SmileDirectClub Stock, Earnings Wipe The Smile From Investor's Faces

Shares of SmileDirectClub stock took a serious beating in Wednesday’s trading session after the release of the company’s first quarterly earnings report since going public in September.

If a clearer sign was needed that most of 2019’s initial public offerings have been full of hot air, this was it. EPS and revenue both comfortably beat expectations, the latter in particular notched an impressive 50% year on year jump but shares still found themselves down 20% from Tuesday’s market close. Maybe it had something to do with the fact that net losses increased more than 25x from the same quarter last year.

SmileDirectClub NASDAQ: SDC sells invisible teeth straightening aligners that don’t require a visit to the dentist’s office. Treatment costs a third of what traditional braces usually cost and customers can order kits online and do everything at home. On paper, it sounds like it has serious potential to disrupt one of the oldest industries in the world.

However, the teledentistry company has never turned a profit and went into earnings with a $4 billion market capitalization having already lost $4 billion in value since IPO’ing in September. If a 50% jump in revenue sent investors running for the door, it’s tough to imagine the results that were needed to send investors rushing in instead.

Bad Year for IPOs

This is the trouble with yet-to-prove-themselves growth stocks that IPO at eye-watering valuations. There’s so much hope and paper potential built into the price, they have to take off immediately and justify it or risk falling even faster. Uber and Lyft are two big names that have also failed to impress, not to mention WeWork.

SmileDirectClub is certainly going in the right direction with 47% YOY shipment growth but there’s a long way to go before they get into the black. The company is forecasting full-year revenue will show an 80% jump while adjusted EBITDA will be around $80 million. Even at its current growth rate, analysts are struggling to see how it will meet 2020’s revenue goals.

This didn’t stop CEO David Katzman from calling Q3 a “good quarter” but he might as well have put lipstick on a pig.

SmileDirectClub stock has truly been on the back foot since the company went public in September - on the very first day of trading shares fell 28%. Not exactly the start investors would have hoped for. Despite a brief rally in the days afterward, it’s been downhill since and their troubles extend far beyond the stock exchange.

Uphill Battles

The State Governor of California signed a bill last month that requires a mandatory X-ray for orthodontic patients - a move that looked like a very purposeful hurdle in the way of SmileDirect Club's efforts to revolutionize the practice of dentistry. Suffice to say that an X-ray is currently not part of SDC’s marketing strategy which revolves around offering users free 3D images of their teeth through kits they order online.

Crucially, SmileDirect Club’s main competitor and former partner, Align Technology NASDAQ: ALGN, does incorporate X-rays into its offering. ALGN shares are up over 25% since the X-Ray Bill story broke in October. For a stock that was itself trading down 35% after July earnings, it sure caught a quick bid then.

Complaints against SmileDirect Club have also been filed with 36 state dental boards along with the FDA by the American Association of Orthodontists and their offices have been raided by the Dental Board of California. Critics say the company is cutting corners and putting consumers at risk. Unhappy customers allegedly have to sign legal releases where they promise not to complain to regulators or online in order to get refunds.

At the end of September, a class-action lawsuit was filed against the company by customers and industry professionals while earlier this week a lawsuit was filed on behalf of SmileDirect Club investors alleging that the company violated federal securities laws.

Negative headlines like these and the associated legal expenses are not a good look for a stock that’s already having trouble staying on its investors’ good sides.

Near Term Action

Despite having rallied 50% from October lows into early November, Wednesday’s price action put the Moving Average Convergence Divergence (MACD) on the verge of a negative crossover as momentum and the moving averages are well and truly only going one way in the short term.

 SmileDirect Club stock RSI is only at 34 so there’s a lot of room for this to sink before the bottom feeders step in for a bounce.

Where I’m from there’s an old saying; “a good start is half the work”. With shares down 60% since going public 2 months ago, one has to wonder what a bad start is.