Don't be distracted by reports of a disappointing initial public offering (IPO) for SmileDirectClub (NASDAQ:SDC). Sure, the stock remains below the initial IPO price of $23 per share. But the more important story relates to SmileDirectClub's long-term prospects.
It won't be just investors who pay attention to those prospects. You can bet that Align Technology (NASDAQ:ALGN), the leader in the clear dental aligner market, is watching its smaller competitor like a hawk. Could SmileDirectClub even knock Align Technology out of alignment?
Since both Align Technology and SmileDirectClub market clear invisible aligners, you might think that Align would be concerned about the potential threat from its newest publicly traded competitor. But that's not the case, at least based on what Align's management says.
In Align's second-quarter conference call, CEO Joe Hogan said what the company's executives have stated in the past: There's around a 10% overlap between the two company's markets. Align is clearly (no pun intended) looking at the positive angle here by focusing on the 90% of its market where SmileDirectClub doesn't currently compete.
Align continues to generate solid growth. In the second quarter, international shipments of its Invisalign clear aligners jumped by 36.7% year over year while U.S. Invisalign shipments increased by 16.5%. Although Align's revenue growth wasn't as robust as anticipated, the main culprit was a soft consumer market in China and not SmileDirectClub.
It's also likely that Align hopes dentists and orthodontists will help keep SmileDirectClub from becoming too great of a threat. National and state dental associations have come out swinging against SmileDirectClub and other providers of orthodontics products that don't require in-office visits.
SmileDirectClub's ability to operate in states depends to a great extent on the state's telehealth regulations as well as the state dental board's regulations regarding the practice of dentistry. It would be surprising if professional organizations representing dentists and orthodontists don't lobby hard to prevent a significant portion of their business from being taken away.
More to the story
While Align Technology's team doesn't appear to be concerned about losing ground to SmileDirectClub, maybe they should be. For one thing, 10% is a big chunk of Align's market. It's not a good idea to dismiss a growing rival that is targeting that much of your turf.
Speaking of growth, SmileDirectClub is growing at a much faster rate than Align. Between 2017 and 2018, SmileDirectClub shipped 187% more clear aligners. In the first six months of this year, the company shipped nearly as many clear aligners as it did in all of 2018.
If you read between the lines with Joe Hogan's comments in Align's Q2 conference call, there are some hints that the company is at least a little more concerned than it's letting on. He noted the "heavy advertising from DTC [direct-to-consumer] players" without specifically mentioning SmileDirectClub. Hogan also said that in recent meetings with 200 orthodontists in four major U.S. cities a key topic of discussion centered on how to "help doctors compete more effectively against DTC offerings."
Perhaps the biggest reason for Align to worry is that teledentistry is only in its early stages. It's not unrealistic to envision a future where SmileDirectClub could compete in a lot more than just 10% of Align's market. With SmileDirectClub's average prices reflecting only a fraction of Align's average price for Invisalign, consumers could shift their buying patterns regardless of what their dentists and orthodontists think.
What about the obstacle for SmileDirectClub presented by state dental boards? The company filed lawsuits against the dental boards in Alabama and Georgia to prevent interference with its business model. It's also involved in litigation with the New Jersey Dental Association. Should SmileDirectClub prevail in these lawsuits, it could have a clear path to expand throughout the U.S.
Smiles all around
I own shares of Align Technology. I also think that SmileDirectClub could be very successful over the long run. And, yes, I suspect that it could put a dent to some degree in Align's potential growth. So am I ready to sell my Align stock? No.
My view continues to be that the market is big enough to enable both companies to generate strong long-term growth. Around 85% of individuals across the world have malocclusions (misalignment of teeth), but less than 1% of them are treated each year.
The U.S. orthodontics market alone represents an opportunity of more than $230 billion annually. By comparison, Align's total revenue in 2018 was less than $2 billion while SmileDirectClub's revenue last year was less than $400 million.
To be successful in investing in stocks, you have to keep an eye on the competitive landscape for the companies in which you own shares. For Align Technology, the competitive dynamics are definitely changing -- thanks in part to the rise of SmileDirectClub. But successful investors also should stay focused on companies' growth opportunities and ability to execute. I'm still sold on Align on both of these fronts. In my opinion, there's plenty of room for smiles all around.