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While SmileDirectClub might be seen as just another tech unicorn that has trouble with profitability, I see a DTC (direct-to-consumer) brand that has the potential to truly disrupt the orthodontist business. Like Uber, a unicorn that has its issues with taxi companies, SmileDirectClub also has its issues with orthodontists. Because of the company's continued cash burn and because investor sentiment has been low on tech unicorns, SmileDirectClub's stock hasn't been performing well.
Months ago, Hindenberg Research published a short-seller report against SmileDirectClub. In that report, short-seller Nate Andersen cites many complaints and numerous bad reviews of the company's products, the NDA forms that the company forces customers to sign, self-dealing, the bad work culture, and many more issues.
To sum up Hindenberg Research's thesis:
“All told, we believe SmileDirectClub will wind up as a case study in why it’s a bad idea to invest in a company that attempts to fit a complex, dangerous medical process onto a low-cost, high volume assembly line.”
While these negatives are all things we should all pay attention to, according to the Better Business Bureau, SmileDirectClub has an A+ rating. Having a rating this strong amidst all of these allegations makes Hindenberg's points less relevant. The strong rating shows that SmileDirectClub is running their business well. While their BBB profile shows that customer ratings are 4-stars and not 5-stars, it's still a great rating for a company that has created many horror stories.
Regarding the self-dealing part, I am partially concerned about it but as long as the business continues to stay strong and stick to its mission, I'll let the self-dealing issue not bother my bullish views on the company.
The Bull Case
The overall bull thesis for SmileDirectClub is that they're disrupting the orthodontist industry. In other words, they're providing a generic version of Invisalign.
While Align Technologies, the creator of the Invisalign, provided orthodontists with an easier and more attractive alternative to braces, orthodontists continue to charge high prices to patients wanting to straighten their teeth. With the patent for the Invisalign expired, SmileDirectClub is looking to capitalize on that by providing a generic version of it.
What makes SmileDirectClub different in terms of
business model is that the startup is looking to have the middleman, aka the orthodontist, removed from the equation and is having the savings passed down to the customers. By relying a lot on
teledentistry, the dentists at SmileDirectClub can create models for the Invisalign devices from looking at your teeth on the internet and ship you the Invisalign devices to your house. SmileDirectClub even has
locations people can go to where a dentist gets a 3D image of your teeth and ships the Invisalign devices to your home.
The whole business model decreases costs for both consumers and the company significantly. That's what makes the Invisalign devices cheaper at SmileDirectClub. Instead of paying $5,000 for an Invisalign from an orthodontist, you can get the same Invisalign devices from SmileDirectClub and pay $1,895. Plus, the company does have payment plans so that way you won't have to pay a huge sum upfront for the dentistry devices.
SmileDirectClub also had a huge opportunity ahead of itself. Besides being cheaper than braces and Invisalign devices from the orthodontist, there is a huge shortage of orthodontists in the US. According to the
Department of Health and Human Services, more than 60% of the counties in the country don't have an orthodontist's office. On the same note, the American Teledentistry Association believes that doctor-directed at-home clear aligner therapy can increase access to orthodontic care. Because SmileDirectClub provides doctor-directed at-home clear aligner therapy to customers, the company is well poised to capitalize on this problem. And for the areas that are hard to reach, the
SmileBus allows SmileDirectClub to reach those areas and provide people there with orthodontal care.
There are many growth catalysts for SmileDirectClub.
SmileDirectClub has formed partnerships with Walgreens and CVS, giving the startup access to a lot more potential customers and will have an easier time expanding its physical footprint. Also, SmileDirectClub is looking to sell dentistry products on
Walmart shelves and Walmart's Jet.com, making it a competitor to Colgate, Crest, and many other oral care brands. Also, by expanding its operations to cater to
teenagers, SmileDirectClub will get to ride orthodontia's largest and fastest market.
SmileDirectClub's largest growth might not happen in the US but
internationally. In many parts of the world, getting your teeth straightened can be expensive and there are plenty of areas that lack access to an orthodontist. Since there doesn't seem to be many companies providing the generic version of the Invisalign devices, SmileDirectClub will have an easier time competing overseas. And by expanding their services to cater to teens, SmileDirectClub can sell to teens in other countries and ride the huge growth in orthodontal services there.
Conclusion
There is
so much to love about SmileDirectClub. Despite the many negatives, SmileDirectClub continues to have a great BBB rating and their products and success
are making orthodontists scared. Like any disruptor, they'll be facing opposition from those that dominated the industry for a long time. Look at Uber and the many taxi companies it angered when disrupting the taxi industry. Also, consider how lawyers felt when LegalZoom tried to disrupt the legal services market. SmileDirectClub is no different as its products and services are creating conflict with orthodontists.
While the company continues to exhibit negative free cash flow and no profits, their strong growth continues to amaze me. It's only a matter of time until the company starts giving the cash flow and profits that investors have waited for. In the meantime, they're investing a lot into growth and in establishing their position in the orthodontal industry.
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