Mail order dentistry provider Smile Direct Club (NASDAQ:SDC) reported disappointing first quarter earnings results today.

The stock is flat so far in after-hours trading.

Revenue of $197 million missed analyst estimates for revenue of $215 million.

The EBITDA loss of $65 million was 50% worse than the $45 million loss analysts were expecting.

Finally the EPS loss of -$0.58/sh missed estimates by 50%.

Smile Direct Club is much cheaper than its main competitor and growing faster, however recent negative headlines have shaken consumer confidence in the product. The company won’t break-even until 2023 at the earliest, but only has 12 months of cash remaining and a debt facility up for renewal in December. Investors need to wait on the sidelines until the cash situation improves and growth picks back up post-Coronavirus 

Understanding Smile Direct

The stock of Smile Direct Club has been quite a disappointment since the company went public late last year.

The stock is down 50%, driven by negative press and analyst coverage of the company’s aggressive approach to suppressing customer feedback.

Smile Direct Club Stock Price Since IPO

To help investors understand how the valuation and growth prospects for Smile Direct Club have changed since the pandemic hit, we’ve put together a table of key metrics.

From a valuation perspective, the stock is now 17% cheaper than it was in late February before the Coronavirus began spreading in the western hemisphere.

However, the cheaper valuation does not completely make up for revenue growth estimates that have completely cratered.

At the beginning of the year, analysts thought Smile Direct Club would grow revenue 46% in 2020, however by May, growth estimates had been cut 62% to only 18% growth.

Slower growth equals a lower multiple and that is exactly what has happened to this stock.

Growth and Valuation Metrics Pre and Post Coronavirus

February 20th May 13th % Change
Market Cap 4,599 3,091 -33%
Revenue 1,096 883 -19%
P/S 4.2x 3.5x -17%
2020 Revenue Growth Estimate 46% 18% -62%

With the valuation of Smile Direct Club now down to 3.5x sales, it looks more attractive compared to its main competitors Align Technology, maker of Invisalign braces.

The key is to find out if this cheaper valuation is warranted or not, which we explore below.

Smile Direct Club is Cheap Vs Align

When you compare Smile Direct Club to its main competitor its clear Smile Direct club is attempting to disrupt the market through price.

Just like many other hot startups, the company has borrowed heavily from investors so it can price its products cheaper than the market and grow fast but also lose lots of money in the process.

The goal is for the company to either scale into its cost structure or raise prices in the future to generate a profit.

Smile Direct charges $2,500 for its aligners while similar products from Invisalign cost up to $7,000 before insurance coverage and $5,000 after.

Smile Direct Club needs to reach at least $2.2 billion of sales to begin generating positive cashflow which the company is on track to reach by the end of 2024 based on current growth estimates. 

The problem is that the company has only enough cash to last until March of 2021 based on the current cash burn rate, plus has a borrowing facility of $150 million coming due in December unless extended.

Management has guided they have cut all marketing expenses while most consumers are social distancing though this will mean sales are going to slow noticeably and the operating cash burn will increase.

The company’s lack of cash and uncertain growth plan are serious concerns that need to be addressed before investors should have any confidence the stock will go higher.

At $3.00/sh this stock was a solid buy, but at $7.50, we would wait for the company to do a capital raise and sort out the cash problem before buying in for the long term.

Comparing Smile Direct Club and Align Technology

2019 Revevenue ($MM) 750 2,407
2020 Expected Growth 18% (16%)
2021 Expected Growth 32% 23%
Gross Margin 73% 72%
EBITDA Margin (27%) 17%
Price/Sales 3.5x 7.8x
Cost of the Product to the consumer $2,500 $4,000

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