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Turn that Frown Upside Down: How SmileDirectClub is Winning Wall Street Back

John Jannarone
  • SmileDirectClub, Inc. Shares Rallied on Multiple Positive Catalysts in Recent Weeks
  • SDC Launched Consumer Products Channel via Walmart, Inc.
  • SDC Announced Sales Directly Through Dentists and Orthodontists
  • Attacks from Dentist Organizations and Attorneys Caused Temporary Confusion
  • IPO Edge Argued SDC Was Undervalued at $10 per Share in October 2019, now at $14.50
  • Sentieo Data Suggest Upswing in SDC Revenue in Recent Weeks

By John Jannarone

Orthodontics disruptor SmileDirectClub, Inc. (ticker: SDC) has been on a tear in 2020, with its shares up 75% so far this year following a pair of big news announcements. First came a deal with Walmart, Inc. to sell a range of consumer products from power toothbrushes to water flossers, creating a brand-new revenue stream. Next, SDC said it will begin selling aligners on a wholesale basis through orthodontists and dentists rather than strictly on a direct basis, allowing it to vie with Align Technology, Inc., which heretofore had a lock on that sales channel.

It wasn’t always so easy for SDC investors. The company, whose private investor roster included Kleiner Perkins, went public just as the 2019 IPO craze was falling apart, shocking Wall Street with a 27% fall on its first day of trade in early September. As the stock languished in the following weeks, SDC began to take even more heat. It found itself uniquely in the crosshairs of multiple parties, some of which had a history of making self-serving – even misleading – statements.

Start with the American Dental Association (ADA) and other groups that work with dentists or orthodontists around the country. Put simply, the dental industry is protective of its turf and willingly has gone to war with regulators.

Just as taxi drivers were unhappy to see the likes of Uber Technologies, Inc. and Lyft, Inc. undercutting them on price and stealing business, dentists didn’t like to see tooth-whitening specialists threaten to take their patients.  The Federal Trade Commission recently won a Supreme Court ruling against the North Carolina Dental Board for trying to stop teeth-whitening services from operating in malls.

The ADA’s first big push against SDC was on April 25, 2019, when it filed a so-called citizen’s petition with the Food and Drug Administration (FDA). After about a month, the FDA said it had received the petition and no subsequent announcement has ever come from the FDA – as is typical. The comment period to the FDC closed on October 22.

Even so, the ADA continued to publicize its petition for months, taking the unusual step of purchasing banner ads with The New York Times in late October stating “ADA Petition to FDA Still Active.” Approximately 289 days have passed since the petition was filed, without any indication of an investigation from the FDA. “As a matter of longstanding policy, the FDA does not confirm or deny the existence of investigations,” a press officer for the FDA said in a statement to IPO Edge.

The ADA ran a parallel strategy with the FTC, filing a letter making similar complaints against SDC. Again, the ADA publicized its FTC complaint and nudged consumers to follow up on it in a press release. Some 226 days have passed without a public response from the FTC. Similar to the FDA, an FTC spokesman declined to comment and said the commission doesn’t confirm or deny the existence of investigations.

Regardless, the ADA continues to presume the authority to speak on behalf of both the FDA and FTC. “The American Dental Association’s petition to the FDA and its complaint letter to the FTC remain active and are still pending with those federal agencies,” a spokesman for the ADA said in a statement to IPO Edge. A spokeswoman for SDC declined to comment beyond public statements the company has made on the matter.

For its part, the FTC has a history of going out of its way to side with SDC on antitrust matters. For instance, in a case between SDC and the Board of Dental Examiners of Alabama, the FTC and the Department of Justice filed a joint amicus curiae brief – a voluntary step taken by parties not immediately involved in a case.

That case took root when SDC filed suit against the board, which had sent the company a cease-and-desist letter saying its practice of photographing teeth and gums to make aligners was an unauthorized practice of dentistry. In the brief, filed last September, the FTC said the board members “did not meet their burden at this stage of the proceeding to show that the State of Alabama actively supervised the challenged regulations and enforcement actions of the Board of Dental Examiners of Alabama.”

Alabama was not an anomaly. The FTC filed a similar brief last year related to a suit SDC filed against state dentistry board members in Georgia.

In early October, a website known for short “ideas” called Hindenburg Research posted a note predicting 85% downside in the stock and a $2 price target. The note’s arguments included references the ADA’s petitions to the FDA and FTC, and the Alabama suit.  A few days later, when the stock was trading at about $10, IPO Edge appeared on investment network Real Vision to explain the stock may be undervalued due to a misunderstanding of issues such as the FTC’s stance on antitrust in the dental industry.

Meanwhile, SDC was being hit with lawsuits – which should have been no shock. It’s common for stocks that fall after their IPOs to trigger shareholder lawsuits, with lawyers posting aggressive press releases suggesting they can win money back for retail investors.

But the case of SDC was unusual because the shareholder suit happened in parallel with a class action suit. And the class action suit appeared to have more heft because of the ADA’s aggressive campaign against SDC. Indeed, at least one shareholder suit used the class action suit to bolster its own arguments, citing the class action in legal filings.

Those lawsuits have begun to fade away. In late December, all but two of the individual plaintiffs in the class-action suit against SDC voluntarily withdrew.

The truth is, dentists are needed to make the SDC model work and they have incentive to work with SDC even if their orthodontist colleagues don’t like it. Every SDC patient has a treating doctor, who is licensed in the state in which the patient resides, according to the company’s website.

And dentists in the SDC network are like most of their colleagues: The vast majority work in  brick and mortar offices. Many of their patients can’t afford – or would be severely financially strained by – traditional orthodontists. It stands to reason that some state dental boards and even the ADA could have been pressured by orthodontists and organized groups that advocate for them.

For investors, shares of SDC appear reasonably priced given the company’s growth and profit trajectory. The stock trades at an enterprise value of 4.8 times 2020 sales, which are expected to grow 52% this year, according to Sentieo, a leading AI-enabled financial research and workflow platform. Ebitda is also expected to swing positive this year, reaching $618 million in 2023 – indicating a multiple of 8.8 times.

Perhaps the most significant recent development is SDC’s ability to sell through dentists and orthodontists. Until now, SDC rival Align Technology, Inc. controlled that channel under an agreement, but SDC will begin selling through dentists in its partner network who are already familiar with the product, with potential to expand further.  Meanwhile, Align was forced to close its standalone stores last year and won’t be able to reopen them for some time.

The beauty of the Walmart consumer products channel is that it exists outside of the dental world. While it’s only beginning, the chance to capitalize on the SDC brand with mass-market retail products has enormous potential.

While any product is bound to have customer complaints, SDC is overwhelmingly popular. It has received over 20,000 Google reviews in the last year and has 4.9 out of 5 stars.

IPO Edge interviewed a father who chose SDC for two of his children. “We chose SmileDirect because it was so easy and you can do it from home,” he said. “Also, they are practically invisible and priced fairly reasonably. Michelle decided on SmileDirect because she liked the customer reviews. Turned out great and both she and Tommy are very happy.”

The latest data point to a continued upturn in sales for SDC. Alexa search results, as tracked by Sentieo, show traffic to smiledirectclub.com returning to peak levels before the IPO announcement, which likely caused an artificial spike in interest.

“We have seen a very interesting phenomenon in alternative data sets for med tech: Since these are high involvement, high cost purchases, things like search interest and web traffic have good validity,” according to Nick Mazing, Director of Research at Sentieo. “There tends to be a high correlation between search traffic and revenue.”

 

IPO Edge Contact:

John Jannarone, Editor-in-Chief

www.IPO-Edge.com

Editor@IPO-Edge.com

Twitter: @IPOEdge

Instagram: @IPOEdge