Clover Health: New Business Model Is A Game Changer (NASDAQ:CLOV) (2024)

Clover Health Investments, Corp. (NASDAQ:CLOV) has recently announced that it will make its technology platform available for all Medicare Advantage payors and providers. This endeavor will effectively change the company’s business model from a traditional Medicare Advantage plan provider to a hybrid SaaS and shared-savings model, with options for full capitation. By doing so, Clover Health is finally embracing the AI aspect of its business model which could help boost its valuation thanks to this endeavor’s potential to benefit from its peers’ growth. In light of this, as well as the company’s improving profitability prospects, I’m rating Clover Health as a buy with a price target of $2.45, implying 120% upside from current levels.

Business Overview

Clover Health is a Medicare Advantage plan provider that combines technology, data analytics, and preventative care to lower costs and increase the quality of health and life of Medicare beneficiaries. The company’s technology platform, Clover Assistant, utilizes AI and machine learning to deliver data and insights to physicians that help with early diagnosis and management of chronic diseases.

While Clover Health remains unprofitable, the company has made significant strides regarding that matter as it announced impressive Q1 2024 results. The company’s insurance revenue grew 8% YoY to $341.7 million and its Medical Cost Ratio (MCR) improved over the same period from 86.6% to 77.9%. As a result, the company posted its first quarter of positive adjusted EBITDA at $7 million and its net loss improved substantially YoY from $72.6 million to $19.1 million. For the full year, Clover Health is guiding insurance revenues between $1.3 to $1.35 billion, MCR between 79% to 81%, and positive adjusted EBITDA between $10 and $30 million.

Clover Health also has a strong balance sheet with cash, equivalents, short-term investments, as well as investments available for sale and held to maturity worth $342.4 million, along with nearly $98 million in long-term investment securities available for sale and held to maturity, and zero debt. This strong liquidity position has allowed the company to announce a $20 million share buyback program over the next 2 years.

Leveraging AI

While the core of Clover Health’s value proposition is its technology platform, Clover Assistant, the company has never marketed itself as an AI company during a time where the term “AI'' has become a buzzword for several businesses. It is for this reason that I find the company’s decision to make its AI-powered technology platform available for all Medicare Advantage payors and providers under the brand name Counterpart Assistant promising for its long-term prospects.

In my opinion, Counterpart Assistant could be highly coveted by Medicare Advantage payors and providers thanks to its ability to early diagnose chronic diseases, namely chronic kidney disease (CDK) and diabetes. According to Clover Health’s latest investor presentation, Clover Assistant patients with stage 3 CKD were diagnosed 1.5 years earlier than non-Clover Assistant patients.

Meanwhile, 16.7% of patients seen with Clover Assistant were diagnosed with diabetes compared to 8.7% in members seen without Clover Assistant, leading to earlier treatment.

Results of early treatment of diabetes have shown better management of blood sugar, lower use of insulin, and lower instances of hypoglycemia.

Counterpart Assistant’s ability to diagnose chronic diseases early is a major attraction point in my opinion. This is mainly due to the lower treatment costs associated with early intervention, which can lead to less expensive treatments, less invasive surgeries, and shorter hospital stays compared to diagnosing diseases at a later stage.

At the same time, early treatment can prevent complications from arising, leading insurance providers to avoid covering costs associated with treating these complications, which can be significant in some cases. Early diagnosis could also allow for preventative measures and lifestyle changes that can keep patients healthier, which often translates to fewer claims for insurance providers in the long run.

With that in mind, I believe Clover Health may announce a deal with a large Medicare Advantage provider such as UnitedHealth (UNH), Humana (HUM), or Cigna (CI) soon, since it shared in a recent presentation that it has a “rich deal pipeline”.

If that’s indeed the case, Clover Health stands to benefit from the growing $900 billion Medicare market due to the current aging population as 76 million Americans are expected to be older than 65 in 2035, representing 22% of total population.

Even if that’s not the case, Clover Health’s endeavor will allow it to benefit from the growing technology spending in the healthcare sector. According to Precedence Research, the US healthcare IT market was valued at $53.2 billion in 2022 and is forecasted to reach $284.4 billion by 2032, growing at a CAGR of 18.3%. Therefore, I believe Clover Health’s growth prospects are robust for the foreseeable future.

Benefits of New Business Model

Aside from the growth opportunity presented by this endeavor, this new business model will aid Clover Health’s profitability thanks to the expected high margins of this new business. Clover Health stated that the new offering will employ a hybrid SaaS and shared-savings revenue model, with options for full capitation.

In a capitation model, Clover Health stands to be paid a fixed amount per patient visited by Counterpart Assistant which provides financial certainty. Meanwhile, a shared savings model entitles Clover Health a percentage of any savings Counterpart Assistant’s users generate through the platform when their total costs of care (TCOC) is lower than the benchmark TCOC agreed upon. As for the SaaS revenue model, Clover Health will receive recurring fees periodically to access Counterpart Assistant.

Through a combination of these revenue models, Clover Health stands to benefit from the secular growth in the Medicare Advantage sector while maintaining higher margins than other insurers. The reason behind this is that insurers’ medical loss ratio is capped at 80% under the Affordable Care Act, which requires insurers to spend at least 80% of their premium revenue on medical care and quality improvement activities. If an insurer spends less than 80% on medical care, the difference must be rebated to policyholders.

Valuation

Given Clover Health’s expected growth prospects from its decision to start selling its technology platform to other Medicare Advantage payors and providers as well as the benefits of its new business model, I believe the stock is undervalued at its current valuation. At its current share price of $1.11, Clover Health has an enterprise value of only $208.7 million. This means that its stock is trading at a forward EV/Sales multiple of 0.16.

Meanwhile, other Medicare Advantage plan providers such as UnitedHealth, Humana, Elevance (ELV), Centene (CNC), Cigna, and Alignment Healthcare (ALHC) are trading at the following EV/Sales multiples.

A reason why Clover Health has a low multiple compared to its peers could be due to its substantially lower size. As is, the company reported 79,527 insurance members in Q1 2024, which pales in comparison to its aforementioned peers, as the following table shows.

*Data compiled from a report from health care analytics firm The Chartis Group.

That said, Clover Health now has the potential to benefit from its peers’ growth due to making its technology platform available to all Medicare Advantage plan providers. It is for this reason that I expect the company’s valuation to increase in line with its peers, or even surpass them if Counterpart Assistant is adopted by several large Medicare Advantage plan providers.

As such, applying a 0.66 EV/Sales multiple to Clover Health, the average multiple of Medicare Advantage plan providers, would imply an enterprise value of nearly $872.3 million. When adding the company’s net cash position of $342.4 million, this would result in an equity value of $1.2 billion, leading to my price target of $2.45 per share, representing 120% upside from current levels.

I used Clover Health’s EV/Sales ratio to reach my price target, since the company is yet to post its full year of EBITDA profitability and its forecasted full year adjusted EBITDA doesn’t represent its future cost structure, in my opinion.

Risks

Although I’m bullish on Clover Health, there are risks to my thesis worth considering. The first risk is government regulations, as the Medicare Advantage program is subject to regulations that may impact reimbursem*nt rates and program requirements, which could negatively impact the company’s growth prospects.

Another risk is Clover Health’s declining insurance members. The company reported 79,527 members in Q1 2024, down from 81,205 in 2023 and 88,627 in 2022. Although the growing net premium PMPM offset the decline in members, Clover Health has to show a path to growing its member base, or else its insurance revenue could be at risk of declining in the future.

*Data compiled from earnings reports.

Conclusion

With the company now offering its AI-powered technology platform to the broader Medicare Advantage market, I’m bullish on Clover Health’s future prospects thanks to its ability to capitalize on the industry’s growth and the expected margin expansion brought by its new business model. Counterpart Assistant has proven to be successful in diagnosing chronic diseases, namely CKD and diabetes, early, which I expect to be the offering’s main attraction point to Medicare Advantage payors and providers thanks to the cost benefits of early diagnosis.

Meanwhile, the new offering will employ a hybrid SaaS and shared-savings revenue model, with options for full capitation. This new model will add more financial certainty as well as boost the company’s margins, which will be critical for its profitability prospects. Based on this, I’m rating Clover Health as a buy with a price target of $2.45, implying 120% from current levels.

Ahmed Abdelazim