Reddit traders recently tried to send Clover Health (NASDAQ:CLOV) stock “to the moon” once again.
The stock managed to crack $10 per share, but ultimately this rocket l did not launch. Instead of sending it back to the $25+ it traded for in June (during its short-squeeze rally), shares in the Medicare Advantage plan provider have fallen back to single-digit prices.
There may be plenty of retail money willing to send it soaring once again, but as factors like fundamentals and valuation come back in vogue don’t count on hope, hype, and momentum alone.
Something significant would have to change to send this “meme stock” favorite back toward its all-time high, and that looks unlikely. Instead, shares will stay stuck at high single-digit price levels as sell-side analysts raise doubts about its prospects and the overall “meme stock” trend continues to fade in popularity.
Once speculators throw in the towel, shares may make their way back to prior lows (around $6.31 per share). Even as its revenue growth remains strong, issues like its profitability challenges could continue to weigh CLOV stock down.
So, what’s the best move right now for this “meme stock,” still one of the most popular among commentators on Reddit’s r/WallStreetBets subreddit? Keep on steering clear of it. At least until its valuation becomes fully based on its fundamentals and prospects.
A Closer Look at CLOV Stock
The Reddit trading community is still excited about Clover because they still see it as a fantastic short-squeeze play. Even as short interest (15% of float), has fallen since the summer.
For example, when our Faizan Farooque wrote about it on July 19, around 27.8% of its float was sold short.
This may explain why its recent rally, which came out of nowhere, failed to maintain momentum. There was enough en-masse buying to bid it up temporarily, just not enough to send the short side scrambling as it did three months back. That said, I don’t doubt that meme traders will try again to send CLOV stock on a turbocharged rally.
But while the Reddit set is staying bullish, the analyst community has a different take, judging from recent sell-side ratings.
Cowen’s Gary Taylor gave shares the equivalent to a “sell” rating and a $7 per share price target. Citigroup’s (NYSE:C) Ralph Giacobbe holds a less bearish view, but still gives Clover the equivalent of a “hold” rating. Giacobbe is concerned that challenges such as cost management outweigh tailwinds like an aging U.S. population.
I believe that Giacobbe’s $10 per share price target is too high, but I share a similar view of the situation: headwinds outweigh tailwinds, for now.
Until its issues with profitability get resolved, what remains of the Reddit trader army isn’t enough to send it back toward its prior high.
The Path to Profitability Remains Murky
As I discussed earlier this month, growth remains on the menu for CLOV stock. Revenue growth, that is. For the quarter ending June 30, sales came in well above analyst consensus ($412 million actuals, versus $205.4 million estimates). Not only that, its full-year 2021 guidance came in well ahead of expectations as well.
The fact its sales are growing well above estimates is encouraging. It shows that Clover, which is trying to disrupt the Medicare Advantage space with its Clover Assistant platform, is finding success grabbing an increasing share of this market.
What’s still uncertain is when it will get out of the red, and finally reach the point of profitability.
With its Medical Care Ratio (MCR) still above 100%, it’s paying out more in Medicare Advantage claims than it’s taking in for premiums. This is despite its platform using technology and financial incentives for physicians to keep patient costs low.
Admittedly, its MCR numbers in recent quarters (like 111% in the June quarter) could be temporary. As the company tried to explain in the release of its quarterly results, increased use of healthcare services after the end of the Covid-19 lockdowns may be to blame.
In the coming quarter, it’ll be clear whether this is the case, or if Clover is trying to explain away a long-term issue. For now, it’s best to be skeptical whether it’s able to eventually get its costs under control.
Running on “Meme Stock” Fumes
As concerns about its business model become more important than its “meme appeal,” Clover will struggle to make a sustainable move out of single-digit price levels. The meme crowd could help keep it steady. But if they decide to make their exit? It could be a quick trip back to its lows.
Until it stops running on “meme stock” fumes, or until it gets over its profitability challenges, the best move with CLOV stock is to stay away.
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.