Clover Health (CLOV) stock fell 3.4 percent on April 7 and is trending downward on April 8. The stock has lost 15 percent over the last month and 56 percent YTD. The sell-off was triggered by a short-seller report that criticized Clover’s business model and challenged its practices. Is CLOV stock undervalued and is it a good buy?
Founded in 2014, Clover Health is a health technology company. The company provides next-generation Medicare Advantage plans. Clover went public on Jan. 8 through a reverse merger with Chamath Palihapitiya-backed Social Capital Hedosophia III (IPOC) SPAC. The business combination valued Clover at a pro forma enterprise value of $3.7 billion.
Clover Health stock is falling.
CLOV stock is now down 58 percent from its 52-week high of $17.45 on Jan. 4. The stock has been falling significantly since Hindenburg Research claimed that Clover Health is under an active investigation by the Department of Justice that it hasn't revealed to investors. According to the short-seller, the Department of Justice investigation includes at least 12 different issues associated with Clover’s business model and Clover Assistant software.
Hindenburg also accused Palihapitiya of deceiving investors when he took Clover public through a blank-check company in January. The short-seller doesn’t claim that Palihapitiya was aware of the Department of Justice inquiry prior to taking Clover public. However, it does raise concerns about his due diligence in doing so. The SEC has launched an investigation into Clover Health in response to Hindenburg's accusations.
CLOV stock is expensive.
From a valuation perspective, Clover Health is trading at an NTM EV-to-sales multiple of 4.2x, which looks expensive compared to its peers. In comparison, Humana (HUM) and UnitedHealth Group (UNH) have NTM EV-to-sales multiples of 0.7x and 1.4x, respectively.
Clover seems to be a risky investment
The SEC probe is a hanging sword for Clover Health. The bearishness in CLOV stock could increase on any negative comments from the regulator. Unless the allegations surrounding Clover Health's business are put to rest, it will be difficult to determine whether the stock is as impressive as it appears on paper. Also, the company isn’t generating profits. In 2020, the company reported a net loss of $91.6 million. As a result, Clover seems to be a risky investment right now.
Will Clover Health stock recover?
Currently, I would avoid CLOV stock because it isn't cheap compared to its peers, even after a significant price drop in 2021. The stock could fall more if the regulator doesn’t clear the company of any misconduct.
According to estimates compiled by Tip Ranks, analysts' consensus target price is $12.67 for Clover Health stock, which is 72.4 percent above its current price. Among the three analysts tracking Clover Health, one recommends a buy and two recommend a hold. None of the analysts recommend a sell. The highest target price of $15 is 104 percent above the stock's current price, while the lowest target price of $10 is 36 percent above the stock's current price.