If you're familiar with the Oracle of Omaha's cautious and long-term approach to investing, the technology-heavy insurer Clover Health (NASDAQ: CLOV) probably doesn't scream "Warren Buffett would love this stock!" to you. It isn't profitable, nor does it have an extensive history of revenue growth or cost discipline.
But, while it's true that Buffett's traditional favorites haven't featured any companies devoted purely to providing health insurance, his portfolio does currently include Globe Life, which sells both life insurance and supplemental health insurance. So, it's at least plausible that he might approve of Clover Health, provided that it fits his exacting investing criteria. Let's examine how the stock measures up.
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Is there a moat?
The biggest reason why Warren Buffett might like Clover Health is that it might have a competitive moat if its business model actually works. If you're not familiar, competitive moats are factors like brand loyalty or the difficulty of switching to another product that protect a company's market share and profitability from being stolen or eroded by competitors. And Buffett absolutely loves companies with strong moats.
In short, Clover aims to administer Medicare and Medicare Advantage insurance plans such that consumers have cheaper access to a wider set of covered healthcare services and providers than the competition can provide. To accomplish this, it plans to use its Clover Assistant software platform to help healthcare providers cut down on their cost of giving care, thereby enticing them into the company's network. Then, it reaps the savings of more efficient service allocation and uses them to fuel further member growth by direct to consumer marketing.
If the aforementioned virtuous cycle operates as planned, Clover will have a wide network and low prices that will consistently attract and retain new customers. While it's possible for people to switch from using Clover to another Medicare plan administrator, the paperwork involved might discourage them from doing so. And it's hard to see why customers would want to defect, assuming that the company really does help them to save money and access all of the services they need to stay healthy.
Likewise, if the Clover Assistant really does enable healthcare providers to spend less on their services, it'll keep them in the network and maybe even prevent them from participating in more expensive competing networks.
So, if Clover does have a moat, it won't be exactly ironclad, but it might be enough to protect its margins, which would appeal to Buffett.
Conservative investors may need more time to come around
Perhaps the biggest issue with Clover Health from Buffett's perspective might be that it's a brand-new company which has yet to prove its business model. It has never reported positive free cash flow, and it might not do so for years. That means the company doesn't hold up to Buffett's approach of investing in businesses with highly consistent earnings, though it could in the future.
Likewise, Clover Health hasn't demonstrated that it can keep its selling, general, and administrative (SG&A) expenses low enough to be a relatively small percentage of its revenue, as Buffett prefers. In the first quarter of 2021, SG&A costs more than doubled year over year, accounting for $104.6 million against its $200.3 million in total revenue. And to make matters worse, Clover Health's net losses increased by about $20 million compared to the same quarter in 2020.
Inefficiencies are to be expected during a global pandemic, as well as during a company's first few years. But no investor is obligated to buy a stock that fails to meet most of their investing criteria. And that's why I'm of the opinion that Clover Health is probably not a Warren Buffett stock at the moment, even if it might be in the future once it reaches a more stable level of spending and growth.
In a few years, I wouldn't be too surprised if someone like Buffett opted to invest. Until then, there are too many uncertainties that need to be clarified by demonstrations of financial performance.
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