'Meaningful First-Mover Advantage': SmileDirectClub Analysts Sound Optimistic Note After Rough First Month

SmileDirectClub Inc SDC's momentum failed to hold up after its September debut on the Nasdaq.

The shares were initially priced at $23 a piece, opened at $20.55 and fell below $13 last week. 

A flood of analyst initiations Monday suggest there’s still hope for the fledgling stock.

The Ratings

• Citi initiated coverage with a Buy/High Risk rating and $19 price target;
• Credit Suisse initiated with an Outperform rating and $18 target;
• JPMorgan initiated with an Overweight rating and $31 target;
• Loop Capital initiated with a Buy rating;
• Stifel initiated with a Buy rating and $19 target;
• UBS initiated with a Buy rating and $24 target; and
• William Blair initiated with an Outperform rating.

The Niche

SmileDirectClub employs teledentistry technology to sell clear corrective aligners and increase access to orthodontics.

“This unique, vertically integrated, direct-to-consumer approach allows SDC to solve for an underserved segment of the orthodontics market, fueling top quartile growth with built in margin expansion,” Citi analyst Stephanie Demko said in a Monday initiation note. 

The company differentiates itself with convenience, affordability, in-house financing and vertical integration. JPMorgan considers the company as a solution to decades-long problems plaguing the orthodontics market.

“By using teledentistry, the company can reach a patient population that was either unwilling or unable to undergo traditional orthodontic treatment for cost, access or convenience reasons,” analyst Robbie Marcus said in a Monday initiation note. 

SmileDirectClub is expected to hold its ground as an industry disruptor and emerging leader.

“We believe SDC has demonstrated prowess in marketing and manufacturing that has created a meaningful first-mover advantage in the DTC clear aligner market,” UBS analyst Kevin Caliendo said in a Monday initiation note. 

The Market Opportunity

Caliendo sees a $70-billion opportunity in the U.S. with a total addressable market of 40 million adults. The analyst expects 15% penetration through 2023 to drive gross margins of around 85% and EBIT margins around 17%.

JPMorgan highlighted a $569-billion global revenue opportunity and expects compound annual revenue growth near 50% as SmileDirectClub achieves brand awareness and scale.

“The global addressable market for malocclusion is significant, and with less than 1% of SmileDirectClub’s target market receiving care today, there is a long, multiyear runway for global growth,” Marcus said. 

“... Looking ahead, continued international expansion, increased SmileShop rollout, and the opportunity to expand into other oral care product lines offer meaningful potential.”

Near-Term Catalysts

Similarly, Credit Suisse anticipates upside to come as a result of innovation and international expansion efforts.

“Its partnerships with CVS Health Corp CVS, Walgreens Boots Alliance Inc WBA, and other international retailers allow SDC to expand and further optimize its SmileShop footprint in a capital efficient manner, while SDC's in-house financing service will address cost as a key barrier for penetration (used by 65% of customers),” analyst Erin Wilson Wright said in a Monday initiation note. 

Operational turnarounds may help, too. UBS attributes the stock’s early struggles to new regulatory risks in California and investor concerns over revenue-stunting operational issues.

“The company's cost to acquire customers has spiked in the last two quarters, but we think the trend will turn by year-end and eventually fall below the gross profit per customer by 2022,” Caliendo said, noting enduring risks in emerging competition and bloated marketing expenses.

While legislative impacts could take time to manifest, the analyst said he expects clarity on operational setbacks in SmileDirectClub's November earnings report.

Price Action

SmileDirectClub shares were down 1.36% at $14.52 at the time of publication.

Related Links:

SmileDirectClub Aims To Raise About $1.2B With IPO

SmileDirectClub IPO: What You Need To Know

Photo courtesy of SmileDirectClub.