Straightening teeth has become big business over the years, and no one knows that better than Align Technology (ALGN -5.33%). The top dog in clear dental aligners has treated its shareholders to heady and refreshingly consistent growth. The stock is a 20-bagger over the past 10 years. What happens when a disruptor gets disrupted?

SmileDirectClub (SDC) has emerged on the scene as a discounter in the niche. It leans on teledentistry to cut out the local dentist or orthodontist in delivering clear dental aligners. But don't judge an IPO by its rookie season. SmileDirectClub went public at $23 last summer, and it's currently trading in the single digits. A lot of things have gone wrong for SmileDirectClub on the way to its 63% haircut, but it does have the potential to bounce back under the right circumstances. Let's open wide and see if SmileDirectClub has what it takes to reward investors for a change at current prices. 

A woman putting in her clear dental aligners.

Image source: SmileDirectClub.

Baby teeth

The market for clear dental aligners was booming before the pandemic. Despite being openly challenged by SmileDirectClub, Align has rattled off impressive double-digit revenue growth over the past few years.

  • 2016: 28% 
  • 2017: 36%
  • 2018: 34%
  • 2019: 22%

SmileDirectClub has been growing even faster. Its top line soared 184% in 2018, decelerating to 78% last year. The COVID-19 outbreak slammed the brakes on SmileDirectClub's growth, at least temporarily. It had to close the localized SmileShops that make the initial dental impressions used in molding the personalized aligners. 

We can't blame the pandemic for all of SmileDirectClub's shortcomings in its first year as a public company. It was the subject of a scathing NBC News report detailing cases of customer dissatisfaction. SmileDirectClub also got into legal fisticuffs with dentists and orthodontists who didn't appreciate the business model.

We'll get a better snapshot of where SmileDirectClub stands when it reports its second-quarter results in two weeks. Things won't be pretty, but they may not be a disaster. SmileDirectClub pointed out in mid-May that it was able to lower its marketing budget by 90% over the previous 60 days but that impression kit and scan volume was only down by 40%. 

Next month's report will still be challenging. The second quarter is historically SmileDirectClub's strongest, as many younger customers choose the summer school break as an ideal time to start straightening their teeth. SmileDirectClub generated $195.8 million in revenue for last year's second quarter, and it will probably clock in at less than half that clip this time around. Align Technology saw its revenue plunge 41% for the same three-month period. 

SmileDirectClub isn't offering any guidance on its near-term financial prospects, and the pandemic isn't helping. Is anyone really concerned about what a smile looks behind a mask? Then again, one can counter that this is the perfect time to wear dental aligners, when no one else will likely notice. 

Folks can still order home-based impression kits without a local SmileShop available, but how far will sales fall in this environment? Dental work doesn't come cheap, and there may be other big-ticket purchases taking priority in the global recession. Of course, that doesn't mean things will end badly for SmileDirectClub investors. The stock is already 63% below last year's IPO price, so a lot of the negativity is currently priced into the shares. SmileDirectClub still offers an attractively priced and convenient alternative to braces and traditional dental aligners. 

The stock is risky, and it will only be slightly less so after the Aug. 12 financial report. However, the ceiling is high. SmileDirectClub's approach makes sense, and its model that is light on fixed costs should be able to weather the storm. It's a buy for investors comfortable with taking on big risks in the pursuit of potentially great rewards.