Health insurance company Clover Health (NASDAQ:CLOV) went public via the SPAC route in January, and since then, its stock has been on a wild ride. CLOV stock became the latest target of the Reddit retail trading crowd, causing Clover’s share  price to reach new highs.

Unfortunately, the stock is now overvalued, and Clover’s underwhelming first-quarter results have left me concerned about its future, despite its potential. Therefore, it’s probably best to wait for a better entry point to invest in disruptive Clover Health.

CLOV stock had been on a negative streak from the time it went public in January until the end of May. The stock shed a substantial 52% of its value during that period.

However, in the last month, the stock is up a healthy 80%, and close to 36% of its float is being sold short. Analysts, however, believe that the stock, which has a forward price-sales ratio of six, is roughly 20% overvalued at this time. With so many of its shares being sold short, CLOV stock clearly poses significant risk.

An Underwhelming Earnings Performance

Clover Health recently posted its lackluster Q1 results that featured yet another massive net loss. Its revenues rose 21% year-over-year to $200.3 million, but the increase was substantially less than in previous quarters. Moreover, it posted a larger-than-expected loss of $48.4 million.

The company’s biggest issue is its cost of sales. Its marginal cost of revenue, or MCR, which is closely linked to cost of sales, was at an astounding 107.5% last quarter. The company stated that its elevated MCR levels were mainly due to claims related to Covid-19.

However, even excluding those claims, the normalized MCR amounted to a substantial 95.4%. Moreover, the company’s recent move into the larger Direct Contracting (DC) market will raise its MCR in the long run.

A significant drag on its operating performance has been its sales, general, and administrative expenses. Its SG&A expenses have risen consistently over the past few quarters, making it incredibly difficult for Clover to turn a profit.

Therefore, it’s not really surprise that its operating and net margins took a big hit in Q1. If these trends continue, Clover will keep burning cash and remain unable to generate significant stockholder value.

Clover’s Outlook

Despite its challenges, Clover Health still can become a disruptor in the U.S. health insurance space. The Medicare Advantage market will grow at an impressive 14% compund annual growth rate (CAGR) from 2019 to 2025, potentially becoming a $590 billion market by 2025. Clover Health’s competitive advantages could help it exploit that growth.

The company, which has become one of the nation’s top health insurers, has predicted that its Medicare Advantage membership will climb 17%-21% to 68,000 -70,000 this year.

However, the company needs to lower its MCR, which is highly elevated at this time. The competitive advantages of its Clover Assistant platform and its foray into the DC segment seem to be doing little to improve  that metric.

The Bottom Line on CLOV Stock

Clover Health’s shares have been volatile since  the company went public. The stock has now risen back to the level it reached on its first day of trading, thanks to its meme stock status.

But on the whole, investors have not been overly enthused about CLOV stock, mainly due to Clover’s growing losses and cash outflows. Clover has a lot of promise, but it’s clear that the firm has not yet tbecome an established ,profitable player in the health insurance sector.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines