In prior articles on Clover Health (NASDAQ:CLOV) stock, I’ve been bearish on this name still popular with the Reddit trading community.
That is still the case, even after the Medicare Advantage plan provider posted quarterly results that came in above analyst estimates, and released guidance showing that its rate of growth could come in much higher than seen in prior projections.
The reason? Revenue growth is just one part of the equation. At some point, this aspiring “disruptor” needs to become profitable. So far, Clover Health remained deep in the red, with losses continuing to come in higher than expected. There’s still also room for concern as to whether its business model, disruptive it may be, is even one that will allow sufficient levels of profitability down the road.
Also, while CLOV stock may still be popular among those active on Reddit’s r/WallStreetBets subreddit, I still hold my view that it’s no longer a short-squeeze play due to the falling percentage of outstanding float currently sold short.
Putting it simply, it’s still far from a great situation. Despite the encouraging results and guidance, Clover could still disappoint down the road. A stock market correction, which would likely hit growth plays like this one the hardest, remains a big risk as well. CLOV stock may have enough on its side to hold steady for now. But there’s little reason to dive in at today’s prices (around $8.60 per share).
CLOV Stock and its Recent Results and Guidance
When it comes to revenue growth, things seem to be looking up for Clover Health. As it reported on Aug. 11, sales last quarter came in well above analyst estimates. For the period ending June 30, actuals came in at $412 million versus analyst consensus of $205.4 million.
Besides these solid revenue numbers for the quarter, the company also released guidance that may show growth is happening at a much more rapid clip than assumed by the sell-side community. Guidance for 2021 calls for between $1.4 billion and $1.5 billion in sales. Compare that to analysts’ numbers, which previously called for just $811.5 million in sales.
So far, CLOV stock has traded sideways post-earnings. Immediately following the news, it popped back above $9 per share. But in subsequent weeks, it has pulled back, bounced back, and as of this writing is trending lower again.
The reason? Other concerns, such as if/when it will reach profitability, could be outweighing the encouraging news when it comes to its revenue growth. Also, its declining appeal as a short squeeze may be leaving some to head for the exits as well. Another risk, more market-related, could be something else that’s making investors hesitant to push Clover Health back to double-digit prices.
Risks That Could Delay This Stock’s Comeback
The prospects for CLOV stock may be stronger than bears (such as myself) give it credit. But even with its improved revenue projections, a move back to $15, $20, or even its all-time high of $28.85 per share may be difficult.
Why? First, profitability, or the lack thereof. Revenue growth may be accelerating. Yet it’s hard not to be concerned about the fact it continued to post wider-than-expected quarterly losses.
For the June quarter, losses per share came in at 78 cents, well above analyst estimates of 14 cents in losses per share. Worse yet, is its reporting of a Medicare Advantage Medical Cost Ratio, or MCR, of 111%. Clover reported a similar number for the first quarter of 2021 as well (107.6%).
For now, it seems Clover Health is willing to take in less in premium than it pays out in claims, all in the pursuit of revenue growth. Yet if it fails to bring its MCR down below 100% after it scales up, CLOV stock will have a hard time maintaining, much less expanding, its current valuation.
Besides the risk profitability remains elusive in the quarters ahead, other factors could delay a possible comeback. With short interest as a percentage of float now down to single digits, don’t count on another squeeze giving it a boost. In addition, if markets correct in the coming months, it could hit popular stocks like this one the hardest.
The Verdict
For the time being, concerns about its eventual profitability will continue to outweigh strong revenue growth for Clover Health. In addition, other factors at play could also either limit its ability to bounce back toward prior highs, or send it back toward its 52-week low of $6.31 per share.
With more pointing to it staying stuck at single-digit prices, what’s the best move with CLOV stock? Continue to steer clear of it until it starts making progress getting out of the red.
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, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.