In this clip from Industry Focus: Tech, analysts Dylan Lewis and Joey Solitro explain why they're so bullish on the recently public SmileDirectClub (NASDAQ:SDC). Learn what this healthcare/tech company does, some of the most exciting numbers from its S-1, just how huge its market opportunity is, where Invisalign -- and other competitors -- fit into the picture, some risks that interested investors should keep an eye on, and more.

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This video was recorded on Sept. 20, 2019.

Dylan Lewis: We're going to cover these in chronological order. We've got Smile Direct, Cloudflare, and Datadog. Definitely three companies that we're going to have to explain a little bit. They don't have the brand name recognition of some of the other IPOs we've talked about in the past. Let's talk about Smile Direct Club first.

Joey Solitro: I'm sure a lot of people know the Invisalign brand for braces. What these guys have done is, Invisalign is actually a supplier of theirs, where they're going direct to consumer with these. They'll have their mold kits, or you can go into one of their Smile shops. They actually have partnerships with CVS and Walgreens, so they're going to start popping up in there. And basically, they take a scan, or they take this mold of your teeth, they ship it to their orthodontists over in Costa Rica, and they create this plan. And then it comes back to a local orthodontist near you that says, "Yeah, they're a candidate for this. Let's give them the green light to go." And then within three to four weeks, you have your new, clear aligners.

The cool thing about them is, they're reducing the cost of doing this. I was doing some research, and traditional braces, whether metal or through Invisalign, is $5,000 to $8,000. Smile Direct is $1,895. They broke it down below $2,000, and you're going to be wearing these for five to 10 months instead of 12 to 24 months. Shorter time, less money, you don't have to waste your time going to the orthodontist 10 to 15 times. It's just a great business model. The growth is real with this one.

Lewis: The way that I think about this one is Warby Parker, but for teledentistry.

Solitro: Exactly.

Lewis: They made their money, and they really got into a market, by saying, "We can cut out a lot of the costs that come with eyewear. We don't need all these flashy retail locations." They ultimately decided to do that. But for a while, they were saying, "We're going to cut all that stuff out, we're going to bring the cost down, because we're doing a direct to consumer model and we don't have nearly as much overhead as some of the other guys out there." That's what Smile Direct has done. The difference is, they're doing it with dentistry.

Solitro: Pretty much, yeah. If you own your supply chain, you can completely reduce the cost. You could go to an orthodontist who buys materials from this person, or has this person make their braces or their aligners. Or, you can go to this one company that cut out a lot of the fat, reduced the costs, and it's going to come directly to you.

Lewis: You mentioned the growth. There are some pretty staggering numbers if you look at the financials. They were up 184% year over year in 2018, over 100% year over year growth in revenue the past two quarters. It seems like this concept is catching on. When you come into the marketplace at a lower price, people tend to pay attention.

Solitro: The other thing, on top of the very impressive growth, gross margin over 75%. I was not expecting that. I thought, based on this growth and what they're doing, they're probably under 50%. I was shocked. And then you see they're aiming for I think was 80% to 85% gross margins long-term. That's not that much of a stretch.

Lewis: Some other stuff that I really like with this business -- people might be surprised that we're talking about it on a tech show, because this is, in some ways, a consumer goods company. But ultimately, the reason that they're able to offer these lower prices is, they've figured out a more integrated system to make all this happen. I'm going to give them a tech check because of that. You look at what they have in terms of inventory, it's tiny. They have very little inventory given what they do in sales. $13 million in inventory at the end of a period where the company did almost $600 million in trailing 12-month sales. You don't see that too often for anything in the consumer goods space.

Solitro: No. That's one thing I don't play with -- I don't like companies with inventory. I love my SaaS companies. If you have a product housed and you have to sell it, and it becomes this toxic inventory, it's just something I've never had success investing in. Traditional consumer goods with these heavy inventories, retailers. So, yes, to see this, that's definitely what I would consider tech because teledentistry, it's almost like Teladoc, where they're saying, "Instead of going to the doctor's office, we'll bring the doctor's office to you." They say, "Instead of going to the orthodontist, we'll bring it to you and make it much easier and much cheaper."

Lewis: And if there's anything we've learned over the last couple years, it's that people will happily take things delivered to their doorstep, pretty much regardless of the industry.

Solitro: I think I'm a very active person, but if you tell me, "Hey, you don't have to go to the grocery store, you can go through Instacart," or, "You don't have to go to the doctor, use Teladoc," it's one less person for me to have to see and pay an inflated amount of money. I'll pinch pennies here and there. Plus, I have two daughters and a son on the way. You're telling me I could spend $1,900 for braces instead of $5,000 to $8,000 apiece. I know my wife was telling me she had to wear braces for over two years to have some correction. I can only imagine how much that was costing her parents. This is just a win-win on both sides for me.

Lewis: Good for consumers. And it seems like it's going to be good for them as a business as well. There's one thing I think that's worth highlighting here. They are not profitable, as you might expect for a company that has recently gone public. The spend is coming on acquisition. That's really what's taking them into the negatives. A lot in SG&A and marketing. We talk about software businesses a lot. Some of the companies we're going to be talking about check this box as well. You spend a ton early on to scale your company. And then you have the lifetime value of the customers that you bring. Takeover. That exceeds whatever you spent to bring those customers in. I buy that narrative for a software business. I worry a little bit with a more consumer packaged product. If someone buys something, or they have this orthodontics kit delivered to them, they aren't a lifetime customer, necessarily. They're being serviced themselves. Once they have their teeth all in order, that might be it.

Solitro: Well, then you have the retainers. They also do the retainer business. You do have that. One thing I like to say is, they're in the ultimate land grab right now. They have a couple competitors. I know Candid is a notable one. I was looking through their S-1. I think they had three other competitors that are like them. So you have to remember, Invisalign, their patent came off in late 2017. 2018 was pretty much where these guys had to start pumping out as much marketing as they could to acquire as many customers as they could. I think they've been in operation since 2014. It's pretty much been in preparation for this ultimate land grab that's going on right now. It's almost like you have to be in the market for it. If you search invisible braces or Invisalign, of course these companies are going to pop up, because that is becoming more popular. Especially for older people that didn't have braces in middle school or high school, they don't want to be walking around with mouths full of metal right now. That's definitely what I would be doing, I'd go the invisible route, especially if you're saving money and it's less time. So I think people are going to be looking for those alternatives. And it's that land grab. That's the only term I could really use.

Lewis: The counter to that point is, if you have a family of three, you spend to get the first kid, from a marketing perspective. And if a family has three and all three need braces, well, there you go, you're fine. You can get the word of mouth going, and then the business results will just take over.