Stock of the week - Clover Health (10.06.2021)

Clover Health (CLOV.US) has experienced a massive volatility recently. Stock is up over 120% month-to-date with a bulk of this increase made this week alone. Stock reached an intraday all-time high above €28 before pulling back lower. However, the stock gave back big part of gains later on and finished Wednesday's trading 23.6% lower, near highs from late-2020. Let's take a closer look at the stock and reasons behind the recent surge.

Company Overview

Clover Health is a US startup offering hospital, medical and private insurance services. Company was founded in 2014 and uses extensive data analysis to improve its health insurance services. Stock receives funding from companies like Sequoia Capital or Google Ventures and has debuted on the stock market via merger with SPAC in 2020. 

New meme stock

Recent price action on Clover Health chart looks familiar - GameStop and AMC Entertainment experienced similar spikes in volatility this year. In fact, there are clear reasons behind this similarity - Clover Health also became a target of the retail crowd from WallStreetBets Reddit forum. Why Clover? Because of high short interest of course. The latest data shows that the stock has a short interest of 36.7% - one of the highest on Wall Street. Retail traders attempt to squeeze institutional investors out of their short positions and trigger a big jump in share price. However, the retail crowd is very variable and a strong pull back on Wednesday seems to prove it. Group's interest moved onto other "meme stocks". This is one of major risks when investing in such hot stocks - the risk of being left with shares bought at high prices when the crowd decides to move onto other markets.

Is there a bull case?

When the Reddit crowd was pushing GameStop shares to the moon, some argued that there actually is a bull case for the company - reopening of the economies. Is there a similar bull case for Clover Health? It is hard to say. Clover is a relatively young company and the history of available financial data is limited. Company generated a net loss of $361.5 million in 2019 on revenue of $462.3 million. Situation improved in 2020 with a net loss of $83.1 million on revenue of $672.9 million. Company seems to become more efficient but its valuation is sky-high following a recent surge. Stock trades at price-to-sales multiple of around 12.5. Even if there is a bull case for Clover's business, current valuation is disconnected from fundamentals and the company's business would need to improve massively to make it justified. It does not mean that the share price will not increase further, it just means that current price action is driven mostly by sentiment rather than fundamentals.

Technical analysis

Share price of Clover Health (CLOV.US) experienced a massive surge during the past month. Shares were trading almost 70% year-to-date higher at one point and over 300% above lows from late-February and May. However, around half of that surge has been erased on Wednesday and the stock pulled back to $17 price zone, marked with previous 2020/21 highs and 50% retracement. From a technical point of view, staying above this zone may hint that another upward impulse is about to be launched. However, traders should keep in mind that rallies in so-called "meme stocks" are often followed by steep drops in share price.

Source: xStation5