Clover Health Investments (NASDAQ:CLOV) recently reported second quarter revenue and earnings on Aug 11. The numbers showed a huge gain in revenue but an equally huge increase in its losses. This does not bode well for CLOV stock.
Additionally, Clover significantly raised its total 2021 revenue outlook from $820 million at the midpoint last quarter to $1.4 billion to $1.5 billion. However, its estimates for Medicare Advantage memberships for 2021 remained the same at 68,000 to 70,000 for 2021.
The bottom line is that Clover Health is not likely to be profitable for a good while. This means that the stock is probably still overvalued.
Clover Health’s Financial Results
Most importantly, the company’s losses skyrocketed in its most recent quarter. As I pointed out in a previous article, Clover Health’s operations are deeply unprofitable, so higher revenue resulted in higher losses. For example, Q2 revenue was $412.5 million compared to $200.3 million in Q1. However, its net loss this quarter was $317.6 million vs. $48.4 million last quarter.
Even the adjusted results were worse with high revenue. For example, adjusted EBITDA losses mushroomed to $138.7 million from $76.2 million last quarter.
Clover likes to adjust these numbers by taking out Covid-19 related expenses to make them better and “normalized.” However, on page three of its Q2 report, the company admitted it had expanded its definition of what was included in “normalized” expenses. Voilà, adjusted EBITDA improved dramatically to a loss of just $58 from a loss of $138.7 million.
I don’t believe in adjusting to “normalize” extensive losses like this. It can be very misleading.
Here is the bottom line. The company’s cash position deteriorated from $720 million last quarter to $630.25 million on June 30. That is a drain of $89.75 million in one quarter and represents a run-rate cash burn of $359 million. In fact, at this rate, its cash resources will be down to $271 million in one year.
There is no way that CLOV stock will have a $3.35 billion market value if that happens, regardless of its revenue. Let’s look at its valuation.
Adverse Selection With Medicare Advantage
Right now, things are not looking good for Clover Health as a supposed growth stock.
For one, based on Yahoo! Finance data as of Aug. 13, it trades for more than 4.3 times analysts’ best estimates of revenue at $811 million for 2021. And for 2022, with forecasts of $1.07 billion, its price-to-sales (P/S) ratio is at 3.13 times revenue. The same analysts see earnings per share (EPS) of negative 51 cents this year and a loss of 33 cents next year.
To put it bluntly, these P/S multiples are simply too high for a company with nothing but actual and projected losses. Higher revenue is simply going to produce high losses.
One way to tell this is to compare its Medical Care Ratio (MCR) ratio with its operating expenses. The MCR ratio is total expenses divided by revenue and is designed so that any number over 100% is worse than a number below 100%. Last quarter, its MCR ratio was 107.6%, meaning that total expenses were 7.6% greater than its revenue. This quarter, the MCR rose to 111%. That means its performance deteriorated with higher revenue.
And note this: Its adjusted operating expenses in Q2 were $64.8 million compared to $61.8 million last quarter. In other words, their overhead did not balloon. What happened is that medical losses spiked. Older people have higher medical expenses. By focusing only on Medicare Advantage, Clover Health might have an inherent adverse selection issue that will be extremely difficult to overcome.
What CLOV Stock Is Worth
The bottom line is that CLOV stock is not worth anywhere near three times sales. I suspect that 2 times to 2.5 times sales is the maximum, especially since higher sales only bring on higher losses with this company.
So, at 2.5x sales next year, it should trade for just $2.775 billion (i.e., 2.5 times $1.11 billion). This implies a $575 million lower valuation than its present value of $3.35 billion, or 17.16% lower.
That puts CLOV stock at a price target of just $6.81 compared to its price of $8.22 as of Aug. 13. Most value investors will wait for the stock to fall before even considering taking a position, unless the company can start making profits.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.