With meme stocks starting to tumble and Wall Street becoming much more skeptical about Clover Health (NASDAQ:CLOV), the outlook of CLOV stock has deteriorated meaningfully in recent weeks.
Meanwhile, Clover’s claims to be a high-tech disruptor are questionable, and the company continues to face Securites and Exchange Commission and Department of Justice probes, making the shares extremely risky. The right response is to get out now before it drops any further than it has.
The Meme-Stock Downturn Is Affecting CLOV Stock
In accordance with my warnings over the last several weeks, meme stocks have begun retreating significantly recently.
Given the fact that the last U.S. government stimulus check was distributed months ago, while tens of millions of millennials have resumed spending money on group activities in recent weeks, that was bound to happen.
Not surprisingly, Clover has not been immune to this trend, sinking 11% during the same period and 42% over the last month.
In the coming months, as the Federal Reserve tapers back on stimulus that has enabled some institutions to join the meme stock frenzy, the extra unemployment payments are eliminated and more millenials start spending money on group activities and returning to offices (giving them less time and opportunities to trade stocks), the sharp retreat of most meme stocks will probably accelerate.
And, as one of the vastly overvalued meme names whose fundamentals are, at best, questionable, Clover is likely to keep tumbling for the foreseeable future.
Wall Street Is Souring on CLOV Stock
With multiple analysts and pundits starting to issue negative reports on Clover, I believe that Wall Street is becoming quite bearish on Clover.
For example, on July 12, JPMorgan cut its rating on the shares to “neutral,” versus its previous “underweight” rating. As reasons for the downgrade, the firm cited the recent reduction of Clover’s 2021 guidance and multiple risk factors, including increased use of medical professionals following the pandemic and the hiatus of the company’s direct contracting offerings.
The firm believes that there is a significant amount of uncertainty surrounding these risks. It reduced its price target on the name to $9 from $15.
Moreover, another InvestorPlace columnist, Tezcan Gecgil, recently warned that the company “pays out 96% – 108% of revenue in medical care expenses.” As a result, she explained, the company is currently gaining market share by losing money.
Finally, Seeking Alpha columnist SMB Insights suggested earlier this month the stock was overvalued and cast doubt on the company’s claim to be a tech firm. The author also warned that Clover’s claim of offering Medicare Advantage plans that are “the ‘obvious’ choice” is “unsubstantiated.”
Clover’s Fundamentals and Potential Do Not Justify Its Valuation
Although I previously believed that Clover did have a great deal of potential, the company’s first-quarter results, coupled with comments made by Gecgil and SMB Insights, have made me more skeptical of the company’s technology prowess.
If Clover’s technology was indeed meaningfully superior and superb at lowering expenses and obtaining superior outcomes, the firm would likely not have to dole out such a high percentage of its revenue to pay medical costs. Put another way, if Clover’s technology was as good as the company claims, it would probably be able to charge much higher prices, and its medical expenses would be a lower percentage of its revenue.
In Q1, the company’s top line rose 21% year-over-year to $200 million. It expects the number of its Medicare Advantage members to climb 17%-21% this year, and it predicted that its 2021 EBITDA loss, excluding certain items, would come in at $190 million to $240 million.
The increases in the company’s customer base and revenue, along with its large EBITDA loss, suggest that its technology may not be that potent. Also making me dubious about Clover’s assertions in this area is SMB Insights’ report that the company does not disclose its research and development (R&D) spending, as most tech firms do. Indeed, Clover’s list of expense items for Q1 did not include any mention of R&D.
Yet despite the shares’ recent declines and the company’s large losses, CLOV stock still has a humongous trailing price-sales ratio of over 100.
The Bottom Line on CLOV Stock
Meme stocks are retreating sharply, while there are multiple indications that Clover’s technology may not be that potent. Further, as I’ve noted in previous columns, the issues raised by the short selling researcher Hindenburg about Clover, along with the government’s probe of the company, make its shares very risky.
Given these points, I recommend that all investors sell CLOV stock.
On the date of publication, Larry Ramer held a long position in Bionano and a short position in Ocugen. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, Ford, Exxon, and Snap. You can reach him on StockTwits at @larryramer.