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SmileDirectClub Stock Has Little Going for It Beyond an Unlikely Short Squeeze

Facing tough, plentiful competition and reportedly losing market share, SmileDirectClub (NASDAQ:SDC) seems to have a lot of negative attributes and not many positive ones. As a result, I believe that longer-term investors should avoid SDC stock.

Source: Thamyris Salgueiro /

Unlike many other fairly low-tech companies that are facing tough competition, SmileDirectClub is not profitable. SDC stock doesn’t pay a dividend, and the company’s balance sheet is unimpressive.

Indeed, its only notable positive characteristics seem to be that many of its shares are being sold short, giving it the opportunity to benefit from a “short squeeze” That may be why it has been embraced by some Reddit users.

In my opinion, those are not good enough reasons for longer-term investors to buy SDC stock at this point.

A Closer Look at SDC Stock

In a note to investors on Sept. 21, Stifel analyst Jonathan Block warned that SmileDirectClub was giving up market share to Align Technology (NASDAQ:ALGN).

Block added that SmileDirect’s “case volume” fell in Q2, versus Q1, but the volumes of another one of its rivals,  Dentsply Sirona (NASDAQ:XRAY), rose in Q2, versus Q1.

According to Marketbeat, there are many other competitors in the space, including  West Pharmaceutical Services (NYSE:WST), The Cooper Companies (NYSE: COO) Quidel (NASDAQ:QDEL), ICU Medical (NASDAQ:ICUI).and Neogen (NASDAQ: NEOG).

Judging by market capitalization, these competitors are all much larger than SmileDirect and thus probably have meaningful advantages when it comes to sales and marketing.

Meanwhile, the fact that SmileDirect is losing market share suggests that it does not have any major competitive advantages.

Market Share and Value Disappointments

Indeed, even Seeking Alpha columnist Pinxter Analytics, which sounded relatively upbeat on SmileDirect’s products and SDC stock did not identify any major competitive advantages enjoyed by SmileDirectClub. The analyst did, however, conclude the article by telling investors to avoid the shares.

SmileDirect is also not profitable, and it’s not even clearly trending towards profitability. Its operating profits in 2018, 2019, and 2020 respectively were -45.6 million, -$490.3 million, and -$185 million.

Further, SDC stock does not pay a dividend. As far as the company’s balance sheet is concerned, as of June, it had $376.65 million of cash and total debt of $777.50 million.

Pinxter Analytics reported that the company’s annual interest bill totals $50 million, and notes that the total “can nearly double” if rates climb.

The main, positive attribute cited by commentators about SmileDirect appears to be the high short interest in the name.

For example, on Oct. 6, members of “the Hammerstone Markets platform” noted that about 36% of the shares of SDC stock were being sold short and that it was becoming more expensive and difficult to short them. Meanwhile, Pinxter wrote, “Currently, over 30% of the company’s shares are held short in what can be setting up an epic short squeeze.”

The Bottom Line on SDC Stock

SmileDirect has many negative, fundamental characteristics. It seems that those who are bullish on the shares believe that they will rally due to a “short squeeze” that’s completely disconnected from the company’s actual fundamentals.

Such an approach may have worked at the beginning of the year, when Redditors were, fairly routinely, teaming up to create such short squeezes.

Now that the main parts of the federal stimulus program –direct payments, the rent moratorium, and the unemployment bonus — are over, it appears that Redditors are largely unable to create such squeezes.

However, defying my expectations, they have been able to keep a number of stocks, including GameStop (NYSE:GME) and AMC (NYSE:AMC), at their previous, elevated levels.

SDC stock itself has been a good example of this failure. It’s been unable to climb much above $6.75 since the beginning of August, and it’s tumbled since its June peak. It trades at just under $5.40 today.

In the current environment, stocks with high short interests and Redditors’ backing, but poor fundamentals, are no longer likely to succeed.

Consequently, I recommend that investors sell  SDC stock.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. 

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