SmileDirectClub Is a Luxury That Few Care About in a Recession

From both a convenience and cost efficiency factor, the concept of telehealth has been one of the most exciting innovations. Not surprisingly, companies like Teladoc Health (NYSE:TDOC) gained tremendous prominence over the years. Further, this burgeoning industry is adding new practices to the mix. For instance, SmileDirectClub (NASDAQ:SDC) is bringing orthodontics to the 21st century. However, SDC stock hasn’t quite had the success of TDOC. So, what gives?

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Most of the problems facing SmileDirectClub can obviously be attributed to the novel coronavirus. Theoretically, the company should be able to mitigate the pandemic’s impact due to its two options for customized teeth aligners: an in-person scan at a physical SmileShop location or a contactless mail-in impression kit. However, the face-to-face options were popular and that’s exactly what the Covid-19 outbreak disrupted, sending SDC stock lower.

Additional pain came from the company’s first-quarter earnings report, which delivered a per-share earnings loss of 28 cents. This dipped well below analysts’ expectations of a loss of 19 cents. Also, SDC rang up $196.7 million in revenue, which was up 11% from the year-ago quarter. However, this too did not meet analysts’ consensus target, which called for $219.5 million.

Naturally, management anticipates that the mail-in kit will pick up the slack in the months ahead. Previously, they were anticipating single-digit growth. Now, they’re looking at over 30%.

Yet Wall Street took a dim view of SDC stock, which has traded disappointingly this month. As I’ll demonstrate below, Teladoc has an obvious catalyst during this crisis. But for SmileDirectClub, its exposure to an elective procedure isn’t helping matters. A great smile is awesome but is hardly a necessity.

SDC Stock Is Suddenly Less Relevant

On paper, the jump in Teladoc shares is absolutely ridiculous. But drill into the details and you can appreciate why TDOC is the toast of Wall Street.

First, while we applaud the frontline responders to this pandemic, we’re reminded that they’ve taken great risks for their service. With many hospitals lacking enough or adequate protective equipment, several medical professionals have fallen ill or sadly succumbed to Covid-19. Therefore, a teleconference with a doctor or nurse, whether it’s for a suspected case of the coronavirus or something else, potentially saves lives across the board.

Second, medical concerns will never go away, necessitating access to professionals in the field. But in our new normal, patients who are fearful of venturing out can receive that same access online. It’s really a win-win situation.

With SDC stock? The matter isn’t quite so clear. Yes, SmileDirect has many of the same features as Teladoc. But the problem is that orthodontic procedures are elective. Everyone would rather have a beautiful smile than not. But sporting a less-than-stellar arrangement of your teeth probably isn’t going to kill you.

And because of the elective nature of SmileDirect, patients can justify not spending on the service until the economy improves. Interestingly, this concept played out during the Great Recession. According to the Journal of the American Dental Association in April 2019:

General dentist visits declined slowly and steadily during the Great Recession, reaching a low of 38.4% in 2010, and have not shown significant signs of recovery. Orthodontic visits also declined to an all-time low of 2.5% in 2010, although they have somewhat recovered. Out-of-pocket expenditures were lower in 2015 than in 2003 for general dental and orthodontic care.

If we don’t get a quick V-shaped recovery, SDC stock could face more trouble.

SmileDirectClub Isn’t for Everyone

If that wasn’t bad enough, SmileDirectClub won’t address every patient’s issue. Obviously, traditional braces are a much more forceful method than the aligners that SmileDirect offers. Plus, I don’t think you can beat the quality of care in regular visits to your orthodontist. Thus, the traditional industry provides a credibility factor that SDC hasn’t quite overcome yet.

Most worryingly, the company may not be what it seems. According to the New York Times, SmileDirect attempts to hide the instances where its product has failed patients. At any time, such shady practices are bad for business. But these PR shortfalls can devastate an organization during a crisis like the one we’re suffering now.

Ultimately, I think investors should be very cautious about SDC stock. While it’s an interesting concept, the economy isn’t favorable for this type of service.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.

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