Despite the run-up in 2020, SmileDirectClub’s (NASDAQ:SDC) stock continues to be sold down by investors.
SDC stock fell from a high of $16 to its current price of about $3 per share. This decline has vastly eroded shareholder value and it doesn’t seem to be stopping.
Investors who bought at $5 thinking the stop was cheap got a huge haircut post-earnings. The company once again missed consensus estimates. This led to the massive sell-off as speculators headed out for the exits.
There have been rumblings of a possible short-squeeze due to the high short-interest on SDC stock. However, I believe this will fail to materialize in the companies deteriorating fundamentals. The company’s earnings have disappointed for three of the last four quarters. There is a risk that SDC stock could head lower from here.
SmileDirectClub Earnings Results Disappoint
SmileDirectClub recently reported its Q3 2021 earnings and it was not particularly good for the company. The company’s losses widened by 105.6% resulting in a Net Loss of -$89 million compared to the loss of -$43 million the year prior.
Year to date the Net loss was a 2.1% improvement compared to the previous year. However, that is of little comfort when the actual loss figure is -$240 million.
Even the adjusted EBITDA numbers are discouraging. SmileDirectClub had an adjusted EBITDA loss of -$54 million compared to a positive figure the year prior.
Year to date adjusted EBITDA loss was -$72 million. Companies typically “adjust” their EBITDA figures to generously exclude certain items. So it is surprising to see such a large EBITDA loss for Q3 2021.
Looking at the quarterly results in more detail, there are several contributing factors to this large earnings loss. Revenue for the quarter was $126 million compared to $156 million at the same time last year. This was a whopping 19.2% decrease in sales.
In the press release CFO Kyle Wailessheds more light on this large revenue miss.
“[T]he macro-economic environment for our core demographic, along with Apple privacy changes earlier this year have presented significant challenges to digitally native brands such as SmileDirectClub,” he said.
Underlying Issues With SmileDirectClub
This excuse is a little hard to believe. My skepticism stems from the fact that its much larger rival Align Technology reported a blockbuster quarter.
Align Technology (NASDAQ:ALGN), makers of the popular Invisalign dental products, reported revenues of $1.016 billion. This was an increase of 38.4% compared to the same time last year.
Align experienced rapid revenue growth while SmileDirectClub had a huge decline. Not only had that but Align managed to grow faster despite having a much larger revenue base.
Typically companies with a much larger base experience slower growth rates. For example, a $1 million increase in sales would be a 10% increase from a revenue base of $10 million yet only a 1% increase of $100 million. SmileDirectClub had revenues 10x less than Align, yet didn’t even manage to grow.
What this tells me is that there is a market for this type of dental product, yet SmileDirectClub is not able to capitalize on this demand.
With the lockdowns ending and people once again going outside, this would have been a perfect time for the company to push its product. Furthermore, habits from the pandemic mean that people are online more often. This should have given digitally native brands like SmileDirectClub a leg up.
My Verdict on SDC Stock
While there is a slim chance of a short-squeeze rally on SDC stock, I would still stay away from it. Typically a short-squeeze needs a strong fundamental catalyst to spark a sustained rally.
If the business itself continues to deteriorate then the shorts are correctly pushing down SDC stock’s price.
My verdict on SDC stock is simply to stay away from it. There are plenty of better opportunities in the market.
With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Joseph Nograles 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.
Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now.
