Clover Health (CLOV 1.82%) isn't a garden-variety health insurance company, because most people in the U.S. aren't eligible to subscribe to its service. Clover administrates Medicare Advantage insurance programs, which are backed by the U.S. government and purchasable by eligible Medicare recipients looking for broader coverage.
In such a tightly regulated industry that's packed with powerful competitors, Clover Health has a lot to prove as the new player on the scene. But, with its information technology-heavy approach to providing care and an increasing level of buy-in from key stakeholders like physicians and patients, it just might have what it takes. Let's explore what's good and what's not so good about this company to see if its stock might be a worthwhile purchase.
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What's exciting about Clover Health
At the moment, the biggest reason Clover Health is an interesting insurance stock that might be worth a buy is that it's raking in revenue. In Q3, the company made $427.2 million, which works out to be a 153% rise in quarterly revenue year over year. In terms of its membership base, for 2021, management expects that the number of Medicare Advantage subscribers should grow by as much as 17%, reaching as many as 68,000 people.
Clover's business model relies on the use of its care management system, the Clover Assistant. In theory, with the Assistant, physicians can reduce their costs of providing care for Medicare Advantage patients and get compensated by Medicare much faster, thereby creating incentives for them to stay on the company's platform. And, on average, they'll get reimbursed by twice as much as the industry's average, which means they'll make a lot more money than they would with a competitor.
Also, patients can access a wider network of clinicians than they would otherwise -- and with lower out-of-pocket costs. All of that sounds great, assuming that Clover can make a profit and that the Assistant can actually lower expenses for everyone like it claims. Both of those assumptions are being put to the test.
Don't put the horse before the cart
There are a few things about Clover Health that should put investors on guard. First, it's unprofitable, and it's unclear when that might change. Second, its entire cost-cutting and higher-reimbursement value proposition to physicians are unproven to be financially sustainable, and its generous payouts may need to be pared back. Without a business model that investors can depend on to be better than other insurance companies in the long-term, there's a lot riding on sustained and rapid revenue growth.
If quarterly sales continue to expand by more than double the prior year's total, the bottom won't fall out of the stock because investors will be too attracted to its exploding revenue. But no company can grow that quickly forever. And with losses of $149.7 million in the third quarter alone, its $442.1 million in cash looks quite paltry unless the losses start to abate by early next year.
Overall, things are moving in the wrong direction. In the last year, its total expenses as a percentage of quarterly revenue have risen by 30.3%. In the same period, quarterly free cash flow (FCF) has fallen by 179.5%, registering deeper losses. And, it looks like shareholders are getting their equity diluted over time to pick up the bill for underperformance, with the number of the company's shares outstanding increasing by 16.9%.
What's the right move?
If you're interested in a speculative investment that could blow up over the next decade, Clover Health is worth a buy today, though it's quite risky for an insurance company. On the other hand, for most investors, I think it's better to hold off, as there are core elements of its business model that may be in conflict with each other, not to mention the financial performance issues mentioned earlier.
In my view, the stock is still worth keeping an eye on even if it's not something you intend to purchase right now. If Clover manages to reconcile its high costs while continuing to build its network of providers for several quarters, it'll be proof that it could outcompete traditional insurance companies. But, if it keeps growing its base of subscribers without being anywhere near profitability, it'll probably need to take out new debt and maybe even dilute its shares even more, much to the chagrin of investors.
