SmileDirectClub Is Only For The Most Risk-Tolerant Investors

Investors new to SmileDirectClub (NASDAQ:SDC) may be asking “why the long face” as SDC stock has tumbled 28% since reporting earnings on Aug. 9. The stock is now trading near its all-time low which occurred at the onset of the pandemic.

At first glance, it seems like an overreaction to a report that wasn’t that bad. True, the company reported negative earnings and revenue that were lower than expected. However, both numbers were higher on a year-over-year basis. The revenue number is particularly encouraging because there was concern that the company was facing a tough comparison to its pandemic-fueled growth.

However, investors may not have liked the company’s decision to suspend, for the time being, any announcements of future quarterly earnings guidance. The company will still deliver quarterly reports, but they will focus on its annual performance and expectations.

SDC stock has only been publicly traded since September 2019. That only gave the company two quarters worth of earnings reports before the pandemic, and the numbers weren’t enough to support the stock’s debut price of over $13

At that time, I advised MarketBeat readers to stay away from SDC stock after an earnings report similar to the one they just delivered. That turned out to be a wise move. Conversely, MarketBeat contributor Jea Yu took a bullish tone last June and that was also the right call.

However, in my opinion, in both cases, external events were driving the stock more than the company’s business model itself. That could be changing.

In March 2020, I pointed out that the global teledentistry market was supposed to grow at a CAGR of 17.1% from 2019 to 2027. Although a number of traditional dental practices are beginning to offer this service, SmileDirectClub still holds a commanding lead in this space.

And there’s a bigger story. SmileDirectClub operates in the orthodontistry niche. And a recent article points out that in the United States more than 60% of the counties in the country don’t have an orthodontist’s office. Digest that statement along with this statement from SmileDirectClub’s CEO David Katzman.

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“This is the question that everyone should be asking, why would someone pay up to $3,000 more when they can get a clinically safe and effective option that has treated over 1.5 million people for up to 60% less and their treatment plan results are guaranteed for life?”

In the days after a company’s earnings report, the analyst community has a chance to weigh in on what they heard. In the case of SmileDirectClub, seven analysts have downgraded the stock and/or lowered their price target for SDC stock. However, while analysts are projecting a slowdown in the growth of revenue, the company is still projected to grow revenue at levels above the industry average.

That being said, with a high price target of $14 and a low price target of $4, investors can presume that a range of outcomes are possible. And that’s why I wouldn’t put too much weight on a consensus target of approximately $8. But it’s also impossible to ignore that there might be an opportunity for short-term gains.

Short interest on SDC stock is very high. This is being fueled, in part, by a short seller report issued by Hindenburg Research. However, the stock’s Relative Strength Indicator (RSI) now indicates it is oversold. Institutional ownership is still less than 20%. However, since the earnings report, there appears to be slightly more interest in the stock. This is something that investors should pay attention to as trading picks up after the Labor Day holiday.

However, with a range of outcomes possible, SmileDirectClub is only a buy for risk-tolerant investors. If the stock has found a floor, investors may benefit from what appears to be, at least, a slight overreaction to its earnings report.

Original Post

Written By: MarketBeat.com