Once upon on time, SmileDirectClub (SDC 100.00%) and Align Technology (ALGN -1.51%) were partners. SmileDirectClub used to buy Align Technology's products, and Align Technology owned a 17% stake in the company. However, the partnership didn't last too long. In 2018, one year before its IPO, SmileDirectClub sued and ultimately won an arbitration hearing against Align Technology. As a result, the company repurchased Align's investment stake and prevented Align from running any physical store or operations as per a non-compete agreement between the two companies.
At the time of writing this article, Align Technology's stock price is hovering around $183.9 per share, down from its 52-week high of $398.88 a few months ago. Despite the price-fall, the stock is up 245% in the last five years. Such an impressive growth was partially due to the company's monopoly-like presence in the transparent tooth straightener market. Its initial investment in SmileDirectClub was an excellent way for the company to keep its finger on the pulse of the new and emerging teledentistry and direct-to-consumer aligner market. However, now that the two companies are competing, is Align still a stock worth investing? Even more importantly, is SmileDirectClub a better investment compared to Align?
SOURCE: YCHARTS
Enough room for two
According to Align Technology's latest annual report, the misalignment of teeth affects 60% to 75% of the population. But, worldwide, only 12 million people receive treatment. Moreover, most of those who are treated use traditional methods such as metal braces. Align estimates that clear aligners can service approximately 75% of the misalignment cases. With proper awareness and education, nearly 300 million more patients could benefit from straightening their teeth globally. SmileDirectClub believes the global opportunity is even more massive. In its S1 document, the company says that the number of patients in need of a clear aligner is as high as 500 million globally.
The two companies, combined, have only serviced about eight million patients; 7.2 million are Align Technology's patients, and 0.7 million are SmileDirectClub's patients. This figure means clear aligners have approximately 2% to 3% of the overall market, leaving a significant untapped market opportunity for both companies and even a few other competitors to play and grow.
Wind behind the back
One thing the puts the wind behind the back of Align is its existing relationships with over 60,000 dentists. The company has always been a supporter of dentists. Especially, as the company focuses on more complex cases such as teenagers' misaligned teeth, it continues to rely on dentists even further.
In contrast, SmileDirectClub is going head to head with dentists and their professional associations. The company's teledentistry model is bypassing dentists for most parts of a typical patient's treatment. Such an approach has led to a letter of complaint by the American Dental Association (ADA) to the FTC about SmileDirectClub's false teledentistry claims. Regardless of the current complaint, in the long run, SmileDirectClub may win over patients with its lower costs and convenience. Also, dentists may eventually accept the new trend. However, getting there is going to be an uphill battle. In the battle against the status quo, Align Technology has the wind of dentists' support behinds it's back.
Financial health
Creating awareness about the advantages of clear aligners, transitioning dentists from metal braces to clear aligners, and continuing to innovate are no easy tasks. Both Align Technology and SmileDirectClub need to be in excellent financial shape to fund their growth. A financial comparison between the two companies shows that Align Technology has a stronger profile.
| Metrics | Align Technology | Smile Direct Club |
|---|---|---|
| Total Revenue (2018) | $1,966.4 million | $423.2 million |
| Growth Profit Margin (2018) | 73.6% | 63.3% |
| Net Profit (Loss) Margin | 20.3% | (17.7%) |
| Cash and Equivalent (Quarterly) | $424.5 million | $149.1 million |
| Long Term Debt (Quarterly) | $0 | $204.9 million |
| Price to Sales Ratio (TTM) | 6.8 | 10.6 |
Align has almost four times more sales, a better gross margin, a positive profit margin, more cash, no debt, and a cheaper priced stock. Although SmileDirectClub is smaller and can grow faster than Align, as it stands now, Align is a financially stronger company.
Final takeaway
Both SmileDirectClub and Align Technology have access to a large market opportunity. Align benefits from the support of dentists and their recommendations globally, and the company has a superior financial status. While SmileDirectClub is pioneering the teledentistry model, it still has to win the fight over dentists, pay back its debt, and invest heavily in sales and marketing. Either of the two can be an excellent addition to a growth-oriented portfolio; however, Align benefits from a lower-priced stock. Overall, it appears that Align Technology is a less-risky and more reliable investment and a better buy at this time.
