Throughout the year, there has been a lot of interest around SmileDirectClub (NASDAQ:SDC). Not so much for the tele-dentistry company’s underlying business. Instead, much of the appeal with SDC stock has been with its potential as a short-squeeze play.
Even after falling by more than 74% over the past 12 months, and nearly 75% year-to-date, short interest is still high. According to Yahoo! Finance, short interest currently comes in at around 29.6% of outstanding float.
However, while its so-called “squeeze factor” is worth mentioning, it shouldn’t be the sole reason to buy this stock … or any stock, for that matter. In fact, this stock is a great example of the perils of buying just on squeeze potential.
Earlier in 2021, plenty of investors bought in, at much higher prices than the $3 per share it trades for today. They then went on to experience heavy losses, and heavier regret.
If its fundamentals were more promising, it would be a different story. Unfortunately, that’s not the case here. As seen in the past two quarterly earnings reports, the company has fallen well short of expectations.
With the short side right on the money betting against this stock, there’s no reason to take the other side of the trade.
SDC Stock and Its Crowded Short Side
Before diving into why so many on Wall Street are shorting SmileDirectClub, let’s take a closer look at the company and its business. As I mentioned above, it’s a teledentistry company. Specifically, it produces orthodontic aligners and serves as a middleman between customers looking to improve their smiles, and orthodontic professionals who can oversee the process.
Generating revenue of $140.3 million in 2017, sales zoomed to $706.5 million by 2019. That same year, it went public, raising $1 billion. However, the market quickly realized it gave this fast-growing company too high a valuation. Dropping by double-digits on its first day of trading, it has been on a continued slide since then.
Yet having too rich of a valuation isn’t the only reason SDC stock has experienced big declines. You can lay much of the blame on the Covid-19 pandemic. The outbreak and its lockdowns put demand for its services on hold.
Not only that, with this headwind hurting performance, the short-side piled in what started to look like a busted growth story. As the short-squeeze phenomenon took off in 2021, speculators began to dive into it, after headlines of other stocks moving sharply higher, possibly due to coordinated short-squeezing. So far though, a squeeze has yet to play out here. Perhaps, because there has been little justification for one.
A Post-Covid Comeback So Far Has Failed to Play Out
Scores of stocks in companies hard-hit by the pandemic have recovered over the past year. That has not been the case for SDC stock, obviously, given the above-mentioned declines. So, what has been behind this?
Mainly, while results have improved versus the depressed numbers printed during 2020, the recovery has missed analyst projections substantially. For example, in Q2 2021 (quarter ending Jun 30, 2021), sales of $174.2 million were up 62.7% year-over-year, yet came in below sell-side estimates. For the most recent quarter (Q3 2021, ending September 30, 2021), results were even worse.
Sales of $137.7 million not only missed projections ($182.5 million), but by a wide margin. They were even down year-over-year, by 18.3%. To top it all off, after delivering disappointing numbers, the company also lowered its guidance. Once projecting sales of $750 million to $800 million for 2021, the company now expects its top line to come in at between $630 million to $650 million.
Well below its pre-pandemic high-water mark, this company has seen no real post-Covid comeback so far. With this, it makes sense why the short-side hasn’t yet covered their positions. With little sign that the situation is getting better, they are correct in betting against this stock. Although it has taken a high double-digit plunge, it could continue to move lower.
The Verdict on SmileDirectClub
Disappointment with SmileDirectClub goes beyond its bad sales numbers. Even during better times, the company was operating in the red, as its operations were not yet large enough to cover its high fixed operating expenses.
With sales sinking, losses have widened. To cover the cash burn, the company’s debt position has increased by 90%, from $377.3 million a year ago to $719.2 million today. Currently earning an “F” rating in my Portfolio Grader, the situation for SDC looks set to get worse before it possibly gets better.
This isn’t to say SmileDirectClub can’t make a comeback. For instance, the company’s international expansion could enable it to get back into growth mode. However, until there’s evidence that’s going to be the case, buying it with the hope this happens isn’t a wise move.
Instead of buying this as a turnaround play, or a short-squeeze play, you should avoid SDC stock.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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