On Jan. 7, special purpose acquisition company (SPAC) Social Capital Hedosophia Holdings III completed its $3.7 billion merger with Clover Health Investments (CLOV -0.39%). The deal was just what the latter needed, as its liabilities outweigh its assets by roughly $488 million and it has been bleeding cash for some time. Clover Health, however, is anything but an underdog in the healthcare sector. The company also has the backing of Alphabet, in the form of a $130 million venture capital infusion to forward its goals of disrupting the medical insurance industry.
Although plenty, that investment dwarfs the size of the $1.2 billion in cash proceeds Clover Health received in the takeover, including $400 million from Chamath Palihapitiya, the founder of Social Capital. Recently, Palihapitiya once again took the investment world by storm as he sided with traders of the now-legendary WallStreetBets subreddit in their battle for control of GameStop stock over short-sellers. As a result, many Reddit investors have now taken a keen interest in the venture capitalist's company. Can Clover Health make investors rich before 2030?
Not just your everyday medical insurer
On behalf of the federal government, Clover Health provides Medicare Advantage plans to seniors over the age of 65 and those with qualifying disabilities. It boasts having the lowest out-of-pocket costs in the nation for physician, specialist, and prescription medication co-pays. Those who sign up realize an average lifetime cost savings of 17% when they switch from similar programs.
The secret sauce behind these savings lies in the company's proprietary Clover Assistant platforms, which provide real-time, data-driven treatment recommendations for physicians. It provides solutions for office visits, teleconsultation, in-home visits, and administrative staff. Clover Assistant can lower the insurer's premium payout by approximately 12% compared with a plan without such technology.
Furthermore, Clover Health's platform has a net promoter score (NPS) of 59. NPS, a measure of how willingly a customer will recommend a firm's services, has a scale ranging from negative 100 to 100. The company's rating is superb in the context of legacy medical record software providers' NPS of negative 44, on average.
For these reasons, it should be no surprise that Clover Health has seen tremendous membership growth. Between January 2018 and September 2020, the company's patient count increased from 30,677 to 57,503. Each member adds approximately $10,000 in annual revenue. There are now over 2,300 doctors serving the needs of Clover Health's members.
In the first nine months of 2020, Clover Health increased its revenue from $347 million in the first nine months of 2019 to $506.7 million. During the same periods, the company's net loss in 2020 amounted to $10 million, compared with a stunning $367.3 million net loss for 2019.
The substantial improvement in its efficiency is mainly attributable to the COVID-19 pandemic. Hospitals and patients began deferring elective procedures, thereby sharply decreasing the amount of premium that healthcare insurers pay to beneficiaries. Indeed, Clover Health's medical care ratio fell to 82% from 98.2% last year.
Despite its good performance, the company is still in its early stages of expansion. Right now, it has no issued patents protecting the Clover Assistant software. It has an impressive 8% market share, but that only applies to 34 counties across seven states. Looking at that number deeper, 97.8% of its customers are located in two metropolitan areas in New Jersey.
What's the verdict?
At the moment, Clover Health is trading for about eight times revenue, which is rather expensive compared to traditional health insurance giants. However, its stock is far less pricey than telemedicine leaders Teladoc Health and GoodRx. Given its outstanding revenue growth, I would argue that Clover Health is less like an insurer and more of a data-driven health-tech stock.
But not everyone believes in its potential. On Thursday, short-selling firm Hindenburg Research published a report alleging Clover Health failed to disclose a civil investigation by the Department of Justice to determine whether or not it improperly induced patient referrals paid for by federal agencies. The report also pointed to higher than average rebates Clover Health pays to its physicians to use its software and highlighted bad company reviews to justify its short position.
While that may seem rather damning, nothing has proven yet. Hindenburg did not deny that Clover was experiencing genuine membership growth. Additionally, some of the practices mentioned in the Hindenburg report are, by their own admission, systemic to the entire Medicare Advantage sector and not solely applicable to Clover Health.
More than 10,000 Americans join Medicare every day. Approximately 36% of them enroll in a Medicare Advantage program. That number could rise to 70% by 2040. In the next five years, total Medicare expenditures would likely amount to $1 trillion, so there is definitely a huge market demand for services like those provided by Clover Health.
Overall, I believe Clover Health is a hidden gem, and many investors have yet to discover its potential. It wouldn't be surprising if the company became one of the biggest players in the Medicare Advantage market in the next decade with its new capital on hand. If you are a believer in Clover Health's technology and that kind of time horizon floats your boat, give its shares a go. Otherwise, check out these great healthcare stocks instead.