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Chamath Palihapitiya Divulges the Greatest Growth Opportunity He's Ever Seen

By Keith Speights - Jan 24, 2021 at 11:00AM

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And he explains exactly why he likes this company so much.

Social Capital co-founder and CEO Chamath Palihapitiya has a long track record of working with and finding excellent high-growth companies. But there's one company that he views as the greatest growth opportunity he's ever seen. That company is Clover Health (CLOV 3.91%). In this Motley Fool Live video recorded on Nov. 16, 2020, Tom Gardner, co-founder and CEO of The Motley Fool, talks with Palihapitiya about what he likes about Clover Health.

Tom Gardner: You said that you view this as the clearest straight-shot growth opportunity that you've encountered, and naturally as you hear and think about healthcare, high degree of regulation, just a tangle for people to navigate in their own personal lives, a nightmare for many people. It wouldn't naturally lineup, check, check, check. This is the greatest growth opportunity that I have seen, but I can imagine that you genuinely mean that, why?

Chamath Palihapitiya: First, just on administrative point, I got an email saying to step back because. Whoever sent me that email, Andy, if you could just get that feedback from the Motley Fool team, hopefully this is better. I apologize if I was screaming into the mic.

Tom Gardner: You're fine.

Chamath Palihapitiya: Sorry. I really did believe it, and the reason is because, I think that just going back to that framework, the product market fit here in many ways is very modellable, and what I mean by that is when you look under the hood at the top of the funnel, you would want to say, "Well, it's just product used by a kind of person in New Jersey and in the other states where they exist." That represents a plurality of Americans, meaning if it isn't, then you're hoaxed.

In this case, what we saw with some really interesting data, if you cut the adoption of Clover by household income or by ethnicity or by geographic location, urban, ex-urban, suburban, rural, and then you take those counties in which they exist and the distribution of outcomes and say, "Do those change a lot?" The answer is actually not that much. Whether you're in a city, or whether you're in a suburb, or whether you're in the rural environment, they tend to grab share very predictably, and what that means numerically is that their take rate is about 50 percent.

Today, if 100 people go into open enrollment, they'll get 50 of them in accounting, tomorrow or next year rather, in open enrollment, the next 100 people that are up for grabs, they'll grab 50, they'll grab 50, they'll grab 50. As you can imagine, it's slow but in the early phases, the growth becomes very predictable.

What you see is that by year three or four, they tend to be about 25 percent share. What they've done is they've taken share from the incumbents, Wellspring, United (UNH 0.83%), Centene (CNC -4.01%), etc. I looked at that and I said, "Okay, well, show me all the other counties in America, the 3,000 odd counties, and show me how similar or dissimilar they are to the counties in which they exist?" What you find is tremendous similarity.

Again, by geography, by household income, by education level, by ethnicity, these guys are cherry-picking white rich people in just a few suburbs in Jersey that are across from New York City. They touch blacks, they touch Asians, they touch everybody of all different spectrum, and those take rates and the market penetration rates still hold. When you translate that, that's where I got comfort that this is a growth model that's going to be very predictable. It's like the slow and steady 25-30 percent compounding every single year. That's number 1. That's what they control, they can control their go-to-market, they can spend more money to accelerate it or not.

But then what you have is a market dynamic that I've never seen before. I have been very close in early on in the Amazon (AMZN 4.03%) and Tesla (TSLA 7.43%) stories and as you guys know, I was an architect with the Facebook (FB 4.24%) story. Men, getting users is hard, getting growth is hard. You have to convince people that what you're doing is worthwhile.

Here, this market is actually getting created demographically for you every single day in every single week. I think the number that we use is like 10,000 people a day age into Medicare and have to decide between the government-sponsored alternative and the for-profit private insurance model called Medicare Advantage, a billion dollars a week of revenue potential, and now in a Joe Biden and his administration, it's actually going to get even better than that because the do no harm solution will be to keep the Medicare age at 65, but Biden has said that he wants to drop the Medicare age limit to 60.

Forget the billion dollars a week, that billion dollars a week could grow to a billion five or a billion seven of new revenue potential every week. If you take this externality tailwind of demographics, and then you take their ability to compound predictably in all kinds of heterogeneous markets, that's where I came to the conclusion like, "This is a very straight, predictable half to millions of member lives."

If you look at millions of member lives, you're talking about a 20 or $30 billion company, and our entry point is in the low single-digit billions. That's where I got to our 10x in 10 years, where it was relatively straightforward. If they just keep doing what they've been doing historically, I think that they will tip in the product market fit expansion phase.

By the way, then there's a free option in the business which we haven't talked about yet, and the free option is what the government is trying to do, which is they're trying to create incentives for all these best-of-breed Medicare advantage companies to come add value to fee-for-service Medicare, meaning that's the government's way of saying, "Holy, if this private insurance market continues to get better and better and more efficient and better outcomes, we should incentivize those same companies to come and take these folks on as well."

The way that we're doing it is with the program called direct contracting, these guys are one of the largest, if not the largest group and entity playing a role there. All that means is take your technology and come and contract into fee-for-service Medicare and help these folks too. I think that that's a big valuation game changer because it is the thing that will pull forward the realization of product market fit in a lot of other spots.

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Stocks Mentioned

Clover Health Investments, Corp. Stock Quote
Clover Health Investments, Corp.
$2.66 (3.91%) $0.10, Inc. Stock Quote, Inc.
$2,221.55 (4.03%) $86.05
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$191.63 (4.24%) $7.80
Tesla, Inc. Stock Quote
Tesla, Inc.
$707.73 (7.43%) $48.93
UnitedHealth Group Incorporated Stock Quote
UnitedHealth Group Incorporated
$502.23 (0.83%) $4.14
Centene Corporation Stock Quote
Centene Corporation
$81.89 (-4.01%) $-3.42

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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