the company is currently losing money even with revenue growth.
Guidance
Based on guidance the company is still delivering on extremely fast growth. They expect around $1.5 billion for full year revenue which would be 117% growth from FY20 numbers. That is accelerating past what they have done in prior years which I will say is definitely impressive. I just don’t have an idea of what the growth will be past FY 21 and I don’t think it is fair to say it is going to be over 100% each year.
Price Target/Valuation
For a company like CLOV I don’t think using a discounted cash flow model would do any good. I think the best method for a company without a ton of past data or available projections going out over the next 5 years, it is better to use something like a price to sales multiple as a gauge for fair value.
At a current market cap of $3.363 Billion and projected revenue of $1.5 billion by the end of the year.
A competitor like Humana trades at a P/S ratio of around 0.7 so the industry clearly has low margins, but they aren’t growing as fast as CLOV so they should be at a lower multiple.
Historically speaking CLOV has traded at a multiple of 3 P/S (which is basically saying its growing 4x as fast as a company like Humana which is reasonable since they have grown at around 8%).
So from their current TTM revenue of 921.7 million and P/S of 3 that would put a fair value at $6.29.
Eventually the ratio will lower as the growth rate cools and people realize that their margins are slim.
If we use something like 3 as a P/S multiple for end of 2021 revenues we could say the company could trade fair value around $10.52 when those numbers are reported, but that has yet to come true.
Technicals
Good lord…seeing that $28 pump is still insane to me. If I had shares and didn’t sell some after that rip I would have to punch myself in the face.
As for the current setup, what is good right now is that CLOV isn’t in the cross hairs of a pump or giant volume (as someone that would be looking to buy for a swing or long term investment that is a plus).
The stock looks to be around it’s support level of around $7-$8 which over the longer trading period seems to be where the stock settles. Also the MACD divergence looks to be setting up for a bullish divergence.
Risks & Ops
The biggest risk in my eyes is the dependence of revenue from the government. Most of the revenue this company is seeing is coming from Medicare advantaged plans.
If somehow out of these investigations they are revoked from being a private company that is allowed to offer these advantaged plans, the company is screwed. Toast. Sayonara.
For opportunities, if they can continue to innovate they can steal market share from older industry players. And with a market cap of around $3 billion and the total addressable revenue of Medicare advantage to be in the $100s of billions that can leave some good upside for the company.
Another opportunity would be if they somehow branched off as more than just Medicare advantage plans and really doubled down on the advantages that the clover assistant software provided. Possibly selling the software to other insurance companies or being bought out.
Conclusion
I will not be touching this stock from a buy and hold perspective as the concentration of revenue is a big risk. If from a regulation side they lose their ability to get paid from the government then the stock will lose probably 80-90% as it would fight to regain their prior status.
Also the fact that they have such small margins with the MCR being so high doesn’t leave much room to desire especially when they go above 100% and lose more money the more they grow revenues (negative gross profit). That just isn’t the business model I like to be involved with.
Clearly investors that are involved with Clover expect the extremely high fast growth to continue and for them to hit profitability once they can scale the business. With the stock not particularly trading at a discount and some other risks involved from regulation to unpredictable profitability, I personally would pass on CLOV.
But I’ll sell a put once in a while in the options portfolio if IVR is high enough and is relatively close to the support levels and fair value. With the volatility in this stock is decent for swing trades.
