Why is the stock price for SmileDirectClub declining so much?

New and innovative business models often interest me. When I sold my condo in 2017 I used an agent from Redfin because of how that business was disrupting real estate brokerage by harnessing the power of the internet to market and sell homes. This is something that was new at the time. As it turns out, my condo went into escrow four days after it went on the market at a price slightly above the asking price. Escrow closed in 30 days. I was very happy with this outcome.

clear alignerNow I am in the market for clear aligners. My dentist recommended Invisalign (ALGN), so I did some googling about them. I discovered that there are other clear aligner brands available, one of which is called SmileDirectClub (SDC).

Invisalign works with the patient’s local dentist, but SmileDirectClub markets itself in a different way. They market directly to the patient rather than to the dental professional. I found this on the SDC website in the FAQ:

“Our telehealth platform eliminates the office overhead that makes traditional orthodontics costly. That’s how we’re able to provide doctor-directed teeth straightening for 60% less than braces or Invisalign with no hidden costs or fees guaranteed for life. We took out the markup that happens along the way by shipping our aligners directly to you, and passing the savings on to you. Doing this has allowed us to help over 1.5 million people get a smile they love.”

They thus are able to eliminate the markup that the local dentist takes, lowering the price for the end-user. Once I discovered this, I was immediately intrigued. I love the idea of saving money, and I also love the idea of supporting new and innovative businesses. I am not an expert in this industry, but bypassing the local dental professional by marketing dental services directly to the patient certainly seems novel to me.

sdc share price

Because I am an accountant and also an investor, I wondered if SDC was public, and if it would be worth investing in. So I found the current stock price. As of this writing, it is about $1.42. I drilled into the history and discovered that it has been on a steady decline since it’s high in January 2021 of about $13.

SDC’s model of bypassing the local professional reminds me of what Intuit tried to do with QuickBooks starting in the late 1990s. Intuit marketed QuickBooks directly to small business owners, which was perceived by small business accountants as an attempt to bypass the need for them. One of QuickBooks’ tag lines was, “If you can write a check, you can use QuickBooks.” The implication was that a small business owner did not need to acquire any new skills in order to perform all of the accounting tasks for the businesses. I sold these kinds of services to small businesses, and I remember feeling resentful about this. I know others felt the same way. Here is a commercial for QuickBooks from 1998 and you can see how Intuit is marketing the new business model.

You may have noticed that I said Intuit tried and attempted to bypass the local professional. Was this a conscious effort on Intuit’s part? I don’t know. But that was the perception in the small business accounting community at the time. Happily and to my surprise, and perhaps for others as well, our fears about QuickBooks were unfounded. The reason? It is double-entry bookkeeping. Yes, Intuit managed to get away from a lot of accounting-lingo, and it managed to make most bookkeeping functions look like paper-based business transactions instead of traditional debit and credit journal entries (ie, a screen that looks like an invoice is used to create accounts receivable transactions). But double-entry is double-entry. As we all know, it is not intuitive at first, and some people never really understand it at all.

This means that the untrained user could, and often did, create problems with the data that they did not know how to solve. You would not believe some of the disasterous-looking financial statements I’ve seen that were created with data that was inputted by such people. So imagine this: these well-intentioned business owners spend time inputting information into QuickBooks. Then they run their financial statements in QuickBooks. They can see that there is something wrong, but even after spending hours trying, they can’t figure out what is wrong or how to fix it. So who do they call? The local accounting professional. And a new revenue stream was born for these professionals: financial statement clean-up services.

Not only that, but many of these small business owners no longer wanted to do their own accounting in QuickBooks. They realized through trial and error that it was a lot harder than the advertisements made it sound like. So the local accounting professional was able to generate revenue in two ways: through clean-up work, and regular recurring monthly (or annual) work. QuickBooks proved to be a pipeline of new clients for accounting professionals who embraced it.

Back to SmileDirectClub and it’s plummeting stock price. Given that their business models seemed to be similar (ie, bypassing the local professional), I wondered if Intuit’s stock price (INTU) during the 1990s and early 2000s went through a similar decline as what SDC is experiencing now. It did not. It has it’s ups and downs but I didn’t see anything like what is happening with SDC.

Then I looked at SDC’s most recent 10-K. The firm’s marketing and G&A expenses absolutely overwhelm its gross profit. Regarding cash, they brought in $1.2B in cash during their IPO in 2019, but operating cash flow remains negative, and total cash has declined for the last two years. Let’s compare to Invisalign. I looked at the most recent 10-K and saw the following for 2021 and 2020:

  • Positive operating cash flow
  • Healthy gross profit

I calculated the per unit revenue for clear aligners as follows:

  • 2,547,700 units were shipped (“Clear Aligner case volume,” page 45)
  • $3247.1 billion in revenue from these units

This means that Invisalign’s per unit revenue for clear aligners is $1275. Per SDC’s website, its per unit revenue is $2050. That’s a big difference, it seems to me. What might explain it (besides me calculating something about it incorrectly lol)? My guess is that SDC has included some orthodontic consulting into its number–the “doctor-directed teeth straightening” mentioned above. Since Invisalign uses local dental professionals, they don’t need to account for those services since the the local professionals provide them. Regardless, SDC is getting more per unit than Invisalign, yet is performing significantly worse on some important financial metrics. Having said that, I must point out that Invisalign was the first in this market, and its been in business for over 20 years which is about three times as long as SDC. It is more entrenched and has name recognition that other brands don’t have.

Look, I’m not a financial advisor and this is not financial advice. My background and training is in accounting, which means compliance. I have very little formal training in investments and finance, and no professional experience in either. But these basic numbers lead me to believe that SDC is in trouble. For me, it doesn’t make sense to buy at this time. Likewise, I don’t feel comfortable betting for a business to fail, so I won’t be taking a short position or buying puts.

I sincerely hope they manage a turnaround. I hate to see an innovative model that seems to have potential to do well fail. Maybe they need to partner with local professionals the way Invisalign has. They might be able to reduce their marketing expenses while selling more units. I bet it will make local dental professionals happy, perhaps the way I felt when I realized that QuickBooks was helping my business, not hurting it.

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