The Clover Health Investments (NASDAQ:CLOV) share price has seen some explosive growth recently. In fact, just over the first week of June, the US stock jumped by nearly 200%, from $7.64 to $22.15. It has since come down to around $15 today. But that is still around 50% higher than a year ago. What’s causing this sudden upward surge? And should I be considering Clover Health as a new addition to my portfolio?
The surging Clover Health (CLOV) share price
Before breaking down what’s going on with the CLOV share price, let’s take a look at the actual business. Clover Health is a Medicare Advantage health insurance company. The revenue model is pretty simple. Customers pay a monthly premium and should they ever need to visit the hospital, the bill is largely taken care of.
An insurance company wouldn’t be my first guess for a business capable of almost tripling in the space of a week, so what happened? It seems the Reddit army is at it again. Unless you’ve been living under a rock, you’ve probably heard of the meme stock movement that sent the share prices of companies like GameStop and AMC Entertainment through the roof, despite poor underlying fundamentals. These retail investors now have their sights locked on Clover Health, making the recent surge in the CLOV share price a result of yet another short squeeze.
Investigating what happened
Back in February this year, famous short-selling firm Hindenburg Research published a report against Clover Health with some pretty serious accusations. It proclaimed that Clover Health failed to disclose a Justice Department investigation when going public via a SPAC. It also accused Chamath Palihapitiya, a backer of the SPAC, of misleading investors when promoting the business.
Following this report, the Securities and Exchange Commission started an investigation. And since then, the volume of shares being sold short has climbed to around 36% today. With such a high short interest, retail investors adamantly started buying shares pushing the CLOV share price up to trigger a short squeeze.
But is this a case of a bad business being inflated by an internet frenzy? Maybe not. The management team has vehemently denied the accusations. CEO Vivek Garipalli described the report as “rife with ad hominem attacks, sweeping inaccuracies and gross mis-characterisations”. And so, giving the company the benefit of the doubt, is the underlying business worthy of its newly elevated valuation?
The underlying business
Unlike other meme stocks, Clover Health does actually look healthy. It has a nearly insignificant amount of debt ($46m) on the balance sheet with plenty of cash ($405m) to spare. What’s more, the company has been successfully growing its customer base over the years, rising from 16,000 members in 2016 to over 66,000 as of the end of March this year. Combining this with a rapidly expanding revenue line makes the company appear to be somewhat undervalued, assuming growth can be maintained.
Having said that, I’m personally not interested in adding this business to my portfolio. Like many Medicare insurance providers, the bulk of the revenue actually comes from the US government, as most customers pay their premiums directly to Medicare. Suppose the allegations by Hindenburg Research prove to have merit? In that case, it could embroil the business in expensive legal proceedings that would likely compromise the CLOV share price.
