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Smile Direct Club Is Putting A Grin On Investors' Faces Prior To Earnings

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Smile Direct Club (SDC - Free Report) is starting to put a grin on the face of savvy investors and traders who were able to buy this stock for any price below $12.

Initial 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 26.8% since its closing price on day one of trading (September 12th), but the stock is starting to see a reversal.

This company is a driving force in the next era of medical treatment, where ease and convenience are the underlying stimulus. Millennials and Gen Z’s value appearance with social media making all your images are worth a thousand words. SDC offers consumers an easier, more convenient, and cheaper option to straighten out your smile compared to traditional orthodontists.

Sell-side analysts are calling this a buy across the board with an average price target of $22.25, which would represent an 85% gain from what the stock is trading at today. SDC is reporting its first earnings as a public company on Tuesday, November 12th, and this could be the reassuring impetus this stock needs to propel it towards its target price.

The Business

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.

Analysts are estimating that this firm will nearly triple its topline in the next couple of years and turn a profit by 2021.

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 4x, 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.

2019 IPO Breakdown

SDC is among the worst-performing IPOs this year. Its other cohorts include Chewy (CHWY - Free Report) , Uber (UBER - Free Report) , CrowdStrike (CRWD - Free Report) , and Peloton (PTON - Free Report) .

Take Away

SDC has rallied 33% since last Monday, giving short-sellers whiplash as they quickly exit their positions. This stock has fallen significantly below its intrinsic value, and I think it is time to invest in the orthodontist of the future.

SDC is a highly risky investment, and I wouldn’t give it a significant allocation in your portfolio.

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