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Clover Health: Will Volatility Bring Another Short Squeeze?

Published 09/19/2021, 07:31 AM
Updated 09/19/2021, 11:31 AM
© Reuters.  Clover Health: Will Volatility Bring Another Short Squeeze?

Clover Health (CLOV) stock has witnessed significant volatility in 2021 thus far. The stock touched its 52-week high of $28.85 a share in June. However, Clover Health since sold off impressively to close around $8 per share mid-week.

These sorts of volatile swings appear to be indicative of the speculative nature of the market right now. Indeed, CLOV stock remains one of the most speculative of its peer group. The retail investor interest with this stock remains sky-high, fueling some otherwise wild swings many other stocks don't typically see.

This is a stock that many investors point to as a short squeeze candidate. Why? Well, the stock squeezed more than 200% in early September in the matter of approximately one week. That is, before shares fell back to earth.

Will this stock go on another run again? Or will investors see more pain on the horizon? Right now, I remain on the fence with this stock.

(See Clover Health stock charts on TipRanks)

CLOV Stock could do it Again

There are certainly quite a few investors out there who remain bullish on Clover Health's ability to squeeze once again. Indeed, relatively high short interest and borrow fee rates that are higher than average have made it so.

Of course, just because a stock is heavily shorted or unfavored doesn't mean it will do well. Quite the opposite, actually. Typically, the markets provide a rather impeccable pricing mechanism. Sometimes the market gets things wrong. However, over the long-term, we see that the stock market is a pretty good estimator of value for companies.

That said, insiders and institutions own approximately 74% of Clover Health's float. This means that if everyone sticks together and holds on with diamond hands, anything's possible.

Indeed, institutional money is often referred to as "smart money" in the markets. The fact that such a large chunk of CLOV stock is held by institutions suggests this is a company some rather smart individuals believe in.

Therefore, investors enthusiastic about another surge in CLOV stock should trade responsibly. 

Mixed Quarterly Results 

Complicating matters for investors bullish on the ability of Clover Health to squeeze is the company's financial results. This past quarter, Clover Health posted revenue growth of 140%, driven mostly by impressive performance in Medicare Advantage premiums and direct contracting revenues.

That said, Clover Health did miss on the bottom line, posting an operating loss of $0.45 per share, versus the $0.17 expected by analysts. In this market, it's perhaps unsurprising to note that CLOV stock surged on these numbers, with the focus clearly being on the company's top line.

Membership growth of more than 125% on a year-over-year basis drove these gains. Adjusted for the net effect of COVID-19, these numbers were still very strong. This indicates there could be additional avenues for further growth down the line.

Clover Health's management team issued strong guidance, for revenues coming in between $1.4 - $1.5 billion. The company expects to lose between $210 million and $250 million on these revenues.

Even with increasing membership and revenue, the company is consistently losing money. That said, there appears to be sufficient appetite for such companies right now. The extent to which the market will continue to reward revenue growth over profitability, however, remains uncertain.

Problematic Business Plan Might be a Hurdle

Clover Health aims to offer vast medical coverage at an affordable rate, compared to its competitors. To do so, the company has to reimburse healthcare service providers faster to help them reduce the cost of providing care. Moreover, Clover Health has outlined plans to potentially pay providers twice that of the industry standard.

Such a business model can't be profitable up front. Investors know that (or should know that). However, Clover Health's plan is to use the Clover Assistant platform to accomplish its business objectives. Clover Assistant is a software that provides technological solutions to cost-cutting objectives. Via technological innovation, Clover Health believes it can lower its cost profile enough to make these investments make sense.

That said, this model isn't yet proven, from a profitability standpoint. The company is growing fast, and is good for consumers. However, investors concerned about the long-term viability of this business model may have reasons to worry, given these ballooning losses every quarter.

What are the Analysts Saying about CLOV?

As per TipRanks' analyst rating consensus, CLOV stock is a Moderate Sell. Out of 4 analyst ratings, there are 1 Hold recommendation and 3 Sell recommendations.

The average Clover Health Investments price target is $9. Analyst price targets range from a low of $7 per share to a high of $10 per share.

Bottom Line

As of now, there isn’t any compelling reason to buy or hold this stock. Sure, CLOV stock could see a nice squeeze at some point in the near future. However, longer-term investors may want to be patient with this company until its business model is proven.

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

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