Is Smile Direct Club a stock to sink your teeth into? - InvestingChannel

Is Smile Direct Club a stock to sink your teeth into?

Who knew braces paid so well?

Dear subscriber,

Today’s TrackstarIQ data highlighted some interesting search data.

Institutional investors’ interest surged in Smile Direct Club (SDC) over the last few days.

Why care about braces?

Americans spent $1.98 billion on orthodontics in 2019.

By 2027, that’s expected to hit $4.21 billion, a compounded annual growth rate of 13.1%.

The days of painful metal braces are a thing of the past.

These days, kids select from products that not only feel better but aren’t nearly as obvious.

Smile Direct Club sits at the front lines, competing directly with companies like Invisalign.

In fact, the two used to be partners.

Unlike Align Technolgy (ALGN), Smile Direct Club doesn’t turn a profit.

So why the interest?

We dug into the two companies to find out.

Who are they exactly?

Back in 2014, SDC partnered with ALGN, which bought a 17% stake in the company.

The supply agreement included a non-compete clause.

ALGN supplied SDC with retainers, and SDC used a direct-to-consumer model to deliver the goods through their SmileShop.

And then ALGN decided to open their own version of SmileShop.

Short version is SDC won.

SDC went out and hit the market with their initial public offering in 2019.

Shares didn’t hold up, falling from over $20 to just below $4.

Since then, they’ve waffled around $10-$14.

Not clean as a whistle

The American Association of Orthodontists weren’t big fans of SDC. 

In fact, they issued a consumer alert warning in 2018 about SDC and other similar companies.

“There’s more to treating a smile than just moving visible portions of the teeth,” said AAO associate general counsel Sean Murphy. “If you want to increase access to care, you have to make sure it’s in the best interest of patient health and safety.”

In fact, the AAO convinced the National Advertising Division of the Better Business Bureau to recommend that SDC discontinue implied claims stating:

  • Teledentistry platform is risky, dangerous, and ineffective, and that medical professionals are not involved throughout SmileDirectClub’s treatment process.
  • At-home dentistry kit is difficult to use.
  • Aligner product is ineffective.

Obviously, SDC disputed this. And so far, court cases haven’t gone against them in any major way.

Flakey Fundamentals

It’s tough to get excited about a company that loses money every year.

Yes, SDC nearly doubled revenues from 2018 to 2019. But they also saw them drop by 12.4% in 2020. For a company trying to cut out the middle man, that’s not too promising.

Currently, the company spends nearly all its revenues on sales, general, and administrative expenses. That’s not exactly comforting for long-term investors.

Our hot take

SDC faces heavy competition, a difficult regulatory environment, and a growing, yet small marketplace. 

ALGN manages to turn a profit in the same industry. So it’s hard to like a company like SDC.

Yes, shares are cheap. But the company carries a heavy amount of debt and doesn’t seem to have a sustainable competitive advantage.

This isn’t a great investment and probably not a good trade with earnings coming up on the 10th.

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