Shares of teledentistry company SmileDirectClub (NASDAQ:SDC) have been hammered at the stock market. Moreover, the retail trading interest in SDC stock is also fading away, which shines the spotlight on its deplorable fundamentals.
SmileDirectClub went public a couple of years ago with an initial price of $23 per share. Today the stock has lost more than 87.6% of its value and is quickly heading towards the penny stock territory.
The company’s fundamentals in a couple of years have clearly disappointed investors. Its sales increased 77% in 2019 to $750.4 million, but losses widened 53%. Moreover, in 2020 the company revenue dipped 12% to $656.8 million due to the pandemic-induced headwinds. In comparison, its key competitor Align (NASDAQ:ALGN) generated a whopping $2.1 billion in clear aligner sales.
Moreover, SDC ran into much controversy in the past two years, including complaints from the American Association of Orthodontists and lawsuits over false advertising. Things were looking more promising in the first half of this year, but its torrid third-quarter results have reaffirmed the bear case.
Weak Third Quarter Results
SDC stock lost almost 21% of its value after its third-quarter results lagged analyst forecasts. In contrast to the top-line growth in the first two quarters, sales dropped 18% from the prior-year period to $138 million. Moreover, unique aligner shipments stood at just 96,600 from over 100,000 in the first quarter. Consequently, the softer volumes have negatively impacted gross margins. The gross margin for the quarter came in at 71%, which was 2.3% lower than the second quarter of 2021. On a more positive note, net loss decreased by 106% on a year-over-year basis to $89 million.
“We are disappointed with our third quarter results driven by the macroeconomic headwinds that are influencing the spending of our core demographic,” CEO David Katzman commented. Also, for 2021, SmileDirectClub has significantly lowered its revenue projections to $630 million to $650 million from $750 million and $800 million estimated three months ago.
Spending Spree
SmileDirectClub has puzzled its investors its penchant for spending money despite its weakening financial position. The company carried a massive long-term debt load of $719 million during the second quarter, yet its marketing and selling expenses rose over 175%. Moreover, selling expenses equated to roughly 55% of revenues for the quarter.
However, the company has taken things up a notch in the third quarter. Though its long-term debt rose even higher to $733 million, selling expenses equaled 70% of its revenues for the quarter.
There’s no clear breakdown available in the company’s financials to see where its spending is going. The lack of transparency on the management’s end makes it extremely difficult to gauge where the company may be overspending and how it may achieve stability in its finances. On the flip side, if you glance through Align’s third-quarter earnings card, it seems like a 360-degree shift. Align’s third-quarter results were in the green with a 38.4% bump in revenues to $1 billion. Moreover, it generated $181 million in net income with almost a 30% improvement from the prior-year period. Additionally, its operating expenses of $428.4 million are just 42.2% of net revenues.
Bottomline On SDC Stock
Clearly, SmileDirectClub’s management could take cues from their competition in being more efficient in managing expenses. Unless the company makes major strides in limiting its expenses and debt burden, things won’t be improving much anytime soon. Moreover, its management needs to own up to its mistakes and devise a recovery plan to steer the business back into the green. However, the chances of a turnaround appear to be incredibly slim at this stage. Until then, it’s best to avoid SDC stock and perhaps invest in Align, which has been killing it of late with its fundamentals.
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
