Please ensure Javascript is enabled for purposes of website accessibility

Why Orthodontists Are Scared of SmileDirectClub

By Taylor Carmichael - Oct 29, 2019 at 9:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

An online startup is disrupting an industry with a cheaper and easier alternative.

Many companies provide YouTube videos where the founder or CEO discusses the business. What's surprising about SmileDirectClub (SDC 3.85%) is all the YouTube videos posted by its customers. People show off their new smiles and talk about the pros and cons of the service. One of these fan videos has been watched by more 700,000 people, pretty fantastic word-of-mouth advertising. Its value proposition is simple: SmileDirectClub will fix your smile. And it's a lot cheaper than going to the orthodontist.  

One of the amazing things about SmileDirectClub is how large its market opportunity is. There are 124 million potential customers in the U.S. and half a billion worldwide. At the prices SmileDirectClub charges, that's a total addressable market (TAM) of $234 billion in the U.S. and more than $700 billion in the rest of the world, which puts its TAM at almost $1 trillion worldwide.

happy smile

Source: Getty Images.

What is SmileDirectClub?

SmileDirectClub is disrupting the orthodontics industry by providing a generic version of the Invisalign teeth aligned that's direct to consumers. Many years ago, a company called Align Technology (ALGN 4.51%) developed a better way to deal with misaligned teeth than traditional metal braces that were grafted into your mouth. Align provided a clear aligner that does the same job and can be put in and removed at will. Orthodontists loved this product because it made their job a lot easier, and they could keep charging the same prices to their patients.

Now that Invisalign has come off-patent, the orthodontics industry is finding its entire business model disrupted. SmileDirectClub uses the same clear aligners, but it cuts out the orthodontist middleman by selling straight to customers. The company relies on teledentistry, which means a dentist looks at your teeth via the internet. At one of its hundreds of Smile Shops, the company takes a 3D image of your teeth. The aligners are made to order and shipped right to your home.

This makes the process a lot cheaper. SmileDirectClub charges $1,895 for its service, versus $5,000 to $8,000 for existing alternatives. And you can spread the payments out. You just make a down payment of $250 and monthly payments of $85.

SmileDirectClub is bringing affordable orthodontics to a huge number of people. More than 60% of counties in the U.S. don't have a single orthodontist office, according to SmileDirectClub. So SmileDirectClub is making teeth alignment both cheaper and more ubiquitous.

The company is growing revenues at a blistering pace of 113%. SmileDirectClub had $586 million in sales over the past four quarters and will surpass $1 billion over the next four. And while SmileDirectClub is currently unprofitable, its profit margin is only negative 16%. Subtracting this negative profit margin from its triple-digit revenue growth, the company has a Rule of 40 score of 97. This is an outstanding business.

The orthodontists fight back

Not surprisingly, orthodontists are unhappy about being undercut by the ease, simplicity, and minimal costs of SmileDirectClub. The American Dental Association and the American Association of Orthodontists have attacked the company. It's not dissimilar to cab drivers being unhappy about Uber or lawyers complaining about LegalZoom. 

The Dental Board of California has been raiding the company's Smile Shops as part of an investigation. The American Association of Orthodontists is running its own video ads emphasizing the need for people to use a specialist for their teeth straightening needs.

It's a lost cause. SmileDirectClub has already improved the smiles of 750,000 people and is reaching more potential patients every day. NBA star Draymond Green was an early user and now he's an investor. "It's affordable, which is extremely important. There are so many people who don't have access to braces or other companies that are not as affordable to correct their teeth," he said.

SmileDirectClub has distribution deals with pharmacy chains CVS (CVS 1.38%) and Walgreens Boots Alliance (WBA 1.74%), where Smile Shops are established inside the drug store. So the tiny startup has some powerful partners.

But the main thing that frightens orthodontists is how popular the service is. The company has a net promoter score of 57, compared to an average net promoter score of 1 for the dental industry. The net promoter score is an attempt to gauge how often people will recommend a business or service to friends. While one may quibble about how accurate a net promoter score is, such an extreme difference suggests what is common sense: Most people hate going to the orthodontist.

For shareholders, owning SmileDirectClub's stock promises to be a bumpy ride. The stock is already being attacked by short sellers in the month following its IPO. The stock is down over 50% from its initial price of $23 a share. But for investors who can stomach a little volatility, this stock could prove to provide an outstanding return on your money. 

 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Align Technology, Inc. Stock Quote
Align Technology, Inc.
ALGN
$247.34 (4.51%) $10.67
SmileDirectClub, Inc. Stock Quote
SmileDirectClub, Inc.
SDC
$1.08 (3.85%) $0.04
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
WBA
$38.56 (1.74%) $0.66
CVS Health Corporation Stock Quote
CVS Health Corporation
CVS
$93.94 (1.38%) $1.28
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
UBER
$21.34 (4.30%) $0.88

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.