By Ciara Linnane, MarketWatch
Just one business day after a short seller slammed teeth-straightening startup SmileDirectClub alleging that it has cut corners and put customers at risk, the banks that led its September initial public offering have published notes on the company, with all 10 rating it the equivalent of buy.
JPMorgan initiated coverage of Nashville, Tenn.–based SmileDirect /zigman2/quotes/214109287/composite SDC +1.63% with an overweight rating and share-price target of $31, or more than double the stock’s current price of about $14. Citigroup, Merrill Lynch, Jefferies, UBS, Credit Suisse, Guggenheim, Stifel, William Blair and Loop Capital Markets also rated the stock a buy.
“These are just SmileDirect’s underwriters hyping their own offering,” said Nathan Anderson, Founder of Hindenburg Research and author of a report published Friday that questioned the company’s “teledentistry” model, highlighted its losses and predicted financial headwinds from regulatory, legal and customer satisfaction liabilities.
“JP Morgan led the IPO, so not surprisingly it has the rosiest price target. These are many of the same banks that thought WeWork, which is now struggling for solvency, was a bargain at $20 billion,” said Anderson.
JPMorgan declined to comment.
SmileDirect’s stock fell 5.5% Monday in spite of the 10 new buy ratings. The stock has struggled since its IPO and is 34% below its issue price of $23.
“Today’s market reports reinforce the value of our business model, unit economics and mission to transform smiles through safe, affordable and consumer-first technology to an addressable market of approximately 500 million people worldwide,” the company told MarketWatch in emailed comments. “We remain focused on long term shareholder value - the next 12, 24, 36 months and beyond.”
The company calls itself an orthodontics disrupter, using a business model that allows customers to receive clear aligners by mail. Customers can either get a free 3-D image of their teeth taken at a so-called Smile Shop or buy a kit online to make an impression of their teeth that they can mail to SmileDirect. The company then develops and ships the clear aligners — a form of dental braces — back, and the customer undergoes a five- to 10-month treatment plan.
“The company sets itself apart from both traditional orthodontics players and direct-to-consumer competitors with (1) the convenience and ease of access it provides over the traditional orthodontics business model; (2) affordable product offerings; (3) a seamless in-house financing option; and (4) complete vertical integration, which drives a best-in-class patient experience,” JPMorgan analysts led by Robbie Marcus wrote in a note to clients.
The addressable market for straightening teeth is significant, said the note, with less than 1% of the company’s target market receiving care and a multiyear runway for growth. “We see a clear path to sustained top-line growth at an almost 50% 2018-23 CAGR, which we view as conservative,” said the note.
Stifel analyst Jonathan Block agreed that there is demand for the product, although he acknowledged challenges.
“To be clear, our checks among consumers identified areas of dissatisfaction, as customer service and lack of oversight [by a medical professional] were issues for a subset of respondents,” Block wrote. “That said, we saw relatively solid ratings for the overall SDC experience despite these shortcomings, as a straighter smile and whiter teeth at a $2,000 price point seemingly resonated with the majority of the company’s customers.”
Hindenburg’s Anderson wrote that the company has attracted more than 1,200 Better Business Bureau complaints in its five years of existence, and some of its practices have been deemed illegal by dental boards in Alabama and Georgia. Medical organizations, including the American Dental Association and the American Association of Orthodontists, have alleged that the company is endangering patients and is practicing medicine illegally, he wrote.