You Should Steer Clear While Investors Are Frowning on Smile Direct Club

Shares of Smile Direct Club (NASDAQ:SDC) continue to sag in pre-market trading. This is despite the company’s earnings report that showed a beat on the top and bottom lines. The company generated $184.6 million in revenue during the fourth quarter. That beat analysts’ expectations for $181.1 million and was up 10% from the prior quarter. However it was 6% lower from the fourth quarter in 2019.

The bottom line delivered similar results. The company reported a loss of 9 cents per share, which was significantly higher than the loss of 25 cents per share it posted the year prior. It was also slightly higher than the negative 11 cents per share posted in the prior quarter.

And Smile Direct Club did meet its goal of posting a positive earnings before interest, taxes, depreciation, and amortization (EBITDA). The company posted $7 million in adjusted EBITDA for the quarter, a whopping 137% gain from the prior quarter and better than the loss of $60 million from the prior year.

So why is SDC stock falling? Some chatter among traders suggests this may be a case of investors being spooked by the company’s future guidance.

I’m not so sure. The guidance wasn’t really that bad. And it was easily explained. The company is planning on ratcheting up its marketing spend.  But that has proven to be a profitable strategy. The company noted that 15% of its orders in the fourth quarter entered its sales funnel at least 24 months ago (i.e. right around the time the company went public).

A more likely culprit is that the markets had a terrible day on the same day that Smile Direct Club reported earnings. This seems to be taking away investors’ speculative appetite.

The competition is doing well

And let’s be clear, SDC remains a speculative stock. The company has made it through one full year of a pandemic that essentially invented the sector of teledentistry. But if you look at the numbers, the company didn’t make gains that investors may have expected.

Although the company made it three straight quarters of beating on earnings and revenue, the top line numbers may not be as strong as analysts would have liked. Especially when you compare Smile Direct Club’s numbers to that of Align Technology (NASDAQ:ALGN) that knocked it out of the park for investors.

One of the reasons for this is that the company, while having a direct-to-consumer model still has a brick-and-mortar presence. And that has been put under pressure with lease abandonment and other related charges.

Plus, although the company delivered a bottom line number that was better than expected, the company still fell short of its goal to have a positive EBITDA by the end of the year.

How does that bode for a post-pandemic future?

The window may be closing

According to the Global Teledentistry Market Report, the teledentistry market is projected to be valued at $2.6 billion by 2027 and grow at a CAGR of 17.1% from last year to 2027. Last year direct-to-consumer companies such as Smile Direct Club had this market mostly to themselves.

That won’t be the case going forward. In a survey conducted by Dentistry Today, 72% of dental practices surveyed did not offer teledentistry in 2020. However 23% responded that they are considering offering such services in 2021. Perhaps more of a concern is that 86% of respondents were either confident or very confident in the future of their practice.

I realize that Smile Direct Club operates in a separate niche, orthodontics. And just a few short years ago, nobody would have dreamed of the ability for consumers to be able to get their teeth straightened at home.

But as noted above, the company does not operate in a moat. And as traditional orthodontistry comes back on line, it may mean that the window is closing.

Wait For a Better Entry Price

Right now, the advice to not fight the trend would be wise. SDC stock is in danger of falling below its 200-day moving average. Momentum is with the bears at the moment. That being said, picking up SDC stock at a price under $10 may prove to be a bargain. The consensus price from the analyst community is $9.61. So if the stock falls below $9 it may be a buying opportunity.