Is Reddit Stock SmileDirectClub Inc. (SDC) a Good Investment?

Founded in 2014, SmileDirectClub, Inc. (SDC) is an oral care company that provides teeth alignment therapy treatment. The company offers invisible aligners, managing the end-to-end process from aligner manufacturing to monitoring the treatment process through its tele-dentistry platform, known as SmileCheck.

Shares of SmileDirectClub have rallied from $5.05 to as high as $6.98 over the past two weeks due in part to the stock’s popularity among retail traders on Reddit’s WallStreetBets forum. However, it gave up some of those gains, declining about 13% over the past five days to close Friday’s trading session at $5.55. 

In today’s article, I am going to analyze SDC to see if the stock presents a good investment opportunity at current levels. 

Industry Outlook

Grand View Research reports that the global oral care market is expected to advance at a CAGR of 5.9%, reaching $49.5 billion by 2028. This steady growth is set to be supported by rising awareness among consumers concerned about oral hygiene, along with a rising incidence of dental caries. This is a trend SDC should capitalize on this growth, especially considering its competitive advantages.   

The competition comes from Align Technology (ALGN), Candid, and byte, which all offer similar products. In my opinion, the main SDC’s competitive advantage is pricing. The cost for its service stands at $1,950 or $89 per month for 24 months. For example, a full treatment cycle offered by Align Technology can cost up to $7,000.

SmileDirectClub’s Fundamentals 

On August 9th, SmileDirectClub issued a disappointing earnings report for the second quarter of 2021. The company’s revenue was up 62.6% year-over-year, standing at $174 million. However, it wasn’t enough to beat analysts’ consensus estimates of $198.5 million. In addition, SDC reported a GAAP EPS of ($0.14), missing Wall Street consensus by $0.04.

The company’s Adjusted EBITDA has been reported at ($22 million), representing a decrease of $2 million from a year-ago quarter. 

For the third quarter, analysts expect SDC’s EPS to come in at ($0.13), which is a decrease from its year-ago EPS of ($0.11). Moreover, analysts forecast that its Q3 revenue should moderately lift by about 8% YoY to $181.9 million.

Let’s consider the company’s valuation multiples as well. When it comes to EV/Sales FWD, the stock’s 1.21x is 82.04% lower than the 6.75x sector median. Also, the company’s FWD P/S multiple of 0.90x looks undervalued compared to the sector’s median P/S ratio of 7.76x.

How much volatility are options traders expect for the stock? 

Taking a closer look at the November 19th, 2021 options, we can figure out that SDC stock could rise or fall by about 30% by mid-November from the $6.00 strike price by utilizing the long straddle options strategy.

In addition, there are currently 4,749 open calls to 4,243 puts at the $6.00 strike price, which suggests a neutral options market sentiment.

Bearish options trades placed on SDC stock

I have also spotted some bearish bets placed on the stock which I believe are worth consideration. The open interest levels for January 21st, 2022, $7.00 puts increased on Tuesday. According to barchart.com, the open contracts rose by about 6,600 contracts to 6,677. For the buyer of the $7.00 puts to earn a profit, the stock would need to plunge to around $4.85 by expiration date, implying approximately an 18% downside from SDC’s current price.

On October 11th, another options trader sold 798 October 22nd call options with a strike price of $6.50. For the seller of those calls to earn a premium, the stock would need to stay below $6.50 by the expiration date.

The Bottom Line 

I remain neutral on this stock for now. While SDC should benefit from the oral care industry’s growth in the long term, I believe that analysts’ weak Q3 outlook, extensive competition in the industry,  and SDC’s struggling balance sheet, could send its shares lower. 

In addition, the company’s popularity on Reddit could make the stock highly volatile. Following this crowd on these particular trades is not a good strategy for those who are risk averse. Furthermore, options traders appear to be betting that SDC stock price will plunge in the coming weeks.

Wall Street analysts have established a “Hold” rating for SDC, with an average price target of $7.30.