What’s the latest with Clover Health (NASDAQ:CLOV) stock? To be honest, not much. Since I last wrote about CLOV stock on Sept. 16, the situation with the meme stock favorite hasn’t changed. The Medicare Advantage plan provider’s key issue, its challenges to become profitable, is still CLOV’s biggest challenge.
Along with this, the stock’s dynamic continues to be one of retail bulls versus sell-side bears. Despite continued downgrades from Wall Street’s sell-side, many individual investors still want to believe that a comeback for the stock, down big from its June short-squeeze, is possible.
The problem? Many retail traders are staying bullish. But it’s a pool of investors that’s shrinking, not expanding. That’s clear from the declining levels of conversation about it on Reddit’s r/WallStreetBets subreddit. This points to low chances of a third round of meme stock madness sending it to the moon once more.
Worse yet, this stock, trading for around $7.40 per share, could be set to get a lot cheaper. As of this writing, investors are shrugging off the latest correction fears. However, the risk of a market downturn isn’t exactly off the table. Changes in monetary policies could still sink stocks, especially speculative growth plays with many fleas, like CLOV stock. So avoiding it is likely your best move.
CLOV Stock’s Big Profitability Problem
As I discussed in my previous Clover article, the main issue with the company is its uncertain path to profitability. With a Medical Care Ratio (MCR) above 100%, it’s paying out more in claims than it’s taking in for premiums. So far, it’s been able to justify these high costs, by pointing to the post-lockdown “recovery” as the reason behind it. This makes sense, as many Americans delayed medical appointments during the height of Covid-19’s lockdowns.
However, in the quarters ahead, recovery will no longer work as a justification (or excuse). If Clover’s MCR remains above 100%, it’ll become more apparent that this company really can’t manage its costs, an issue that Citi analyst Ralph Giacobbe pointed out as a concern, in his coverage of CLOV stock. Sure, you may think that, with management’s outlook calling for $1.4 billion-$1.5 billion in sales this year, more than double its top-line for 2020 ($672.9 million), the company’s apparent scaling up means today’s profitability concerns are overblown.
But as my InvestorPlace colleague Mark Hake recently argued, high revenue growth by itself isn’t going to save the day for CLOV stock. If it can’t bring its MCR down to 80-85% (which is necessary to cover both claims costs, as well as overhead costs), operating losses for Clover are going to widen, not narrow.
High Downside Risk for Clover
As short-squeeze attempts have continued to fizzle out (most recently in early September), the number of meme traders bullish on CLOV stock has fallen. Expect this to continue. Market uncertainty will convince more still holding CLOV “with diamond hands” to finally throw in the towel and cash out.
What do I mean? The market’s dipped in the past few weeks, but it’s yet to capitulate. That may soon change, if a combination of rising bond yields, Federal Reserve tapering, and slowing economic growth becomes too great for investors to shrug off as “no big deal.”
Stocks across the board could experience an extended sell-off. Speculative plays in particular, like this one, could get hit even harder. The retail traders (who skew young) that are long CLOV have grown accustomed to a runaway bull market. How will they react to a bear market? Chances are, if the market makes a complete move from “risk on” to “risk off,” newbie traders will panic sell whatever they still hold among the riskier meme names.
In turn, CLOV stock, down nearly 73% from its all-time high, could still see another double-digit percentage move lower.
The Music Stopped for CLOV Stock Months Ago
Earlier this year, Clover may have been a popular meme stock, able to move higher on factors outside its fundamentals. Today, that meme stock status has largely faded, and those still holding it as a “to the moon” play could soon make their exit.
As fixing its profitability problem remains a work-in-progress, and as a market downturn will likely send it plummeting once more, avoiding CLOV stock is still your best move.
On the date of publication, Thomas Niel 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.