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Bombed IPOs With Ripening Valuations

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Some of 2019s most disastrous IPOs are starting to look like buys as nervous investors and trend riding traders oversell some of these stocks. Not all of the bombing IPOs are looking better at lower valuations, but below I will discuss a few that I believe have the potential to drive substantial returns for your portfolio.

These IPOs are considered high-risk stocks, higher-reward option. Keep this in mind when evaluating my picks.

SmileDirectClub SDC

Shareholders were not smiling when SDC lost 27.5% of its IPO valuation on the first day of trading in mid-September. This was the worst first-day IPO price drop in roughly 2 decades (for firms raising $500 million or more), according to Dealogic. SDC is down another 27.7% since its closing price on day one of trading (September 12th). I believe that this substantial drop in value may have created a buying opportunity.

SmileDirectClub is the leading direct-to-consumer teeth aligner (95% market share), which allows users to treat mild to moderate crowded or crooked teeth without ever seeing an orthodontist. The process takes less than half of the time a traditional orthodontist would and only costs $1,895, a fraction of what the conventional orthodontic model charges (typically between $5,000 and $8,000).

With only 40% of counties having access to orthodontists, this model is attractive because of its convenience, ease, price point, and proven results. So far, SDC has helped over 700,000 people across the Americas as well as Australia and the UK. This year analysts are projecting that the firm will acquire around 450,000 new customers.

The total addressable market (TAM) for SmileDirectClub is astronomical, with 85% of the world having malocclusion (misalignment of teeth) and less than 1% of them are being treated. The convenience and affordability of SDC’s product offering positions the firm to penetrate the untapped market potential.

Smile Direct has seen an unprecedented amount of growth in the past two and a half years. The company demonstrated almost 200% year-over-year revenue growth in 2018, and the first 6 months of 2019 illustrated 113% year-over-year topline appreciation.

SDC has been experiencing expanding gross margins proving economies of scale, which is an excellent sign for a growing business. Marketing and sales are making up a majority of the company’s costs, but that’s par for the course of a fast-growing company.

Right now, SDC is only trading at a forward P/S of around 6x, which is quite reasonable due to its exceptional growth outlook. The analyst coverage of this stock is still quite light, and I believe the recent selloff is due to this product’s controversial product offering.

Investors are concerned about potential legal action associated with an orthodontic product being dispensed without the individual actually seeing an orthodontist. This type of practice is becoming increasingly common, with virtual/online doctors’ appointments becoming a norm for convenience chasing Millennials.  

SDC’s lock-up period comes to an end on 3/10/2020, meaning that pre-IPO shareholders will be able to sell out of their positions at this point. This could cause a short-term price slide in March of next year.

SDC is trending down as we speak with a 15% price drop just today. Short-sellers are going to get whiplash when the reversal begins. With this compelling business and analysts’ buy rating, I expect to see a SDC rally very soon. Top banks are rating this stock as a buy with price targets representing more than double its current price.

This stock is a highly risky investment and wouldn’t give it a significant allocation in your portfolio. SDC appears to be oversold, and I see a short and long-term upside.

Other Recent IPOs to Watch

CrowdStrike (CRWD - Free Report) is an exceptionally promising security cloud stock. It’s a proliferating company with a ton of growth priced in, but still some excellent opportunity for stockholder returns if you are willing to bear the risks involved. Its reoccurring revenue streams make it an attractive investment even at excessively high multiples. Analysts are rating this as a buy, and its recent dip could have created a good buying opportunity. The lock-up period expiration is 12/09/2019.

Online pet retailer Chewy CHWY has sold off over 25% since its first day of trading, though the stock is still up about 20% over its IPO price. The pet industry has been expanding as millennials need for a best friend deepens. Chewy’s online presence and positioning caters exceptionally well to millennials who seem to order everything online. CHWY is trading at 1.9x, which is unusually low for a firm that is expecting north of 20% topline growth moving forward. The lock-up period expiration is 12/11/2019.

Take Away

The IPO frenzy hasn’t yielded investors the strongest returns this year, but that doesn’t mean that these stocks’ potential went down the drain. For some of these stocks, it means that valuations have ripened, and so has the upside potential. Keep an eye on the stocks I discussed above, and their quarterly releases moving forward.


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