shares of smiledirectclub (SDC 24.61%) is up 24.6% in today’s close.
It was an odd rally considering I couldn’t find any news to justify such a large move in the stock.
With that in mind, it looks like a huge little squeeze today was caused by investors shorting the stock before gains covered their bets. Yesterday, SmileDirectClub stock fell following its second quarter earnings report.
In its second-quarter report released Tuesday night, SmileDirectClub’s revenue fell 17% sequentially and 27.8% year over year, falling short of expectations. A glimmer of hope may be that the net loss narrowed to $8 million from $65.2 million in the first quarter as a result of the company’s cost-cutting efforts; On the other hand, net loss per share was still $10 million worse than the year-ago quarter.
SmileDirectClub has fallen this year as the pandemic-era growth of its clear aligners was reversed as the economy reopened and consumer budgets were squeezed by inflation. What’s even more important here is that SmileDirectClub also has a huge debt load. At the end of the second quarter, the company had just over $790 million in debt while having only $158 million in cash.
In the first six months of the year alone, SmileDirectClub burned $112 million in cash between cash uses and property purchases. So, SmileDirectClub needs to make a quick profit or raise more money – and it’s definitely not a good time to raise money. As a result, SmileDirectClub stock fell more than 10% yesterday.
But as of July 15, SmileDirect’s publicly traded shares were small at about 24% of the free float, which is a high percentage. And even after today’s boom, SmileDirect stock is down 75% over the past year. So, given the lack of physical news, it appears that some of these short sellers are buying the stock today to cover their shorts, causing the stock to surge tremendously.
Is this short-covering rally a disadvantage for SmileDirectClub? I wouldn’t count on it, but there might be some green shoots causing the shorts to take profits now. For one thing, management has consistently continued its cost-cutting efforts; it remains to be seen whether this will be enough.
Second, and perhaps most importantly, in the results release, CEO David Katzman outlined a new go-to-market strategy based on the new SmileDirectClub smartphone app. The new app allows users to take a picture of their teeth with their smartphone and then view a full 3D treatment plan. Prior to the app, SmileDirectClub customers had to either visit a licensed dentist, visit a SmileDirectClub physical store, or request a home impression kit to be shipped back to the company.
This seems like a really easy way to get started with SmileDirectClub’s teeth straightening service. However, given high inflation and SmileDirectClub’s appeal to low-income consumers, it’s unclear whether the new streamlined customer acquisition strategy will pay off in the short term. SmileDirectClub remains a speculative option for all but the most risk-averse investor.
Billy Duberstein has no position in any of the stocks mentioned. Your customers can own the shares of the mentioned companies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.