SmileDirectClub Stock: No Easy Solutions (NASDAQ:SDC)

In February of this year, I wondered if investors in SmileDirectClub (NASDAQ:SDC) had something to smile about. The company has seen very soft performance since the company went public in 2019. While the pandemic offered a valid reason for underperformance in 2020, the same cannot be said for 2021 as results only turned for the worse.

Given the huge cash burn, I was very cautious as the hole seems very deep, too deep to see any appeal.

Former Takes

SmileDirectClub offers clean aligners in an affordable and convenient way and with a $2,000 cost per treatment. The solution is far cheaper than traditional orthodontic solutions which come in at 3-4 times that price, while patients require fewer visits with the solution as well.

Founded in 2014, the company focuses on cheaper costs, fewer visits for patients, as improved aesthetics and proliferation in technology in healthcare have been drivers behind the initial adoption of the solution. This allowed the company to go public at $23 in 2019, levels at which operating assets were valued in excess of $8 billion.

That was a big valuation for a business which generated $423 million in sales in 2018, albeit that sales tripled that year. Operating losses for the year came in at $91 million. The company has seen solid momentum ahead of the IPO with sales doubling to $373 million in the first half of 2019, with adjusted operating losses narrowing to $31 million for the six-month period. With revenues trending at $800 million per annum, sales multiples fell to 10 times, yet slower growth and losses left real question marks.

This comes as the company is facing stiff competition from Align Technology (ALGN), among others, as this competitor traded at just 6 times sales while being incredibly profitable. Given all of this, regulatory concerns, as well as bad governance practices, I was very cautious.

Early in 2020, the company posted 2019 sales of $750 million, while adjusted EBITDA losses were reported around a hundred million. The company guided for over a billion in sales in 2020 and anticipated EBITDA losses to narrow to $50-$75 million, yet the pandemic threw these projections out the window. In the end, 2020 revenues actually fell to $657 million, with EBITDA losses reported at $77 million, as GAAP losses were substantially higher.

The company saw continued pressure on the business with first quarter sales of $199 million falling to $174 million in the second quarter, to just $154 million in the third quarter, as losses were building. With the pandemic fading, these poor results were clearly the result of self-inflicted issues. With cash down to $300 million at the start of the year, while debt increased to three quarters of a billion, I was very cautious as the fourth quarter outlook for 2021 called for sales at just $130 million. Add to that a CFO resignation, and it was very easy to stay away from the shares.

Woes Continue

Since shares traded around the $2 mark in February, shares have only gradually come down further, having fallen to a low of $1 in recent weeks, now trading at $1.30 per share.

Towards the end of February, the company posted its fourth quarter results as revenues of $126 million fell short compared to the guidance. EBITDA losses were posted at $62 million, as net losses were reported at $95 million. The company hardly expects a recovery in 2022 sales, seeing revenues between $600 and $650 million. Despite flattish sales compared to the $638 million revenue number in 2021, the full year EBITDA guidance calls for losses of around $50 million. Net debt has risen to $516 million following the continuation of the losses here.

First quarter results were posted in May, with revenues up 20% on a sequential basis to $152 million, albeit that sales were still down year-over-year. The same applied for the EBITDA performance as a $34 million loss posted solid results on a sequential basis, but were down year-over-year, as the company confirmed the guidance issued for the year. While the sales run rate in the remaining three quarters of the year should come in a bit stronger, real improvements are seen in EBITDA, but even in that case we still see substantial losses.

Still Cautious

As the second quarter results will be announced next week, there are a few signs to be upbeat. Even as the sequential improvements in the first quarter are to be applauded, the reality is that this is still just a $600 million business, which is posting steep losses at around $300 million per annum if we look at recent quarterly performance. The extent of the losses is huge and worrisome, certainly in relation to reported revenues, as debt is quite high already.

Hence, there is no easy way out as the prospects for investors remain very dire, with restructuring of the debt rapidly needed down the road, as the real issue is that the underlying business model is not economical which is the biggest issue, as the combination of both is what makes me very cautious.