Better Buy for 2022: SmileDirectClub vs. Align Technology

SmileDirectClub (SDC) and Align Technology (ALGN) are both companies that are part of the dental services vertical.  This market is forecast to touch almost $700 billion by 2030, indicating an increase of 6.4% between 2021 and 2030.

North America is the leading dental services market due to a high geriatric population as well as rising demand for cosmetic dentistry in the region. 

Today I’ll analyze and compare SDC and ALGN to determine which stock is currently a better buy for 2022.

SmileDirectClub

SmileDirectClub is a small-cap stock valued at a market cap of $857 million. It's down 88% from all-time highs and has burnt massive investor wealth since going public in September 2019. The company focuses on providing low-cost services to consumers and this strategy might backfire in an inflationary environment.

Rising costs primarily hurt families with a lower disposable income which is the target market of SDC. Right now, inflation has risen to its highest levels in 40 years and has already impacted order volumes for SmileDirectClub.

SDC recently announced it will suspend operations in international markets in Mexico, Spain, Germany, Austria, Netherlands, Singapore, New Zealand, and Hong Kong and will also halt expansion plans into additional markets until the impact of COVID-19 is eased. These exits will enable the company to allocate capital to regions with the potential for near-term profitability.

It will also reduce its workforce and these initiatives will help SDC to lower costs by $120 million this year.

While sales were down 12% in 2020 at $657 million, it might fall by another 2.6% to $639 million in 2021, before rising by 4.4% to $667 million in 2022.

Align Technology

A much larger player compared to SDC, Align Technology is valued at a market cap of almost $40 billion. It has returned 414% in the last five years and 1,810% since February 2012. Despite the staggering gains, the stock is also down 31% from all-time highs.

Align Tech reported sales of $2.4 billion in 2019 and ended 2021 with a top-line of $3.95 billion. So, its growth rate in the last two years is around 27%. Unlike SDC, Align is also profitable and its operating margin stood at a healthy 24.7% in 2021. 

Further, the clear aligner market is expected to grow at an annual rate of 28% through 2030, providing Align with enough opportunity to expand its revenue going forward, given it accounts for 80% of this market.

Analysts expect Align to increase sales by 20.6% to $4.77 billion in 2022 and by 22% to $5.81 billion in 2023. Comparatively, its adjusted earnings are forecast to expand from $11.22 in 2021 to $15.64 in 2023.

So, Align stock is valued at a forward price to 2023 sales multiple of 6.9x and a price to earnings multiple of 33x which might look expensive.

The verdict

It's easy to pick a winner between SmileDirectClub and Align Technology. While SDC is struggling with inconsistent revenue growth and negative margins, ALGN is a company that is poised to experience substantial growth, and generate solid earnings all while dominating an expanding market.

Align stock is also trading at a discount of 30% to average analyst estimates and offers an enviable risk-reward profile to investors.

SDC shares were trading at $2.27 per share on Tuesday morning, up $0.06 (+2.71%). Year-to-date, SDC has declined -3.40%, versus a -6.46% rise in the benchmark S&P 500 index during the same period.

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.

More...