SmileDirectClub is Headed for Penny Stock Territory
My editors asked me to give my 2 cents about SmileDirectClub (NASDAQ:SDC), the direct-to-consumer medtech platform that’s supposed to make your smile look like a million bucks. Unfortunately, for IPO investors, SDC stock has been anything but a millionaire-maker since going public in September 2019 at $23 a share.
SDC stock is down more than 70% since its IPO and has been flirting with penny stock status for the past two months. However, its low-priced shares have caught the attention of Reddit traders. In fact, it is currently the fourth most commented stock on the WallStreetBets subreddit, according to SwaggyStocks.
The majority of the comments have been bullish, but let’s look a little closer at what’s going on.
Reddit Traders Rally Around SmileDirectClub
On Monday, SDC stock came within a few cents of penny stock territory, hitting a low of $5.02. By Wednesday’s close, shares had shot up nearly 33%. What gives?
Well, the company did announce it secured a U.S. patent for its SmileBus. As you can probably guess, this is a fleet of buses that travel around offering free 3D imaging to lure in customers.
Prior to the rally, there had been some rumblings on Reddit that a short squeeze was imminent. Others seemed to believe SDC stock was only down because the market was down and that a bounce would happen once the market resumed its upward climb.
Hey, I appreciate a little optimism, but have longs considered the business’ fundamentals?
When SDC stock went public, it had a market capitalization of nearly $8.9 billion based on 384.9 million shares outstanding. That was 11.9 times its Q2 2019 annualized sales of $747 million. Today, it’s trading at 3.1 times its trailing 12-month sales of $726.6 million.
Essentially, SmileDirectClub’s sales have gone sideways over the past two years while it continues to generate negative free cash flow.
SDC Stock Underperforms Its Peers
Back in April 2019, I recommended seven dental stocks to buy. SmileDirect had yet to come public. However, one of the stocks on the list was competitor Align Technology (NASDAQ:ALGN).
You could have bought any of the seven dental stocks below two years ago, on the day SDC stock went public, and you’d be ahead of SDC shareholders.
SDC Stock vs 7 Peers – Sep. 11, 2019 to Oct. 7, 2021
| Company | Price 9/11/19 |
Price 10/7/21 |
% Return |
| SmileDirectClub (NASDAQ:SDC) | $23.00 | $6.59 | -71.4% |
| Henry Schein (NASDAQ:HSIC) | $63.90 | $79.71 | 24.7% |
| 3D Systems (NYSE:DDD) | $8.12 | $26.79 | 229.9% |
| Align Technology (NASDAQ:ALGN) | $177.90 | $661.41 | 271.8% |
| Dentsply Sirona (NASDAQ:XRAY) | $51.09 | $58.00 | 13.5% |
| Patterson Companies (NASDAQ:PDCO) | $17.99 | $32.51 | 80.7% |
| Procter & Gamble (NYSE:PG) | $119.86 | $142.32 | 18.7% |
| Church & Dwight (NYSE:CHD) | $70.60 | $82.98 | 17.5% |
Sure, you can find fault with every one of the seven peers. But, at the end of the day, investing is about making returns on your money. On a risk-adjusted basis, the difference in returns is probably even greater.
For investors hoping the short-squeeze gods will ride to SmileDirectClub’s rescue, that’s flawed thinking. What precisely has changed over the past two years — other than its share price falling by almost three-quarters — that makes it a better buy today?
I don’t see anything about its business that’s better. And neither do analysts. Of the 12 covering SDC stock, only one has a “buy” rating on the stock. Overall, analysts rate it a “hold” with a median target price of $6. That’s about 9% below the current share price.
The Bottom Line on SDC Stock
I won’t pretend to understand why some investors seek out risk as if it’s something meant to be conquered. It’s not. Preservation of capital is the name of the game.
Whether SmileDirectClub can avoid penny stock status in the immediate future is irrelevant. What matters is that longtime holders of SDC stock have wasted two years on a company that loses money and is expected to continue to lose money for the foreseeable future.
That’s not something to bet on, in my opinion.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
