SDC Shares Turning Volatile, Giving Investors Little Reason To Smile
Nashville-based investors SmileDirectClub (NASDAQ:SDC) entered the fourth quarter with a highly volatile stock in its portfolios that has lost more than half of its value so far this year. The 52-week range for SDC shares was $ 4.63 to $ 16.08, and the shares are now hovering around $ 6.50.
SmileDirectClub stock has become an attractive target this year for short-term rallies led by Reddit. Retail investors on social media recently joined forces to push SDC stocks higher, resulting in a significant increase in average daily trading volume. The Average volume over 10 days amounted to 19.2 million shares compared to a three-month average of 15.2 million shares. The five-year monthly beta is a whopping 2.47.
SmileDirectClub has aggressively marketed its transparent aligner therapy dental treatment in recent years. She sells mouth aligners, impression kits, whitening gel and other dental products. Management marketed its aligner as a cheaper alternative to Align technology (NASDAQ:ALGN) Invisalign brand of transparent device.
Yet dismal second quarter results show that the company is largely losing out in competition with Align. Before the pandemic, SDC stock was trading at $ 15. Stocks plunged almost 25% in a single week after the release of its recent earnings report.
Along with mounting competitive pressures and a fragile balance sheet, long-term prospects remain unclear for SDC stock. While the short-squeeze frenzy could boost the share price in the fourth quarter, investors should nonetheless remain cautious. Let’s see why.
How SDC Stock’s Recent Profits Came
SmileDirectClub issued second quarter financial results early August. Revenue increased 63% year-over-year to $ 174 million. Revenue not only fell 12% from consensus expectations, but was also down 45% from the second quarter of 2019. Lower shipments of aligners during the pandemic contributed to the bottom line. disappointing turnover.
The company reported a net loss of $ 55 million, down from a loss of $ 95 million in the previous year quarter. The diluted net loss per share was 14 cents. SDC spent $ 35 million in cash in the second quarter. Cash and cash equivalents ended the quarter at $ 389 million.
On these results, CFO Kyle Wailes noted, “The short-term headwinds from the residual impacts of the April cyber attack, the lasting economic effects of COVID on our target demographic, and the slower ramp-up of some of our new international markets due to COVID have us prevented from reaching our planned second quarter. results.”
Despite $ 377 million in cash and cash equivalents, the company also has over $ 716 million in long-term debt, on which it must pay more than $ 50 million each year in interest expense. As the economy moves towards a rising interest rate environment, paying a high percentage of gross margin in interest costs involves significant profit issues for a growing business.
For the third quarter, the company expects shipments of 83,000 to 87,000 aligner orders, an increase of 49% from the second quarter. SmileDirectClub’s price / sales (P / S) and price / delivery (P / B) ratios are 3.12x and 10.71x respectively.
A saturated dental market
Over the years, SmileDirectClub has seen an impressive increase in sales as more consumers seek cheaper treatments for straighter, whiter teeth. The company sells tooth aligners through its website, professionals, corporate partners and a store network of 300 SmileShops where customers can acquire a free 3D image of their teeth.
Oral care is a large and diverse industry, that analysts predict will grow at a compound annual growth rate of 5.9% over the next seven years to nearly $ 50 billion. Politically, Democrats are keen to include dental care in Medicare, which could at some point introduce the TCS and other dental services to an aging American population. In addition, the company’s international operations are another important area of growth, as management sees 35% of its market addressable in global markets.
While the industry is growing, SmileDirectClub operates in a saturated market with considerable competitors. The company relies on effective marketing and product improvements to remain a competitive player. Besides Align Technology which continues to report strong profits and extends its lead, other key market players include 3M (NYSE:MMM), Danaher (NYSE:HRD), and Dentsply Sirona (NASDAQ:RADIOGRAPHY), the maker of the Byte aligner.
The Bottom Line on SDC Shares
Currently, 33% of SDC shares are currently held short. In other words, Wall Street could witness another short tightening in the months to come. This is a speculative stock game so all bets are off on what retail traders might decide to do.
SmileDirectClub is currently in a difficult financial situation and may therefore need to raise capital in the near future. As it is primarily funded by debt and appears to be burning cash at a high rate, dilution appears to be a significant short term risk for SDC stock. There are too many unknown variables in its business environment to justify a substantial investment in a single-product business.
At the date of publication, Tezcan Gecgil had (neither directly nor indirectly) positions in the securities mentioned in this article.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the US and UK. In addition to having completed graduate studies in the field, she has also passed all three levels of the Chartered Market Technician (CMT) exam. His passion is for options trading based on the technical analysis of fundamentally sound companies. She especially enjoys setting up weekly covered calls to generate income.