What happened
SmileDirectClub (SDC 4.76%) shareholders are grinning today as they watch their stock soar 17% -- as of 12:25 p.m. EST -- on news that the supplier of "direct" to consumer teeth-straighteners will now enter the wholesale market as well.
Yesterday, SmileDirect announced that "with the December 31, 2019 expiration of its exclusive supply agreement with Align Technology (ALGN -3.25%)," it's now free to invade the wholesale market and begin selling to Align's own primary customers. Previously, Align made the corrective plastic "aligners" for SmileDirect, which was in turn "obligated to stay in the direct-to-consumer channel" and not sell to dentists or orthodontists.
Image source: Getty Images.
So what
Why is this significant? First and foremost, it introduces new competition to Align, which may pressure the latter's operating profit margins (currently a plump 21.1%, according to data from S&P Global Market Intelligence). At the same time, it's reasonable to assume that if Align was able to earn such strong margins selling wholesale, then a move into this market may improve SmileDirect's own profit margin, which currently sits at negative 71.6%!
It's probably important, too, that SmileDirect says it will be specifically targeting "dentists and orthodontists in search of a premium and affordable teeth straightening solution for their patients" (emphasis added). This, it seems to me, is a strong hint that SmileDirect will be competing on price to add to its market share.
Now what
On one hand, that may limit the profit margin upside for SmileDirect. On the other hand, though, Align's 21.1% profit margin suggests there's plenty of profit to go around in this market. This announcement by SmileDirect has the potential to be good news not just for SmileDirectClub stock itself, but for Align, too (by broadening and helping to popularize this nascent health market) as well as for kids (and parents!) in need of expensive braces.
