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SmileDirectClub's IPO Was Misaligned, but Is the Company?

By Motley Fool Staff – Sep 19, 2019 at 11:04AM

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The disruptive dentistry business got a chilly welcome from Wall Street.

In recent years, some wily upstarts have been upending the traditional orthodontics business with teledentistry and 3D-printed clear aligners. One of those, SmileDirectClub (SDC 0.84%), went public last week with great fanfare, followed by a fairly stunning share price drop. It lost 28% on its first trading day.

In this segment from Motley Fool Money, host Chris Hill and senior analysts Andy Cross, Ron Gross, and Jason Moser consider where the problems lay -- with the business, or the offering -- and what its long-term outlook might be.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 13, 2019.

Chris Hill: SmileDirectClub went public this week. Shares fell 28% on the first day. That is a rough start, Jason, for the online dentistry company.

Jason Moser: Yes, maybe, but --

Hill: Wait, "maybe"?!

Moser: It's pulling back a little bit! All in all, it was a net loss for the week, but maybe it wasn't as bad as the first day portended. You look at IPOs, generally, they fall into one of two categories. Either it was well done and they made a lot of money from it, or it was mispriced and they didn't.

Ron Gross: Hot or not.

Moser: It looks like in this case, maybe it was a mispricing. I would encourage investors to not use an IPO mispricing as the reason to say, "This is a bad business/ a bad company." You dig through the S-1 for Smile Direct, and there's some interesting things here. It actually looks like it could be a pretty compelling idea. They paint a picture, certainly, of a very big market opportunity. U.S. market opportunity of 124 million people, $234 billion based on that $2,000 price tag. If you expand that out globally, obviously, it gets much larger.

I do like the value proposition vs. the traditional orthodontic model. Mac Greer, I know, loves it whenever I mention Teladoc and telemedicine. This gives you the opportunity to say teledentistry, Chris. Teledentistry. Just say it a few times. It rolls right off the tongue. Listen, they have 300 Smile shops around the world. Partnering up with CVS and Walgreens. You can either get this thing done through the mail or you can actually go to one of those mall shops and see an orthodontist in their network.

What works against them. They do have a very convoluted organizational structure that I would encourage investors to at least understand a little bit more about. But all in all, again, don't look at a bungled IPO as necessarily a sign of a bad business. It was obviously a bad IPO and not the best start, but it's an interesting business from a number of angles.

Gross: Yeah, yeah. Great business! Back to the IPO for a second. Am I right that they priced higher than the indicated range, and then the stock got slammed? That's and investment banking bundle a bungle to the 10th degree. That's a terrible pricing!

Andy Cross: And didn't they raise the range up a little bit too from what was originally reported?

Gross: Somebody did not read the demand correctly on this one. That's a big deal.

Cross: You'll often see that.

Andy Cross has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. Jason Moser owns shares of TDOC. Ron Gross has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends TDOC. The Motley Fool recommends CVS. The Motley Fool has a disclosure policy.

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