SmileDirect Club (NASDAQ:SDC) stock is built around orthodontic services using clear plastic retainers. It’s a growing market.
SmileDirect showed it was no longer growing in its third-quarter report.
It wasn’t the loss of $27.4 million, 23 cents per share that hurt so much as revenue of $126.8 million, 18% below the previous year’s $156.5 million.
When a growth stock stops growing analysts and investors toss it aside like yesterday’s meme. Since the third-quarter earnings report came out SmileDirect stock took a beating.
SDC stock trades at around $2.55 today. That’s a market cap of just $1.06 billion for a company that still expects 2021 revenue of $696 million.
I wrote about SDC stock in early October, a month before the earnings came out.
A Closer Look at SDC Stock
At the time, its market cap was $2.13 billion, which was blamed on its trouble reducing operating losses. I identified a better investment in the space, rival Align Technology (NASDAQ:ALGN). Their product is called Invisalign.
Align has been profitable, focusing on dealing directly with orthodontists. SmileDirect, as the name implies, goes directly after customers through storefronts.
One of SmileDirect’s big financial problems in 2020 was the cost of closing unprofitable storefronts during the pandemic. This came to $28.6 million in the first three quarters of that year.
Those losses are down to $4 million this year. But marketing costs rose sharply, to $96 million from $66.7 million a year earlier. General and administrative expenses also rose.
SmileDirect is responding by seeking lower-cost growth. It’s creating a “partner network” under Brett Deaver. He was recruited from Revance Therapeutics (NASDAC:RVNC), which like SmileDirect is based in Nashville. It also signed a marketing deal with celebrity cosmetic dentist Amira Ogunleye, who is based in Miami.
If the new deals can get growth going again, SmileDirect may be a good stock to own, given its low price to sales ratio. But our Louis Navillier will need to see some results before he recommends it again.
He notes that the third quarter missed analyst projections by almost $50 million. He is telling clients to avoid it.
Those who are still pushing the stock see the new marketing as a game-changer, and the valuation as too cheap to pass up.
There also remains substantial short interest (nearly 26% of the float) with even more held in “dark pools” of SDC stock. Tipranks, meanwhile, is down to just 1 buyer out of 10 analysts, despite an average price target double the current price.
SmileDirect hasn’t given up hope. The company still has international expansion on its mind, 4,100 employees, and it’s continuing to recruit, but traffic is down at Reddit, which once boosted SDC as a meme stock.
One poster recently ragged on those who previously said they had up to 20,000 shares at $6. One response admitted it’s “depressing to follow SDC.”
The Bottom Line
As I wrote in October there’s still growth in this market.
It’s just that Align is the better place to capture it. That stock is up 11% in 2021, although it’s well down from its October highs. Partnering with orthodontists is an indirect way to reach the market, but it seems to be an effective one.
People don’t buy orthodontics the way they do eyeglasses or hearing aids. They go through dentists and orthodontists they trust, and those relationships matter. These are often well-off parents, the patients often school-age kids.
Going direct should be cheaper, but it turns out that’s not the case. If you want to buy into orthodontic growth, go with the existing sales channel.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. Write him at email@example.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.