SmileDirectClub, Inc. ( NASDAQ:SDC ) share price declined 50% over the last year. Some investors view this as a failing business, while others love the product and see this as an opportunity to buy low. In this article, we will analyze both the fundamentals and the business of SmileDirectClub.
First, we must acknowledge that SmileDirectClub is a young growth company, and as such it is expected to incur growth expenses for marketing and expansion. The better question is whether SmileDirectClub is employing capital with efficiency that will allow it to grow in the future.
For this reason, we turn to the Sales to Capital ratio, which shows us how much sales is the company generating for every $1 it invests. For SmileDirectClub, the sales to capital ratio has been hovering above 100% in the last 6 quarters, currently standing at 122%. This means that for every $1 spent from the company, they generate $1.22 back in revenues. For a young growth company, this is a good leading indicator to growth, because it shows a smart allocation of capital.
In the last twelve months, SmileDirectClub increased its revenue by 6.8%.That's not a very high growth rate considering it doesn't make profits.Given this lackluster revenue growth, the share price drop of 50% seems pretty appropriate.In a hot market, it's easy to forget growth is the life-blood of a loss making company.
This is why it is important to analyze the future growth potential of the company, and see if there is a possibility to break the average and surpass at tapping the target market .
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
It is evident that analysts do not project enough growth for the company to become profitable or to experience meaningful revenue growth rates that would justify a higher valuation. However, this is the "Safe" approach for analysts, and is usually true until it is not . That is why we need to look at the business model, growth prospects and see what is the potential scenario for a successful SmileDirectClub.
We like that insiders have been buying shares in the last twelve months.Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. This free report showing analyst forecasts should help you form a view on SmileDirectClub
A good dental profile is something that influences the quality of life for people on the long term. So, finding a more cost-effective way for people to improve their dental profile is a bountiful business venture for SmileDirectClub.
SmileDirectClub sells custom teeth aligner treatment. Initially, clients undergo a 3D scan, after which they get their multi-stage custom teeth aligners and get a prescribed treatment that usually lasts between 4 and 6 months.
The concept is not new, but SDC improves upon some key points that make their product more appealing:
- The aligners are transparent, customizable and 3D printed!
- This is probably one of the more productive ways to use the 3D printing technology, as it gives clients a quick and personally tailored product.
- Lower costs by circumventing the orthodontist and using 3D printing.
- As SDC likes to point out , the office visit is only needed to do a 3D teeth scan, and the services of an orthodontist that used to make braces are not required.
- Utilizing tele-dentistry.
- At various stages of the process, clients can consult and receive care directly from their dentist using online meetings or tele-dentistry. This further pushes down the costs for clients and lowers the barrier for purchasing these services.
The result of all these improvements is a more affordable service for clients, and with that, an increased pool of potential customers that would like to fix their teeth.
The U.S. advertised price point for the SmileDirectClub aligner service is US$1950 for the full treatment v.s. an estimated US$5200 to US$5600 for similar services from competitors .
The company is already going international and offers services in Spain, Germany, Australia etc. And is further expanding their potential reach with recently including France .
The service is considered discretionary - as opposed to essential. This means that possible economic downturns will put pressure on the sales for SDC.
This is one of the reasons why a high service uptake by the target market is not yet expected, and the company may have to lay some more groundwork before both market and service conditions are optimal to produce the necessary revenue growth.
For investors, this could be the opportunity to get in when the price is relatively pessimistic, and hold out for a few more years before the company enters into a high-growth phase.
The retail investor may have the upper hand here before the institutions, because that level of risk without meaningful returns is not acceptable in institutions where traders have to answer why their positions are declining in the short term.
For all investors however, the danger here is two-fold:
- Investors might be early, and miss the opportunity to put their money somewhere where it would generate a positive rate of return
- The other, that the company model fails because of running out of cash and competitors introducing similar services
Being first is not always the best position in the long run.
That is why this company is still considered high-risk, and investors may want to look into smarter ways of entering riskier positions, such as: investing at a lower portion of their portfolio, or spreading the investment across companies in the same industry that have the potential to pivot their service to the business model that proves to be the most effective.
While SmileDirectClub shareholders are down 50% for the year, this could signal an opportunity - albeit quite a risky one.
The company is improving dental services for the consumer on a cost-effective basis - In the long run, the better service wins, however it won't be necessarily lead by SmileDirectClub.
SmileDirectClub has a great business model and is utilizing 3D printing technology to appropriately lower costs for clients. This will increase the possible consumer pool for their services. Cost-efficacy also comes from using tele-dentistry and cutting out the orthodontist middle man.
The investment is still high-risk, and significant growth may not materialize in economic downturns.
SmileDirectClub is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
What are the risks and opportunities for SmileDirectClub?
Revenue is forecast to grow 12.63% per year
Earnings have grown 0.8% per year over the past 5 years
Earnings are forecast to decline by an average of 0.2% per year for the next 3 years
Has less than 1 year of cash runway
Highly volatile share price over the past 3 months
Negative shareholders equity
Shareholders have been diluted in the past year
Currently unprofitable and not forecast to become profitable over the next 3 years
Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Goran is an Equity Analyst and Writer at Simply Wall St over 4 years of experience in financial analysis and company research. Personally, Goran has over 4 years of experience in financial analysis and company research, where he previously worked in a seed-stage startup as a capital markets research analyst and product lead and developed a financial data platform for equity investors.