Social Capital Hedosophia Holdings Corp. III is a former blank check company incorporated in the Cayman Islands on October 18, 2019 formed for the purpose of effecting a merger, asset acquisition, or share purchase. On April 24, 2020, it completed its initial public offering (the “Initial Public Offering”). On January 7, 2021, the company consummated a business combination with Clover Health Investments, Corp. and changed its name to Clover Health Investments, Corp.
Clover Health Investments, Corp. operates as a Medicare Advantage insurer in the United States. The company through its software platform provides preferred provider organization and health maintenance organization health plans for Medicare-eligible consumers.
Clover Health Investments are susceptible to the adverse effects associated with the COVID-19 pandemic, which is having a major impact on health systems. The extent to which the COVID-19 pandemic may impact business, results of operations and financial condition remains uncertain. Furthermore, because MA plan operators are compensated pursuant to the CMS risk adjustment payment system, the full impact of the COVID-19 pandemic may not be fully reflected in the company’s results of operations and overall financial condition until future periods.
A significant portion of Clover’s strategy is based on the notion that it can reduce members’ medical costs by utilising the Clover Assistant to encourage physicians, to engage with members and to help prevent a deterioration of members’ health. As a result, when the crisis associated with the COVID-19 pandemic abated, Clover experienced a significant increase in medical care costs. Clover gives no assurance that these increased costs were appropriately taken into account when the prices for premiums it set. There is a substantial lack of knowledge in the management about how COVID has impacted the business to the point where Clover can not comment on it still.
Governments have modified, and may continue to modify, regulatory standards around various aspects of healthcare in response to the COVID-19 pandemic, and these rapidly changing standards may create challenges for Clover to ensure timely compliance and meet various contractual obligations. Also, insofar as governments do not modify regulatory standards in light of the COVID-19 pandemic, the changing circumstances may undercut its ability to meet regulatory performance standards and carry out effective and efficient business operations.
Note: Price of CLOV stock rose sharply in 2020 from an average of $10 in November to $17 on 28th December 2020, but this was due to the announcement by the US govt. to expand Medicare and make it more accessible, thus increasing target market size for CLOV.
Clover has a short interest of 22% which is considered exceptionally high. This frenzy of short-selling started after Clover posted its first earnings report in May 2021. Although the company had revenue of $200.3M, 65% higher compared to previous year(2020), the business was in loss worth $48.4M- nearly doubling its year-over-year (YOY) losses as medical costs jumped under the pandemic. Clover Health’s medical ratio jumped to 107% in Q1 2021, as compared to 89% in 2020- 85% or below is considered desirable.
The sentiments of analysts changed and investors were left disappointed. Shortly after the impressive debut, Clov Health stock struggled. The struggle was exacerbated following a short-seller report from Hindenburg Research that attacked CLOV in February. As the dissatisfied investors started shorting CLOV Health stocks, the stock caught redditors eyes and this turned into an “apes vs suits” battle. The high short interest on Clover Health Stock still makes it an ideal target for short-term investors who want to generate a short squeeze. This is not to say that Clover is an overpriced stock and all gloom, if Clover Health manages to reach its operational targets, it still has potential to create high value and revolutionize health care as it aimed to.
CLOV has always had negative EBITDA and earnings, so comps analysis on standard P/E and EV/EBITDA will not be insightful.
Peer analysis with comparable companies based on P/S multiple suggests that CLOV stock is overvalued. CLOV fair value by P/S analysis ranges from $1.2 to $3.3, averaging at $2.1.
By comparing CLOV’s EV/EBITDA multiple to that of competitors, fair value for the Clover Health stock from $1.3 to $3.5, averaging at $2.3.
Owing to the risk and lack of experience that management has about Clover Health Investment listed above and by going through various online resources, following assumptions can be made about CLOV:
Revenue Growth Rate: Revenue growth rate is expected to be high initially owing to the boost in medicare subscribers under Biden administration. The growth would gradually stabilise over 10 years. Thus revenue is assumed to grow from 40% initially to 7% in the year 2030. With perpetual growth rate at 1.5%.
COGS: Cost of revenue is high in this industry set at 89% initially and gradually reducing to 82% over time. These ranges are taken from projections by CLOV up to year 2025 and then kept stable at 82%.
Operating Efficiency Increase: Operating Expense is calculated on the basis of target Operating Income set by Clover Health. The company aims to decrease its operating expense to 11% by 2025.
WACC: WACC of CLOV is set to 8.77%- from gurufocus.
Taking into consideration the growth rate projected by CLOV following assumptions have been made for Asset growth rate and Liability Growth Rate for upto year 2030.
Asset Growth Rate: from 20% initially to 7% in 2030, averaging at 12%
Liability Growth Rate: from 15% initially to 6% in 2030, averaging at 11%
PPE Growth Rate and D/A Growth Rate: Change in PPE and value of D/S has been immaterial and is projected to stay that way. Thus both are not included in the calculation of FCF.
Based on above assumptions the fair value of Clover stock is $8.77, which is very close to the current stock price. The average fair value price based across WACC and perpetual growth range come to 9.5. The sensitivity analysis of variation in assumptions and football field for CLOV Stock can be checked in attachments below.
Clover also has strong partnerships with retail giants such as Walmart, CVS, Walgreens, Kroger, and Costco. All these positives make the stock a good long-term investment. Based on our analysis, CLOV stock is a buy for long-term investors. Please note here that we’ve put more weightage on DCF analysis as compared to Comps because we have assumed that CLOV’s growth opportunities will be the driving force of the stock price, not the peer comparison. Clov Health stock is also a buy for short-term investors who are aiming for a short squeeze. It is to be noted that CLOV has been meeting its target for the past few quarters and projecting profitability starting 2025, it is still slightly overpriced considering its current performance. The stock price is projected to go up over the years provided Clover Health attains its potential growth and reduces operational costs.