What happened

After disappointing third-quarter revenue and earnings estimates sent its stock price sharply lower last week, SmileDirectClub (NASDAQ:SDC) rallied 11.4% on Tuesday.

So what

SmileDirectClub markets clear-aligner therapy directly to customers through a teledentistry platform. Demand for clear aligners, a more affordable and less visible solution than traditional metal braces, has increased as innovation has allowed their use in increasingly complex cases.

A man draws a rocket soaring in space on a wall while standing on a step stool.

Image source: Getty Images.

As a result, SmileDirectClub reported on Nov. 12 that its sales increased 50.6% year over year to $180.2 million last quarter. But that wasn't enough to match industry watchers' expectations for sales of $207.6 million. SmileDirectClub also under-delivered on the bottom line, reporting a third-quarter loss of $0.89 per share that was $0.04 worse than anticipated. The disappointing numbers caused shares to fall 27% through Nov. 18.  

Today, bargain hunting -- and potentially short covering -- may have helped give shares a boost. Although the company's third-quarter performance was shy of estimates, management is guiding for sales to finish the year between $750 million and $755 million, representing a 78% improvement versus 2018. Because its share price has been more than halved since its IPO earlier this year, short-sellers may have decided it's time to cover their position. At the end of October, roughly 20% of SmileDirectClub's shares available for trading, or its share float, were held short.

Now what

The company's shares have been beaten down. Sales are growing rapidly, but expenses are high and net losses are likely to continue for a while. Through the first nine months, marketing and selling costs more than doubled to $340.4 million from $143.7 million, and general and administrative expenses surged even more to $486.3 million from $77.6 million. Those expenses far outstripped revenue of $553.7 million. Given the likelihood of additional losses in coming quarters, SmileDirectClub's shares are best suited for risk-tolerant investors, at least until a pathway to profitability emerges.

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