Investing

Every major analyst loves SmileDirectClub shares even after IPO tanks

Key Points
  • Eight major Wall Street firms initiated coverage of SmileDirectClub on Monday with buy ratings, despite the stock being down 36% since its initial public offering last month. 
  • SmileDirectClub is not yet profitable but Credit Suisse estimates the teeth-straightening start-up can reach profitability by 2020. 
  • "SmileDirectClub's clear aligners and the DTC business model the company employs solve many of the issues in the orthodontics market that have remained unaddressed for several decades –high costs and a significant time commitment," said J.P. Morgan's Robbie Marcus in a note to clients.
  • J.P. Morgan has the highest price target on the Street, $31. 
Jordan Katzman, co-founder of SmileDirectClub Inc., center, and Alex Fenkell, co-founder of SmileDirectClub Inc., right, look at a monitor during the company's initial public offering (IPO) at the Nasdaq MarketSite in New York, U.S., on Thursday, Sept. 12, 2019.
Bloomberg | Bloomberg | Getty Images

Wall Street loves SmileDirectClub but the stock's performance is not something to smile about.

Eight major Wall Street firms initiated coverage of the newly-public teeth-straightening start-up on Monday with buy ratings and rave reviews, despite the stock's poor debut.

"We are bullish on the story and see a long runway of continued strong sales growth as the company is poised to benefit from a leadership position in a vastly underpenetrated TAM (total addressable market)," said Bank of America's Michael Ryskin in a note to clients. The firm has a $19 price target on SmileDirectClub.

Shares of SmileDirectClub are down 36% since its initial public offering last month, after tanking 28% on its first day of trading. The online dentistry company's ranks as the fifth worst debut of the 123 companies to go public this year. UBS said the stock's recent underperformance spurs from concerns about third-quarter operational issues impacting revenue growth and new regulatory risks in California weighing on sentiment.

"When the company reports 3Q earnings on November 12th, we believe we will get visibility on growth when management can explain the magnitude and duration of the issues," said UBS analyst Kevin Caliendo.

There is a blackout window following IPOs where major analysts from underwriting firms restrain from writing about the new stocks as to not appear hyping up the shares. It goes back to the rules put in place to create a separation of the investment banking and research units. Now that the blackout is over, analysts are free to write what they want about SmileDirect, though skeptics will say the analysts are still just trying to support shares brought public by their firms.

Profitability woes

The start-up, founded in 2014, sells teeth aligners directly to consumers on its website and in its "SmileShops" starting at $1,895 for a two-year plan. SmileDirectClub shares will open at $14.72 on Monday but Wall Street set price targets for the company from $18 to $31 per share.

"SmileDirectClub's clear aligners and the DTC business model the company employs solve many of the issues in the orthodontics market that have remained unaddressed for several decades –high costs and a significant time commitment," said J.P. Morgan's Robbie Marcus in a note to clients. The firm has a $31 price target on the stock, the highest on the Street.

While firm's are betting on SmileDirectClub for its dominant position in an untapped market, SmileDirectClub is not yet profitable. The company posted a net loss of $74.8 million last year, more than double the net loss of $32.78 million in 2017, according to its prospectus.

Credit Suisse estimates the company can reach profitability by 2020, the firm's research analysts Erin Wilson Wright said in a note to clients.

Wall Street is also betting big on SmileDirectClub's growth potential. UBS forecasts 50% compound annual revenue growth by 2023.

"We think the US alone could be a $70B market opportunity for SDC," Caliendo said.

Guggenheim named the stock a Best Idea as the company is in its "early innings of growth, disrupting the traditional orthodontics market by providing a cheaper, more aesthetically pleasing alternative to brackets and wires," said the firm's analyst Glen Santangelo in a note to clients.

Shares of SmileDirectClub fell 8.36% on Monday.

— with reporting from CNBC's Michael Bloom.

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