While telemedicine stocks have been soaring as patients move to virtual platforms for physician consultation in response to the COVID-19 pandemic, the performance of teledental stocks such as SmileDirectClub (NASDAQ:SDC) has been rather disappointing. Indeed, shares of SmileDirectClub have lost about 44% of their value since their IPO last year.
Has the stock fallen to a spot where it's safe for long-term investors to go bottom-nibbling? Let's find out.
What is SmileDirectClub?
SmileDirectClub is a dental company that makes 3D-printed clear aligners. For the aligners to be custom-fit to patients' dental molds, customers either visit one of its SmileShop retail stores for a 3D scan or order an impression kit online. Then one of the 250 dentists and orthodontists in the company's network works with the patient to determine the next steps of treatment. The company competes with Align Technology, which primarily sells its clear aligners through orthodontist offices rather than direct-to-consumer.
Since its inception in 2014, the company has treated 1 million patients with its aligners in the U.S., Canada, New Zealand, Australia, and the U.K, in a market size that is estimated to be 500 million cases of malocclusion (teeth misalignment) globally.
Out of 81,549 Google reviews for Smile Direct's aligners, 97% are positive. The device costs about $1,770 for a course of treatment, which is much cheaper than traditional braces. As a result, the company has seen its revenue growth skyrocket, until recently.
In the first quarter of 2020, SmileDirectClub sold 123,000 unique aligners, representing a 12% growth year over year. Revenue grew by 11% compared to last year, to $197 million. However, in mid-March, the company was forced to close nearly all of its 418 retail stores due to the COVID-19 pandemic. Without these closures, the company estimates it would have sold 141,000 unique aligners (29% year-over-year growth) and generated revenue of $235 million (33% year-over-year growth).
As a newly IPOed company, SmileDirectClub's business model is still in its early stages. The company recognized gross margins of 70% from its aligners but is operating at an earnings before interest, taxes, depreciation and amortization (EBITDA) loss of $67 million per quarter (albeit significantly improved compared to last year). Furthermore, the company is heavily reliant on sales and marketing for product acquisition and recognized 72%, or $142 million, of expenses in this category.
It's no surprise the company was devastated by the COVID-19 pandemic. Even though SmileDirectClub purports to be a teledental company, about 90% of its revenue comes from its retail sales channels. In April, the company generated merely 10,500 unique aligner orders and expects only 11,000 to 15,000 unique aligner orders in May.
Customers prefer going to the store to get 3D scans before buying the product rather than ordering an impression kit online. Right now, having a business model that is reliant on retail sales is a risk because there's never been a pandemic without a second wave.
Takeaways for investors
In short, if an investor's sole wish is to capitalize on a short-term trading rebound from SmileDirect's stock, then now is not a bad time. After all, many states are now beginning to relax their lockdown restrictions as the first wave of COVID-19 cases has steadied and even declined in the U.S.
However, for investors with a more long-term outlook, it's best to avoid SmileDirect's stock for now. Unfortunately, the business will likely be creamed when the second wave of the COVID-19 pandemic hits, forcing its SmileShops to close again. At the minimum, investors should wait to see if SmileDirect is able to grow its customer acquisition base from impression kits to levels similar to what it's able to achieve via 3D scans at the company's retail shops before initiating a position.