Stock Market

Clover Health Appeals to Its Base, But Profits Are in the Distant Future

In our world of data-driven everything, Clover Health (NASDAQ:CLOV) stock would seem to be a slam dunk. Through its flagship product, the Clover Assistant, the company uses artificial intelligence and predictive analysis to provide doctors with actionable patient care information that, in theory, allows them to make more informed decisions that will lead to better health outcomes.

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But CLOV stock investors haven’t been enthusiastic about Clover Assistant. Since the last time I wrote about the stock in late August, the share price has been cut nearly in half. And most of that loss has occurred after an earnings report that showed the company growing revenue and posting better-than-expected, but still negative, earnings per share.

My InvestorPlace colleague, David Moadel, sees this dip as a buying opportunity. Moadel suggests that Wall Street is overlooking the company’s ability to generate revenue. However, I don’t think that revenue is the primary objection to CLOV stock. Rather, their business model requires them to serve a market that is going to make it difficult to turn that revenue into profit.

It could be years before investors see significant progress. And that’s the reason for my caution in giving a full-throated endorsement of CLOV stock.

Appealing to the CLOV Stock Investor Base

I was curious to read what Clover executives had to say during their “Ask Me Anything” session in August. Chief Executive Officer Vivek Garipalli and Chief Technology Officer Andrew Toy took questions from the Reddit community.

Let me start by saying that I think there is a brilliance to this approach. Retail investors have been doing the heavy lifting on CLOV stock for a long time. It’s respectful to allow them to give them a forum to ask questions.

However, I picked up on one answer from Roy that defines a key concern that investors should keep in mind. When talking about potential obstacles to adoption, Roy said, “Honestly, we believe the main reason doctors decide not to use our platform is that they don’t care for enough Clover Medicare Advantage members yet to, in their minds, justify adopting a new technology.”

Fee-for-service Medicare has its own challenges, but with Medicare Advantage those challenges are larger. And, for that reason, many physicians stay far afield from those patients.

Saying the Quiet Part Out Loud?

In fairness, Clover says it pays these physicians “substantially more than the Medicare rate for what a PCP receives for an office visit” when they use the Clover Assistant as part of an office visit. In other words, they’re providing a financial incentive to overcome the objection that doctors may have about adopting a new system that may seem redundant. It’s also important to note that the company is looking into expanding the Clover Assistant to traditional fee-for-service Medicare customers.

And you can applaud the company’s belief that giving away their flagship product and paying higher rates is worth it to get widespread adoption. Because that, they say, will lead to better health outcomes.

I refer to this as saying the quiet part out loud for a simple reason. Going back to something I wrote earlier, the primary problem with Clover Health from a fundamental perspective is not revenue; it’s profit. That also happens to be the same problem with Medicare Advantage patients in the eyes of physicians.

So this creates a scenario where Clover Health may continue to grow revenue but will be slow to turn a profit.

CLOV Stock May Be Priced Fairly

I believe that, at times, investors get very good at ignoring bearish truths from company executives. If you’re going to load up on CLOV stock, then you’ll have to ignore the company’s statements that it may be three to five years before you see a significant reward.

In the meantime, other competitors are likely to enter the sector. I applaud what Clover Health is attempting to do. But frequently the first company through the door isn’t the best investment. If Clover Health is an exception, then bullish investors will be rewarded.

But with the market giving off bearish signals, there are better opportunities right now. Put simply, I like the company, but I have a hard time getting excited about CLOV Stock.

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.

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