As CLOV’s stock dilutes, shareholders give up
Health Clover (NASDAQ:CLOV) the stock seemed like a good choice at one point, but it’s starting to look like it’s not anymore.
It’s hard to admit you’re wrong, but it’s something that happens when you invest.
A long-term investor should cut his losses when the original investment thesis is no longer valid. I believe I am close to this point with the CLOV stock.
I’ve had CLOV stock on my radar for a while, but never pulled the trigger because my technical indicators never aligned for me. However, I believed in the direction of the company and their vision and was a huge fan. This belief has been shaken.
Share the offer to dilute existing supporters
Clover released some disappointing news a few weeks ago. The management of the company has announced the completion of its public offering of new shares.
They sold approximately 52.2 million CLOV shares for a price of $ 5.75. The underwriters have a 30 day option to purchase an additional 7.8 million shares at the public offering price. Taking discounts and sales charges, the proceeds of the offering are approximately $ 300 million. These are all new shares offered by Clover itself and will therefore have a dilutive effect for existing shareholders.
It’s incredibly disappointing on so many levels. The first is the dilution of these shares on future profits. Since these are all new shares issued by Clover Management, future earnings per share of existing shareholders become lower.
This is because with more shares now in circulation, existing shareholders now own a lower percentage of the company. According to the company’s latest 10-Q, prior to the share offering, Clover had approximately 420.6 shares outstanding.
This secondary offer would then increase the number of shares by 12.4%. This translates into an impact of around 11% on any future EPS.
Bad timing for a stock offer
The other disappointing aspect of this share price offer is when and at what price it was made. Offering new stocks for $ 5.75 is a major slap in the face for investors who have backed the stock. Most of them were private investors who believed in Chamath Palihapitiya and the mission of the company.
Remember that it was not until January that the CLOV share became public via an ad hoc acquisition company (SPAC). The shares were offered to investors for $ 10 at the time. The current offer price of $ 5.75 is roughly half of the SPAC price and reflects the bad sentiment currently surrounding CLOV stock.
Thanks to the success of its PSPC, Clover was able to raise approximately $ 1.2 billion in cash. Now the company says it needs more cash. But why exactly? After such a successful PSPC, Clover should have sufficient cash flow for its operations.
Is the company reporting that it thinks its shares (which are trading at around $ 4.65 today) are overvalued at $ 5.75? Or are there some deep-seated issues in the company’s operations that we are not aware of? Could it be that Clover is burning cash much faster than management expected?
The company’s Medicare Advantage MCR has remained stubbornly high in recent quarters. Clover’s MCR for the third quarter of 2021 was 102.5%. This means that medical care cost Clover more than it received in premiums.
This could be a potential signal that Clover’s business model isn’t really working. Management cited “working capital and general business objectives” as the reason they needed to raise capital. Simply put, this explanation is not good enough. Clover management promised to disclose more information after the 30 day silence period.
Your takeaway meals
Chamath and Clover management are expected to work overtime to restore investor confidence in CLOV shares. Since the company has no profits, the lack of confidence could spell the end of the stock. The famous investor bought an additional $ 10 million of shares at an average price of $ 5.75.
It remains to be seen whether this will be enough to restore confidence in the CLOV action. I would avoid this stock for now.
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At the date of publication, Joseph nograles did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
Joseph Nograles is a part-time freelance writer specializing in the financial industry. He has worked in a wide variety of industries, from technology to consulting with one of the ‘big four’. He has always enjoyed analyzing businesses and has been a CFA charter holder for nearly a decade now.