Because Clover Health Investments (CLOV -1.51%) is  a health insurance company, most investors might expect it to have a relatively stable share price. But that assumption hasn't yet been proven correct. Its shares got severely punished in the bear market and are down 68% compared to a year ago.

Still, analysts on Wall Street see the stock rising by 67% in the next 12 months, and management is claiming that 2024 will see significant progress toward becoming profitable. So does that mean you should buy the stock?  

Why it might be worth buying

Clover Health isn't a traditional insurance business. Rather than selling coverage to consumers, it sells Medicare Advantage plans to people on Medicare who want additional coverage at a low cost and a wide network of providers. It expects to make as much as $1.2 billion in revenue from its insurance plans in 2023, though it isn't profitable yet.

It's clear that there's demand for its services as its quarterly sales rose by 212% over the past three years. In the coming years, as the population of people over age 65 expands to become a larger proportion of all people in the U.S., there will likely be a growing group of potential customers, which might translate into a steady trickle of new long-term subscribers.

What's more, the company seeks to develop a competitive advantage in low-cost servicing of its plans by making an artificial intelligence (AI) system called the Clover Assistant that it deploys to healthcare providers to make their claim filing and administration tasks easier. It also claims that primary care physicians (PCPs) who use the Assistant can get reimbursed faster while also delivering better care to patients -- all at a lower cost of coverage than what they might get elsewhere. 

If the Assistant is actually helpful, Clover's business model will look like a virtuous cycle. Practitioners will want to join its network to ease their paperwork burden and access the company's growing body of healthcare data. Patients will want to buy coverage because it'll be cheaper and with a bigger network than other Medicare Advantage plans. And the economies of scale inherent to its data sets and provider networks will drive coverage costs low enough to expand aggressively, and perhaps even return some capital to investors in the long term. 

Any whiff of the cycle working as intended could send the stock climbing, which is what the Wall Street analysts are likely thinking about when they set their price targets. The only issue is, the business has a long way to go from where it is today to that state of flourishing described above.

Why you might want to stay away

At the moment, it does not look like Clover Health is executing its business model as effectively as needed to be for its stock to be worth a purchase. 

In the first quarter, its total revenue fell by 40% year over year, arriving at $528 million. Whereas in Q1 2022 it reported covering around 85,000 people with its insurance plans, in the first three months of 2023 it only covered 83,794 people. So much for the idea that its base of subscriptions is sure to grow consistently.

Furthermore, Clover hasn't yet shown it can deliver insurance coverage profitably, and it's currently weighing how to address that issue. Its quarterly gross margin and profit margin have actually both worsened since late 2021. Management says that it'll be pursuing around $30 million in annual selling, general, and administrative (SG&A) savings starting in 2024, and that it'll also likely be increasing the premiums for its plans.

While those cost savings aren't bad, hiking prices too much could easily drive away more subscribers and lower revenue as a result. And nobody is claiming that the changes will be enough to push the company to profitability within the next year or so. 

At the same time, over the trailing 12-month period it burned $208 million in cash, and it currently has $190 million in cash and equivalents as well as $226 million in short-term investments. That's enough cash for now, but without some serious cost improvements, it'll need to liquidate some of its investments (potentially at a loss), take out fresh debt, or issue new shares, none of which would be great for shareholders. Its debts are currently negligible, but it'd take quite a lot of borrowing to extend its runway by even one year. 

Clover Health is in a period of shifting from a focus on growth to a focus on profit, but it hasn't proven that it's capable of succeeding with either of those two priorities. Once it gets a few consecutive quarters of margin improvements under its belt, preferably without losing a bunch of subscribers in the process, it'll be worth reassessing. For now, stay away.