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Clover Health released their Q2 financial results, and the share price has reacted well to this news. Are earnings a strong support for future growth, or was the stock oversold prior to the release?

Earnings

“Second quarter revenue grew 140% year-over-year due primarily to the launch of Direct Contracting. Clover is on a $1.6 billion annual revenue run rate based on the second quarter results,” said Joe Wagner, Clover Health CFO. Revenue was $412.5M, up 140% from $172.1M for the same quarter in the previous year. This consisted of $195.4 million in Medicare Advantage premiums and $216.4 million in Direct Contracting revenue. The company made a net loss of $317.6M for the quarter and had an adjusted EBITDA of $138.7M. Total lives under Clover management at quarter end was approximately 129,000, an increase of 126.3% compared to June 30, 2020.

Potential

Shares are currently up over 17% in pre-market. Although the company reported a net loss for the quarter, the increased revenue is the driving force behind investors buying up the stock. The company is a growth stock, so the bottom line is not the focus at this time. A 140% increase is a clear sign that they are growing and there is demand for their cheap Medicare Advantage plans. The stock is a favourite for traders. Increased volume alongside this positive news could see the stock make some good short term gains.

Concerns

What are my concerns for investing into this stock long term? The current budget proposal, currently being reviewed by congress, is a proposal for Medicare coverage to include vision, hearing and dental care benefits. At this time, seniors are only covered for these through private medical plans, such as Clovers product. If this legislation was to pass, Clover could face a struggle to keep these customers, as this added coverage from the legislation will be cheaper than before.

Clover came under scrutiny after being accused of withholding information from its investors. They were subject to an investigation that they did not announce as the management team decided it was immaterial. They finally released a statement after a short sellers report came out announcing the investigations.

Long term growth

Clover partnered with Walmart (NYSE:WMT), at the later stages of 2020, to offer a series of Medicare Advantage plans. This is Walmart’s first step into the health plan space. This could be key to Clover’s growth in the future, as such a big name can bring them the client base that they are after. The demand for cheaper healthcare will be ever-increasing in the United States, but the companies ability to overcome problems that they face will be key.

I think there is potential for growth due to the sector and the product they offer. But long term growth may be dependant on management learning from previous errors and building the trust of investors back up.

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