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Could This Underdog Be the Next Big Meme Stock?

By David Jagielski - Updated Jun 17, 2021 at 4:59PM

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Even if it isn't, SmileDirectClub could still be an underrated growth investment.

Meme stocks have the potential to generate some incredible returns during just a short time frame. And in some cases, they double as great long-term buys as well. The key for investors looking to cash in on the meme hype is to invest in stocks that have substance and bright futures -- stocks that won't just generate quick returns and then crash afterward.

One stock that meets these criteria and is worth keeping an eye on is SmileDirectClub (SDC 23.12%). With many people betting against the company, leaving the stock with a high short interest, it's one investment that could potentially be a good meme stock candidate and solid long-term buy.

A dentist working on a patient.

Image source: Getty Images.

Why it's an underdog

Year to date, shares of SmileDirectClub are down 20% while the S&P 500 has risen by more than 13%. Part of the reason for the bearishness is that SmileDirectClub may be seen as a stay-at-home stock -- one that does well when people are stuck inside and aren't going anywhere, including to the dentist's office.

But although SmileDirectClub does make it easy for people to take impressions of their teeth at home, it also has SmileShops that customers can visit. While the shops themselves aren't sources of demand and primarily act as fulfillment centers, customers who aren't comfortable making their own impressions will likely opt for in-person scans. And with SmileShops closed during the pandemic and customers not able to make in-person visits, that has likely impacted the company's top line. In 2020, sales of $657 million were down 12% year over year. Having the shops open again should help SmileDirectClub rebound this year.  

The company also came under fire last year after NBC ran a critical report about its products. SmileDirectClub said the statements were false and misleading, and it went on to sue the network. More than 2,700 complaints have been filed about the company with the Better Business Bureau in the past three years -- although it does average a rating of 3.98 out of 5 on the site. Regardless of your opinion of the company's products, it's evident that there are many people who are betting against the stock, translating into a high short interest:

SDC Percent of Float Short Chart

SDC Percent of Float Short data by YCharts

Although it hasn't been a popular buy with retail investors this year, SmileDirectClub has a higher short percentage (of its float) than GameStop, AMC Entertainment, and BlackBerry. That could make the healthcare stock primed for a possible short squeeze sometime this year.

However, while its sales were affected by the pandemic, SmileDirectClub was previously posting strong numbers. Sales of $750 million in 2019 were up 77% from the previous year. While getting back to that type of growth will be a tall task, SmileDirectClub is certainly much more of an attractive growth stock today than BlackBerry.

SmileDirectClub's growth story isn't over just yet

For the first three months of 2021, SmileDirectClub's sales of $199 million were up a modest 1% year over year. Management is predicting similar numbers for the second quarter, with revenue no higher than $200 million. That would put the company at an annual run rate of approximately $800 million -- and on track for a record year that tops 2019's totals.

But its numbers could come in even higher than that. Now that the economy is opening back up in many areas and people are returning to the dentist's office, many of those people may well find problems with their teeth, driving up demand for straightening products. The president of the FDI World Dental Federation, Dr. Gerhard Konrad Seeberger, has called the pandemic's effects on dentistry a "dental disaster," with many people simply skipping necessary dental treatment.

For SmileDirectClub, this presents an opportunity to meet what could be a surge in demand as those visits resume. One of the reasons the company's products are so attractive is that they are affordable (SmileDirectClub claims that its aligners are 60% less than the cost of braces). It also allows consumers to pay in monthly installments. SmileDirectClub could be on its way to what might be a promising year. And retail investors love a good growth story.

Should you buy shares of SmileDirectClub?

The biggest risk with SmileDirectClub is that the business isn't profitable just yet and it has burned through $42 million in cash in the past 12 months over the course of its day-to-day operations. And it has a high debt-to-equity ratio of 3.4 -- Johnson & Johnson, for example, has a multiple of just 0.5. While high debt loads may not be a worry in today's environment of low interest rates, they could become more burdensome as rates start to rise. SmileDirectClub's price-to-sales ratio of 5.4 is also higher than the average holding in the Health Care Select Sector SPDR Fund, where investors are paying just 1.8 times revenue. 

SmileDirectClub stock isn't terribly cheap. And there is definitely some additional risk here with its high short interest. While that could make it an attractive meme stock, with the potential for a short squeeze (especially if it gets the attention of Reddit investors) that would send the stock soaring, there's also the risk that all the short-selling puts downward pressure on the stock and sends it into a tailspin. If you're OK with that risk and the company's debt load, then it might be worth taking a chance on SmileDirectClub, as it could turn out to be a good contrarian bet right now. 

David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends BlackBerry and Johnson & Johnson. The Motley Fool has a disclosure policy.

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Stocks Mentioned

SmileDirectClub, Inc. Stock Quote
SmileDirectClub, Inc.
SDC
$2.13 (23.12%) $0.40
BlackBerry Stock Quote
BlackBerry
BB
$6.86 (1.18%) $0.08

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