Clover Health: A Profitable Future Ahead Fueled By AI And Star Rating Success

seekingalpha08-15

Clover Health Investments posted its first profitable quarter as a public company and raised its full-year guidance in Q2.Clover Health’s star rating increased by 0.5 stars, which could have a ...

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Rating Success\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-15 20:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4714783-clover-health-stock-profitable-future-ahead-fueled-by-ai-star-rating-success><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Clover Health Investments posted its first profitable quarter as a public company and raised its full-year guidance in Q2.Clover Health’s star rating increased by 0.5 stars, which could have a ...</p>\n\n<a href=\"https://seekingalpha.com/article/4714783-clover-health-stock-profitable-future-ahead-fueled-by-ai-star-rating-success\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"CLOV","symbol_name":"Clover Health 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STRATEGIES \"A\" ACC","LU2089283258.USD":"安联环球可持续基金Cl AM Dis","MDT":"美敦力","BK4539":"次新股"},"translate_title":"Clover Health：人工智能和星级成功推动的盈利未来","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"UNH":1,"ALHC":1,"HUM":1,"GEHC":1,"ELV":1,"CNC":1,"CLOV":1,"CI":1,"MDT":1,"TEM":1,"TWST":1,"MA":0.9},"content_text":"Clover Health Investments posted its first profitable quarter as a public company and raised its full-year guidance in Q2.Clover Health’s star rating increased by 0.5 stars, which could have a positive impact on future top line and bottom line growth.Clover Health’s star rating increase is a testament to the effectiveness of Clover Assistant, which could drive demand for the platform, in my opinion.I’m reiterating my buy rating for CLOV stock and raising my price target to $4.73 per share, representing 88% upside from its current valuation.   Just_Super/E+ via Getty ImagesClover Health Investments Overview Last May, I initiated my coverage on Clover Health Investments, Corp. (NASDAQ:CLOV) with a buy rating after making its AI-driven technology platform, Clover Assistant, available for all Medicare providers and payors. Since then, the stock is up more than 124%, reaching a new 52-week high of $2.55 recently, on the back of strong Q2 earnings, improved full-year guidance, recalculated Medicare star ratings for the 2025 payment year, and a $1 million insider buy.   Seeking AlphaIn light of these factors, as well as Clover’s return to member growth in Q2, I’m reiterating my buy rating and raising my price target from $2.45 to $4.73, implying 88% upside from current levels. Clover Health Q2 Earnings In Q2 2024, Clover Health reported 11% YoY insurance revenue growth from $314.4 million to nearly $350 million at an improved MCR of 71.3% compared to 77.2% in the prior year. Overall, the company’s total revenues increased 11% YoY from $320.1 million to $356.3 million. These results, combined with Clover’s operating costs remaining unchanged YoY, have led it to post its first profitable quarter as a public company on a GAAP basis with a net income of $7.4 million compared to a net loss of $28.8 million a year ago. This substantial improvement in Clover’s bottom line performance has led it to generate $36.2 million in adjusted EBITDA in Q2 compared to $9.9 million in the prior year, which is higher than its original full year adjusted EBITDA guidance between $10 and $30 million. Accordingly, Clover revised its original guidance by raising its insurance revenue guidance to a range between $1.35-1.375 billion compared to $1.3-1.35 billion, insurance MCR to 77-79% compared to 79-81%, and adjusted EBITDA between $50-65 million.   Q2 Investor PresentationIn terms of liquidity, Clover’s financial position increased in strength during Q2 with cash, equivalents, short-term investments, securities available for sale, and securities held to maturity worth more than $379 million, and has zero debt on its balance sheet. Moreover, the company has long-term securities available for sale and securities held to maturity worth nearly $103.8 million, which means that the company has total liquidity of $482.8 million. The company’s strong financial health has allowed it to buy back $1.77 million worth of stock in Q2 as part of its $20 million share repurchase program.   10-Q FilingIn addition to Clover’s impressive financial performance, the company witnessed a return to member growth in Q2 as it exited the quarter with 80,261 members compared to 79,527 at the end of Q1, meaning that it added 734 new members during the quarter. This is especially promising considering that Clover mainly operates in Georgia and New Jersey, with lesser coverage in South Carolina, and limited coverage in Texas and Pennsylvania. As such, as the company expands its coverage into more states, its member base could continue growing in the foreseeable future.   Clover HealthStar Rating Increase is a Tailwind to New Offering One of the factors that could aid Clover’s future member growth is its recent star rating increase from 3 to 3.5 stars for the 2025 payment year. While the 0.5-star increase might seem small, it can be a stepping stone to a 4-star rating, which could have a major impact on Clover’s financial performance in the future. With that in mind, MA plans with a rating of 4 stars or more are eligible for a 5% quality bonus adjustment for the following year and have their benchmark increased, giving them a competitive advantage in their markets. Although Clover wouldn’t be able to receive this benefit yet, its higher star rating could lead to higher rebate percentages, which would be a tailwind for its bottom line performance. Moreover, a better star rating can impact Clover’s risk adjustment models, which could potentially lead to higher payments for sicker members. The higher star rating also improves Clover’s reputation as an MA provider by making its plans more attractive to potential members, and in turn, lead to more enrollments. It should also be noted that Clover’s higher star rating must have been a direct result of improving member experiences with its plans. This is extremely beneficial in reducing member churn, which is another tailwind to Clover’s future top line growth. However, in my opinion, the biggest advantage of Clover’s higher star rating is that it is a testament to the effectiveness of its AI platform, Clover Assistant, in improving care outcomes and member satisfaction. This is especially promising after Clover’s decision to make its platform available to the broader MA ecosystem, as its success could attract the attention of other MA providers to its technology. In this way, Clover could position itself as a leader in healthcare technology and gain a competitive edge in the MA market. At the same time, this new focus could lead to a re-rating of Clover’s stock, as it could be viewed by the market as an AI investment in the MA industry. CLOV Stock Valuation At its current share price of $2.51, Clover has an EV of $896.6 million, leading to an EV/sales multiple of 0.64, at the midpoint of the updated guidance.       Market Cap $1,248,646,560   Liquidity $379,052,000   Debt $0   EV $869,594,560   Revenue Guidance (Midpoint) $1,362,500,000   EV/Sales 0.64   Click to enlarge In comparison, Clover’s competitors in the MA space, UnitedHealth (UNH), Humana (HUM), Elevance (ELV), Centene (CNC), Cigna (CI), and Alignment Healthcare (ALHC) are trading at the following multiples.       Company EV/Sales   UNH 1.47   HUM 0.44   ELV 0.84   CNC 0.26   CI 0.50   ALHC 0.57   Average 0.68   Click to enlarge While in my previous coverage I reached my price target by comparing Clover to the aforementioned MA providers, I believe it should also be compared to other AI-driven healthcare companies in light of its Q2 results which showcased the benefits of Clover Assistant, in my opinion. These companies include Tempus AI (TEM), GE HealthCare (GEHC), Twist Bioscience (TWST), and Medtronic (MDT), all of which are trading at the following EV/sales multiples.       Company EV/Sales   TEM 9.42   GEHC 2.34   TWST 7.75   MDT 3.70   Average 5.80   Click to enlarge Since Clover’s technology platform will be a secondary offering to its primary business, which is MA plans, I’m giving an 85% weight to the MA sector average EV/sales multiple and a 15% weight to the AI healthcare sector average EV/sales multiple to reach my target multiple for Clover. Accordingly, my target EV/sales multiple for Clover is 1.45.          Average Weight   MA Providers 0.68 85%   AI Healthcare 5.80 15%   Target Multiple 1.45 100%   Click to enlarge In this way, I’m raising my price target for Clover to $4.73 per share, implying 88% upside from its current valuation.       Revenue $1,362,500,000   EV $869,594,560   EV/Sales 0.64   Target Multiple 1.45   Implied EV $1,973,410,938   Net Cash $379,052,000   Equity Value $2,352,462,938   OS 497,468,749   Price Target $4.73   Share Price $2.51   Upside 88%   Click to enlarge Conclusion  In conclusion, I’m reiterating my buy rating for Clover Health and raising my price target to $4.73 per share, representing an upside of 88% from current levels. The company posted its first profitable quarter on a GAAP basis as a public company in Q2 and further strengthened its balance sheet with total liquidity of $482.8 million, leading it to raise its full-year guidance. The company also witnessed an increase in its star rating from 3 to 3.5 stars, which could have a major impact on its financial performance in the future, as well as being a stepping stone to a 4-star rating. 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