What happened

Shares of SmileDirectClub (SDC -35.00%) rallied today, up a whopping 24.6% as of the end of trading. 

This was an odd rally, given that there was no news I could find that would justify such a massive move in the stock.

In that light, it appears today was a large short squeeze brought about by investors who were shorting the stock prior to earnings covering their bet. Yesterday, SmileDirectClub's stock plunged following its second-quarter earnings report.

So what

In its second-quarter report released Tuesday night, SmileDirectClub's revenue fell 17% sequentially and 27.8% from the prior year, missing expectations. One silver lining could be that its net loss of $65.2 million narrowed from the first quarter by $8 million, as a result of the company's cost-cutting measures; on the other hand, net losses per share were still $10 million worse than the year-ago quarter.

SmileDirectClub has plunged this year as the pandemic-era growth in its clear dental aligners has reversed as the economy reopens and consumer budgets have been squeezed by inflation. What's more concerning here is that SmileDirectClub also has a sizable debt load. As of the end of the second quarter, the company had just over $790 million in debt, versus just $158 million in cash.

In the first six months of the year alone, SmileDirectClub burned through $112 million in cash, between operating cash uses and the purchase of property, plant, and equipment. So, SmileDirectClub needs to get profitable quickly, or raise more money -- and it's certainly not a good time to be raising money. As a result, SmileDirectClub's stock dropped more than 10% yesterday.

Yet as of July 15, nearly 24% of SmileDirect's publicly traded share float was shorted, which is a high percentage. And even following today's surge, SmileDirect's stock has fallen 75% over the past year. Therefore, given the absence of any material news, it appears as though some of those short-sellers may be buying the stock to cover their shorts today, resulting in a big spike in the stock.

Now what

Does this short-covering rally mean the bottom is in sight for SmileDirectClub? I wouldn't count on it, but there may be some green shoots spurring the shorts to take profits now. For one, management has followed through on its cost-cutting efforts, although it remains to be seen if that will be enough.

Second, and perhaps most importantly, in the earnings release, CEO David Katzman outlined a new go-to-market strategy based on the new SmileDirectClub smartphone app. The new app will allow users to take a picture of their teeth from their smartphone, then be able to see a full 3D treatment plan. Prior to the app, SmileDirectClub's customers would have had to either visit an approved dentist, visit a SmileDirectClub physical store, or apply for an at-home impression kit to send back to the company.

This does seem like a much easier way to get started with SmileDirectClub's teeth realignment service. However, given high inflation and SmileDirectClub's appeal to lower-income consumers, it's unclear if the new streamlined customer acquisition strategy will pay off in the near term. SmileDirectClub remains a speculative choice for all but the most risk-on investor.