Why SmileDirectClub’s Recent Earnings Won’t Last

Shares SmileDirectClub (NASDAQ: SDC) has recently made impressive gains. On October 6, 2021, the stock climbed around 15% after members of Reddit’s WallStreetBets community began expressing bullish sentiment for the chronic underperforming.

The company’s light-hearted approach to providing dental alignment services makes perfect sense in a country where access to dentistry is woefully limited. In 2019, more than a third of American adults didn’t even go to clean up.

Image source: Getty Images.

Recently, the SmileDirectClub announced to investors that it had received a patent for its innovative SmileBus concept. The SmileBus travels the country doing free oral scans. The company can use these scans to create a set of transparent tooth aligners for people who may not have considered the procedure.

The bull suitcase for SmileDirectClub

SmiileDirectClub also targets clients with general access to dentistry, in addition to those who do not receive regular exams.

The company’s biggest competitor in the field of tooth alignment, Align technology (NASDAQ: ALGN), encourages dentists and orthodontists to market its Invisalign brand of transparent aligners to their patients. Acting as intermediaries, dental professionals charge their patients much more for Invisalign than these patients might pay for a similar set of aligners from SmileDirectClub.

Investors were also encouraged by Dentsply Sirona‘s (NASDAQ: XRAY) Acquisition of Byte in late 2020. Byte is another manufacturer of a clear dental alignment system that does not require clients to see an orthodontist.

Byte was a relatively small company with just 450 employees, but Dentsply Sirona paid over $ 1 billion in cash. SmileDirectClub is a much larger operation with around 4,000 employees at the end of 2020.

A quick math on the back of the envelope suggests that a buyout offer with a juicy premium is imminent. At recent prices, the SmileDirectClub enterprise value is only $ 2.75 billion.

Take a closer look

The markup dentists receive from each set of Invisalign aligners they sell is a strong incentive to market Align Technology’s products. It also allows the competitor of SmileDirectClub to manage a much lighter operation.

In the past year, for every dollar of gross profit Recognized, Align Technology spent only $ 0.58 on selling, general and administrative (SG&A) expenses. By the same metric, SmileDirectClub spent an unbearable $ 1.87 on sales and administration fees.

SDC Gross Profit (TTM) Chart

SDC gross profit (TTM) given by YCharts.

While Align Technology blocks the growth of SmileDirectClub by selling aligners to people with access to general dentistry, Dentsply Sirona is attacking traditional SmileDirectClub customers. The Dentsply Sirona service acquired in late 2020 sells a low-cost option that employs professional dentists remotely so clients don’t actually need to see a dentist in person.

It doesn’t look like SmileDirectClub can win a price war with any of its big competitors. Byte, the new subsidiary of Dentsply Sirona, sells aligners starting at just $ 1,895 per set. That’s just a hair above the average sale price of $ 1,885 reported by SmileDirectClub in the second quarter. Align Technology’s average selling price to traditional dentists is approximately $ 1,050 for relatively simple aligner sets.

Dentsply Sirona is a very profitable company that can afford to sell clear aligners at a loss until SmileDirectClub implodes – and it might not take very long. SmileDirectClub ended June with just $ 377 million after losing $ 151 million in the first half. Another year of heavy losses is probably more than its shareholders can take before showing up for exits.

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Cory renauer has no position in any of the stocks mentioned. The Motley Fool owns shares and recommends Align Technology. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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