What happened

Last year brought few smiles to SmileDirectClub (SDC 140.00%) investors as all of 2021 was largely a long, steady slog downhill. The orthodontic services provider ended the year with a drop of 23.5% in December, according to data provided by S&P Global Market Intelligence.

The stock of the direct-to-consumer invisible dental aligner specialist now trades for just over $2 a share and there's no indication it has found the bottom. Disappointing quarterly earnings results all year long have set investors' teeth on edge.

A person putting on a silicone dental aligner.

Image source: Getty Images.

So what

Considering SmileDirect Club had what can only be described as a phenomenal 2020 where its stock gained more than 36%, the dramatic reversal of fortune last year was a bit shocking.

Obviously a pandemic economy that closes down businesses and locks people in their homes is going to provide a tailwind for a business that offers mail-order braces that are cheaper than the competition's, but it doesn't fully explain why that value proposition should suddenly evaporate when the economy reopens.

As my Motley Fool colleague David Moadel explains, SmileDirectClub has a spending problem that makes it seem as though it's very difficult to attract and acquire customers. Marketing and selling expenses eat up virtually all of the gross profits the direct-to-consumer company generates.

Being a mostly online company (it does operate a network of brick-and-mortar SmileShops, though it is rationalizing many of them in the aftermath of COVID-19), SmileDirectClub should have lower overhead expenses, but it still managed to spend $96.1 million of the $98.2 million it earned in gross profit on marketing and selling in the third quarter. It also promises to spend even more in the future to attract more customers to its website.

Now what

SmileDirectClub ought to have a winning formula. Selling a product that is significantly cheaper yet is just as good as the high-priced competition should be driving customers to its site and stores. 

Sales were down in the third quarter (revenue is 10% higher year to date), but those marketing expenses are rising at a much faster rate (up 18% so far in 2021) and its losses are widening. Even on an adjusted basis SmileDirectClub is still in the red.

It does offer a cheaper valuation at this level than Align Technologies, which makes the original Invisalign retainer, but there seems like good reason for that. SmileDirectClub may not have found the bottom yet.