Right now SDC is poised to break out on social media attention. Retail traders are attempting to perform a short squeeze on Smile Direct Club. This is because SDC currently has a 33% short interest ratio and if targeted properly by retailers could see a 100% gain day.
This article is going to look closely at SDC to determine the feasibility of a short squeeze taking place. I will outline the stock’s fundamentals and why people are shorting, the technicals of the stock, and give an analysis on the situation.
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Without further ado, let’s jump into the SDC Short Squeeze.
Well the investment thesis happened a lot sooner then I had initially expected. I was aiming to give you guys a couple weeks head start but the market decided to go ahead and start pumping up SDC.
If you bought OTM calls on SDC then congratulations you got a 100-450% return. Currently SDC is sitting at a nice $6.42 and still stands to explode up further if retail investor hype continues.
Still where there is volatility in a stock there is money to be had. Check out this article on how to generate returns no matter what way the stock starts trading by using Iron Condors.
Smile Direct Club Fundamentals
In this section we have the business model, risks, and finances. The goal is to give you a clear depiction of what Smile Direct Club does and how well they do it.
Business Model (Source)
Smile Direct Club provides teeth alignment retainers that over time will straighten out customers teeth. The goal of these retainers is to replace the traditional braces that teens typically undergo. Further, SDC’s pricing is close to about 60% less than traditional braces.
SDC does not replace the traditional orthodontist visit, it simply allows the patient to have a clear alignment tray to position their teeth. As such, ADC over the years has partnered with a large network of orthodontists.
Smile Direct Club also has brick and mortar “SmileStores” located throughout the U.S, Canada, Australia, U.K, New Zealand, Ireland, Hong Kong, Germany, Singapore, Austria, and Spain.
The potential client will go to their doctor, request the SDC tray, and then go to one of the many “SmileStores” to have their mouth imaged to create a personal set of trays.
Then the doctor will monitor the client’s use of trays to make sure they are getting the ‘perfect’ smile. Normal braces can cost clients in the range of $2500-$3500 in the U.S while SmileDirect can offer a similar service for an average price of $1,950.
The overall risks to SDC are present in the consumer market and the overall speed at which the Smile Direct Club has grown over the past 4 years. While there are other risks these two (consumer market and growth) are the largest.
Consumer Market Risk
First, the consumer market. Right now the world is starting to recover from the Covid-19 pandemic. This pandemic has caused a massive decline in consumer spending across the world as many people wait for the economy to return to normal.
This has caused significant turmoil in the dentistry sector. One published article by A.M Kranz and G. Gahlon in the JDR Clinical and Translational Research journal indicates that over 50% of U.S adults reported delaying dental care due to Covid-19. (Source)
This is consumer market risk. If the average consumer does not get dental care they will not spend money in the dental sector. Further, what dental care does get performed will be in the form of essential procedures. Smile Direct Club provides a tray that aligns teeth.
Since the SDC trays are not essential consumers simply won’t buy them during the pandemic. This has significantly hurt Smile Direct Club and if the pandemic continues so will this risk.
Rapid Growth Risk
If the pandemic was not bad enough for Smile Direct Club then the cherry on top was when they decided to pursue rapid growth.
Smile Direct Club rapidly expanded right before the pandemic. This means that to acquire the necessary talent, partnerships, and resources SDC had to spend a significant amount of capital.
It was a strategic risk and as a result from 2018-2021 SDC has been operating at a loss. In 2018 SDC’s net loss was $287 million, in 2019 $537 million, and in 2020 $74 million. (Source)
Normally this is fine as spending this type of money would have net increasing revenue. However, since SDC decided to expand right before the pandemic they dug a grave for their company. It was a calculated risk, and SDC lost.
SDC will need to demonstrate either a new product or have the pandemic reverse its trend on the dental consumer market to start seeing a return on those investments.
It comes as no surprise to see that SDC’s finance spreadsheet is horrible.
As we can see from the above 2020 10-k for SDC their revenue has declined by 13% from 2019 to 2020. The executives at Smile Direct have tried to offset this decreased revenue by cutting back on overhead but unfortunately the company is still operating at a loss.
Smile Direct has attempted to cut back on their growth expansion plan but still are burning through cash at an alarming rate. It remains to be seen if SDC can crawl out of this financial hole.
It really is unfortunate because the reason this company started failing in 2019-2021 was because of the rapid growth plan along with the pandemic.
Technicals of the Stock
So now we know why companies are shorting SDC…it’s because of the pandemic and failed expansion attempt.
So now how does the stock perform and what is its possibility of exploding? To determine that we need to look at the technicals of the stock ticker itself. This means that you need to look at the float, average volume, and short percentage.
This will tell us what the likelihood of SDC exploding is.
Statistics for SDC Stock Ticker
Here are the statistics for SDC’s stock ticker. (Source)
First, the average volume. As we can see the average volume for the past 3 months is 8.14 million per day. However in the past 10 days this has increased to 22 million shares being traded per day.
This is a great sign for a breakout. If this average volume continues to increase so will the likelihood of the stock breaking out on a short squeeze.
This is because as more and more people buy the stock the likelihood shorts will have to cover will increase. This will drive the price up further, which will cause more people to begin to buy it.
Second, the float. The float on the stock is under 100 million at 99.47 million. This is a great sign as that means there is only 99 million shares available to trade on any given day.
The lower the float the higher the chance of a short squeeze with consistently high volume. This is because of the law of supply and demand, if there are less shares available to buy (low float) then chances are it will be worth more as more traders want to buy it.
Third, the short percentage. Currently the amount of shares that are out on loan that need to be bought back is 32% of the total float. That means that if a short squeeze starts to take off then we could see close to 30 million shares being liquidated at market value to cover the short percentage in lower value accounts.
The technicals on SDC indicate that a short squeeze is very likely to happen should this volume continue to increase or remain the same.
If you are interested on why ‘shorting’ is a thing or why shorts are forced to cover check out this article I wrote a while back on the mechanics of shorting.
Is the Short Squeeze Going To Happen?
If volume remains the same at around 20 million and the overall trend of the stock continues to increase then yes, the short squeeze will happen.
However, that situation will only happen if retail traders continue to pour into the stock and push its share price up higher and higher. Eventually the shorts will be forced to cover and this will shoot the price up through the roof on Smile Direct Club.
If the volume starts to decline or the trend starts to reverse then the chances of the short squeeze happening will decline.
I would play it safe for now but if SDC should pass above $7 by the end of 2021 then you will see an explosion of growth that could easily swing the stock to a range of $12-$14 within a week.
If you just buy the shares you can liquidate between $10-$14 for up to a 100% gain on investment. However, if you buy OTM option calls then you can make significantly more.
If you buy 10 call contracts at the strike price of $12 that expire in January of 2022 on SDC and the squeeze happens as expected then you will make a 450% return on investment!
There you have it the SDC short Squeeze and how it could generate returns in the range of 100-450% on investment. That’s a huge number and for many investors on the market they are willing to take the huge risk to make a huge return.
You should always be safe when looking at potential investments like these. Sure the returns are high but so is the risk. You need to think critically of your portfolio and its goals before engaging in trades such as these. However if it fits your risk profile and you are willing to sweat a little because of risk then yeah, you could turn $10,000 into $38,000 within a couple months.
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Further, you can check out some of the other articles below!
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Until we meet again, I wish you the best of luck in your investments.