OSCR: Oscar vs. Clover: Which Health Insurance Stock Is a Better Buy?

It’s been an impressive year for IPOs. In total, there were 480 companies that went public in 2020 and about 80 companies have listed thus far in 2021.

Two companies that have recently debuted on the public markets are insurance stocks Oscar Health (OSCR - Get Rating) and Clover Health (CLOV - Get Rating). Insurance stocks can be great additions to your portfolio, when trading at reasonable valuations, as they perform well across economic cycles.

Here, we analyze and compare these two companies to see which is the better investment in 2021.

The case for Oscar

Oscar Health (OSCR - Get Rating) is considered to be a next-generation health insurance company. This month it went public as it raised about $1.11 billion in gross proceeds via an IPO. Its shares were priced between $36 and $38 and the stock is currently trading at $35, valuing the company at a market cap of $8.6 billion.

Oscar was founded in 2012 and the company ended January 2021 with 529,000 members and ended 2020 with $2.3 billion in direct policy premiums. Its revenue in 2020 fell by 5% to $463 million due to a 3% decline in earned premiums. However, Oscar’s net loss widened to $407 million last year, compared with a loss of $261 million in 2019.

Oscar said it will use a portion of the IPO proceeds to retire its debt that stands at $167 million.

Oscar confirmed it achieved positive unit economics through an MLR (Medical Loss Ratio) of 84.7%. This metric measures a percentage of premium dollars a health plan spends on claims and quality improvements.

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The company serves 291 counties in 18 states and this number is expected to expand in the upcoming decade. The U.S. healthcare industry is huge and continues to grow, creating significant opportunities for innovation among private insurance players.

According to a report by CMS, healthcare spending in the U.S. was forecast at $4 trillion in 2020 and might touch $6 trillion by 2028. Around $3 trillion of the healthcare spending last year was passed through insurers and this figure might reach $5 trillion by 2028.

As Oscar eyes expansion, it can take advantage of an expanding addressable market due to the company’s ability to create innovative models of integrated care.

The stock is trading at a trailing price to sales multiple of 16, which is steep especially for a company that experienced a revenue decline last year.

The case for Clover Health

The company went public via a SPAC deal on January 8, 2021. Clover Health (CLOV - Get Rating) is an insurance company in the Medicare advantage space and receives around $100,000 in annual sales per patient from Medicaid Services and the Centers for Medicare.

It offers lower out-of-pocket expenses to its customers. Further, Clover’s reimbursement rates are also higher compared to other insurance providers. Still, it uses approximately 89% of revenue collected from premiums to pay member claims.

In the third quarter of 2020, Clover Health reported a profit of $13 million. Its average membership also rose 39% year over year in the first nine months of 2020 to 56,500 members.

In 2020, Clover’s sales stood at $672.88 million, indicating revenue growth of 45.5%. The company managed to narrow its operating loss to $92.70 million last year, compared to a loss of $183 million in 2019.

Clover Health’s market cap of $3.3 billion indicates its trading at a trailing price to sales multiple of just 4.9x which is attractive given its growth rates.

The final takeaway

Both of these companies are making waves in the insurance industry. However, Clover’s significantly lower valuation, narrowing loss, and robust top-line growth make me believe that it is a better stock to invest in than Oscar at this time.

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OSCR shares were trading at $35.85 per share on Friday morning, down $0.14 (-0.39%). Year-to-date, OSCR has gained 3.02%, versus a 4.86% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...