SmileDirectClub Shares Continue Dropping After IPO

SmileDirectClub (NASDAQ:SDC), which is the pioneer of in-home teeth straightening systems, pulled off one of the largest IPOs of the year, raising a cool $1.3 billion. Not bad for a company that has been around for only five years.

SmileDirectClub Shares Continue Dropping After IPO

Source: Helen89 /

Yet the debut has been rocky. In early trading, SmileDirectClub stock is off about 19% from its IPO price.

So what now? Is this an opportunity? Well, let’s first develop a background on the SmileDirectClub IPO.

The company is the mastermind of Alex Fenkell and Jordan Katzman, who like many kids hated dealing with braces. In fact, little has changed since then. The traditional orthodontic model involves months of appointments and the costs are far from cheap — ranging from $3,000 to $10,000.

But for Fenkell and Katzman, this was really a juicy opportunity for disruption. They essentially turned the traditional model on its head. With SmileDirectClub a person will spend much less time in treatment (an average of six months versus a few years) and the costs are generally under $2,000. This is accomplished through the teledentistry platform. A customer will get a kit that can be administered in-home and then has access to a network of qualified professionals to help out. SmileDirectClub has also been innovative in its devices, such as the Nighttime Clear Aligners.

Oh, and the company has developed its own payment model, which involves a monthly payment plan as well as arrangments with UnitedHealth (NYSE:UNH) and CVS (NYSE:CVS).

Now, what if you are not comfortable with the DIY approach? You can go to a local SmileShop (there are currently over 300 in the U.S., Puerto Rico, Canada, Australia and the United Kingdom). The company is also forging relationships with retailers like CVS and Walgreens (NASDAQ:WBA).

SmileDirectClub’s Growth Strategy

No doubt, one of the biggest attractions of the SmileDirectClub IPO is the company’s staggering growth. Last year, revenues hit $423.2 million, up nearly 200% on a year-over-year basis. Since 2014 the company has served over 700,000 customers.

And there is much more runway for growth. Note that about 85% of people across the globe suffer from malocclusion — or incorrect positioning — of their teeth. As a result, SmileDirectClub estimates that more than 120 million people are potential customers for its solutions.

The Cons

There are certainly challenges and risks with the SmileDirectClub IPO. After all, the company continues to rack up substantial losses. Last year they came to $74.8 million.

There is also more competition coming into the market, which should intensify because of the success of the IPO. Some of the players include Candid, Smilelove and SnapCorrect.

But perhaps the biggest risk to the SmileDirectClub IPO is the uncertainty regarding laws. According to the U.S. Securities and Exchange Commission Form S-1:

“A number of dental and orthodontic professionals believe that clear aligners are appropriate for only a limited percentage of their patients. National and state dental associations have issued statements discouraging use of orthodontics using a teledentistry platform. Increased market acceptance of our remote clear aligner treatment may depend, in part, upon the recommendations of dental and orthodontic professionals and associations, as well as other factors including effectiveness, safety, ease of use, reliability, aesthetics, and price compared to competing products.”

The Bottom Line on the SmileDirectClub IPO

While the IPO market has been particularly strong this year, there has been quite a bit of volatility. Just look at high-profile names like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT).

Now as for the SmileDirectClub IPO, it’s a good bet that there will also be lots of volatility. This is natural for any high-growth company, especially when there is regulatory risk. In other words, if you are thinking of buying shares, the best approach is probably to take a small position — and average in over time.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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