The past year has been a lousy one to be a Clover Health (CLOV -1.51%) shareholder. From its public market debut last January through Feb. 24, the stock lost around 87% of its value.
But things are finally looking up for Clover Health. A fourth-quarter earnings report delivered after the market closed on Wednesday pushed the stock higher and a rosy outlook suggests that better days are ahead. Let's take a closer look to see if this stock can keep climbing higher.
Reasons to buy Clover Health
Clover Health surprised analysts with a fourth-quarter report that suggests its business is a lot stronger than it looked just a few months ago. Its fourth-quarter revenue that grew 160% year over year to $432 million was $24 million more than the average estimate on Wall Street.
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Clover Health's outlook for 2022 was even more encouraging than its recent performance. The average investment bank analyst following Clover Health expected the company to forecast $2.6 billion in total revenue this year. Instead, management told investors to expect between $3.0 billion and $3.4 billion.
Last year, Clover Health began a direct contracting program and demand is much stronger than anticipated. The company expects the average number of directly contracted beneficiaries to land in a range between 160,000 and 165,000 this year.
Hands down the most important reason to buy Clover Health now is the trend toward an improved medical care ratio (MCR). The amount Clover Health shells out to providers is expected to fall significantly this year to a range between 95% and 99% of premiums collected.
Clover's prediction of profitability is an easy pill to swallow because the company can show a history of decreasing medical expenses. Medicare Advantage members treated by doctors who used the Clover Assistant application last year had MCRs that averaged 1% less than members with doctors who didn't use it. The savings increase with time too. In 2021, members with doctors who started using Clover Assistant in 2018, had a 4.9% lower MCR than members with doctors who began using it in 2019.
Reasons to avoid Clover Health
At the end of 2021, Clover Health managed healthcare benefits for around 68,000 Medicare Advantage members. That was just 17% more than the company managed at the end of 2020. If the company's relatively new direct contracting business hits a snag, this stock could tumble lower again.
Investors also need to keep an eye on the bottom line. Clover Health finished 2021 with $791 million in cash after operations burned through a whopping $637 million in 2021. The company is getting its overall MCR down to a more reasonable range but management still expects a net loss this year.
A stock to buy now?
Clover Health has grown by leaps and bounds but we've only seen the tip of the iceberg. Annual Medicare spending is expected to exceed $1 trillion soon if it hasn't already. This enormous opportunity makes the stock like a buy but only for investors who can tolerate a lot of risk.
The company's trend toward profitability is encouraging but investors need to remember they could also suffer swift and heavy losses if Clover can't meet some lofty expectations. If you do buy this stock, make sure it's part of a well-diversified portfolio.
