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CLOV Stock Is in Need of a Break After Massive Upsurge This Past Month

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After reporting excellent earnings and an upbeat outlook, Clover Health (NASDAQ:CLOV) is back on investors’ radar. Reddit lost interest in it for a while, but some positive recent developments brought it back to life. However, CLOV stock is way off its 52-week high of just under $29. So, is CLOV stock a buy? After the massive month, it is better to let shares cool off.

Person holding smartphone with logo of healthcare company Clover Health (CLOV Stock) Investments Corp on screen in front of website

Source: Wirestock Creators / Shutterstock.com

Last year, shares of the healthcare company skyrocketed after it became a topic on WallStreetBets. However, due to geopolitical tension and the prospect of a sluggish economy, investors are sticking with safer companies, putting pressure on growth stocks.

Clover Health is an artificial intelligence (AI) health company that leverages data analysis to help people stay healthy. It has grown quickly, but investors need to remain cautious. If Clover can’t meet its high expectations, it could go down fast. Successful investors have learned to take risks at opportune moments because there are no guarantees in this industry. But it is better to wait for a correction before buying CLOV stock.

Investors Rejoice on CLOV Stock’s Bright Outlook

Clover Health surprised analysts with its fantastic fourth-quarter (Q4) report and reversed negative sentiment. It saw a significant boost in Q4 revenue because the number of lives under management for Clover Assistant increased by 223% during the same period. The top line increased by 160%, handsomely beating Wall Street estimates.

Furthermore, Clover Health gave very optimistic guidance for the upcoming quarter. To be more specific, the company predicts anything from $3 billion up to as much as $3.4 billion in revenue over the coming year. This guidance beat consensus estimates of $2.6 billion. On other metrics, the company was bullish for the current year. Clover expects their medical care ratio to end between 95% and 99% of premiums.

The company expects the Direct Contracting program to have between 160,000 and 165,000 users, up from prior guidance of 125,000. This is also a substantial uptick from the program’s average of 62,125 members in 2021.

The recent pandemic caused many patients to avoid in-person care. Now that things are getting back to normal, patients are opting for lower-cost in-person care again, increasing costs. That is why net loss for the quarter was $69 million, wider than Q4 last year.

In addition, there is a huge market to exploit. The U.S. government’s healthcare spending is expected to grow by 5.4% through 2028 and reach $6.2 trillion. However, the company offers healthcare benefits to a limited number of members, which grew just 17% last year.

Overall, the company’s latest earnings report was extremely positive. The market reacted positively and it looks like the company will continue to perform well.

What Are the Risks to Clover Health?

Barring the last month, many people are unhappy with CLOV’s recent performance. Social Capital’s Hedosophia investment fund acquired Clover Health in October 2020 for a whopping $3.7 billion. The company had a triumphant launch on Jan. 8, 2021. However, Hindenburg Research’s report shut them down.

The activist short-seller made certain allegations against Clover Health and Chamath Palihapitiya. According to the report, the company failed to disclose an ongoing U.S. Securities and Exchange Commission investigation before going public. Palihapitiya tried to defend the company. However, the damage was done.

Apart from this, there are other factors that affected the stock. First, after the reverse merger was completed, shares have generally fallen in price because of the lapse of the lock-up period. Additionally, the company needs to deliver solid quarterly reports against shareholder expectations. Unfortunately, Clover Health’s performance on that front was lackluster.

Three other broader factors could push this stock down:

  • The markets have been punishing unprofitable growth stocks.
  • The U.S. Federal Reserve is looking to reign in inflation by increasing interest rates. This will affect sentiment.
  • Currently, the situation in Ukraine is a topic of discussion, specifically around inflation and the rising price of oil. We’ll see what happens over the next few weeks.

Finally, as my InvestorPlace colleague Will Ashworth points out, the Centers for Medicare and Medicaid Services announced that it would revamp the Direct Contracting Model. It is big news since the direct contracting business constitutes a major chunk of Clover’s overall business. The revised Accountable Care Organization Realizing Equity Access and Community Health will be tested from Jan. 1, 2023 until 2026. Time will tell what this means for Clover Health.

CLOV Stock Needs to Reflect Prevailing Risks

CLOV has made considerable headway in the last few weeks. They’re on a mini-surge, largely due to earnings and outlook for their future. The company’s return to profitability has been impressive when most stocks are down.

However, the risks associated with the company have not vanished. Hence, shares should lose momentum before you think of adding this one to your portfolio.

On the publication date, Faizan Farooque 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.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.

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