What happened
Shares of SmileDirectClub (SDC -25.00%) were down by 26.3% as of 11:09 a.m. EST on Wednesday. The steep drop came after the oral care company announced disappointing fourth-quarter results following the market close on Tuesday.
SmileDirectClub reported Q4 revenue of $197 million. While that reflected a 53.1% year-over-year increase, it fell short of the $199.9 million expected by Wall Street analysts. The company posted a loss of $0.25 per share in the quarter, worse than the average analysts' estimate for a Q4 loss of $0.11.
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So what
One disappointing quarter isn't anything to be overly concerned about. Most companies would salivate over revenue growth of more than 50%.
But SmileDirectClub is a growth stock that's priced at a premium. Growth stocks have to consistently meet and beat expectations to maintain their sky-high prices. When there's a revenue or earnings miss, these stocks get hammered. That's exactly what we're seeing with SmileDirectClub today.
Also, it's important that it demonstrate that it's on a path to profitability. A deteriorating bottom line isn't what investors want. A small revenue miss probably wouldn't have caused too much angst. But SmileDirectClub's spending is simply growing too much too quickly, and investors aren't pleased.
Now what
CEO David Katzman promised to control growth and reduce costs so that the company achieves positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the fourth quarter of this year. CFO Kyle Wailes added that profitability will be "a big focus for us in 2020, and we understand the levers we have to pull to achieve profitability."
It's understandable why shares plunged after its Q4 update. But the company's business model appears to have a lot of potential. If SmileDirectClub can make significant strides toward becoming profitable over the coming quarters, the stock should still have shareholders grinning.
