What SmileDirectClub's Fall Means for Retail Investors

By Kirsteen Mackay


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SmileDirectClub's bankruptcy offers valuable lessons for retail investors. From assessing risk in high-growth startups to exploring new investment opportunities, discover how this case could shape your investing approach.

In this photo illustration the SmileDirectClub logo seen displayed on a smartphone.
Diversification Lessons from SmileDirectClub's Decline

SmileDirectClub Inc (NASDAQ: SDC) operates in the teledentistry sector. The company came into existence in 2014, thanks to the efforts of co-founders Jordan Katzman and Alex Fenkell. It is based in Nashville, Tennessee. SmileDirectClub's journey over the years presents a case study in the volatility and challenges of startup scaling and market competition. After going public in 2019 with an initial valuation of $8.9 billion, the company recently filed for Chapter 11 bankruptcy.

Despite raising $1.35 billion in its IPO, it listed $499 million in assets against more than $1 billion in liabilities at the time of the bankruptcy filing. This allows it to continue operations while restructuring its debt and business model, with its founders injecting at least $20 million as part of the reorganization.

Once the bankruptcy petition is filed, the court typically issues an "automatic stay," which temporarily halts all debt collection activities against the company. This gives the company breathing room to reorganize its finances or to liquidate assets under the supervision of the court.

In the case of SmileDirectClub, the bankruptcy petition is a crucial first step in its recapitalization strategy, providing it with the legal framework to restructure and improve its financial health.

The Highs

SmileDirectClub initially captured attention and market share by offering a cost-effective alternative to traditional braces. Its direct-to-consumer model was groundbreaking, leveraging plastic aligners to straighten teeth at a fraction of the cost. At one point, it even entered into an exclusive deal with Walmart (NYSE: WMT) to sell oral care products, including an electric toothbrush and a tooth whitening system. This partnership aimed to disrupt the oral care aisle and also helped Walmart appeal to a younger demographic.

The Lows

However, the road was far from smooth. SmileDirectClub never posted a profit, and its revenues started to decline over the years. During the pandemic, it cut back significantly on sales and marketing efforts. It also got embroiled in a patent fight with a rival, further draining its resources. These challenges, coupled with an intensely competitive market featuring giants like Align Technology and newer entrants like Candid and Byte, severely impacted its financial health.

The Walmart Deal: A Mixed Bag

The Walmart deal, announced in January 2020, did initially cause the stock to surge. Yet, the gains were short-lived. The deal put SmileDirectClub in direct competition with established brands like Colgate-Palmolive, as well as subscription-based oral care services such as Burst and Goby. Even with the Walmart partnership, and a positive share price run through 2020, SDC stock never regained its IPO price.

What Lies Ahead

As it stands, SmileDirectClub's future is uncertain but not entirely bleak. The Chapter 11 filing offers it a lifeline to restructure and hopefully return stronger. The commitment from the founders to reinvest in the company shows a level of confidence in its core business model. However, to turn the tide, the company will need to address its declining revenues, resolve its legal issues, and find a way to stand out in an oversaturated market.

SmileDirectClub offers crucial lessons on the risks and rewards of disrupting traditional industries. Its initial success showed promise, but the subsequent challenges have proven that innovation alone is not enough to guarantee long-term stability.

Why This Is Important for Retail Investors

  1. Risk Assessment in High-Growth Startups: SmileDirectClub’s journey illustrates the high risks involved in investing in startups that show rapid growth but lack profitability. Despite a groundbreaking business model and a multi-billion-dollar valuation at its IPO, the company filed for bankruptcy. This serves as a cautionary tale for retail investors who may be swayed by buzz and initial market excitement.

  2. Importance of Due Diligence: The Chapter 11 filing is a clear reminder of the importance of conducting thorough due diligence. Retail investors should scrutinize not just a company's growth prospects but also its balance sheet, liabilities, and revenue streams. SmileDirectClub had $499 million in assets compared to $1 billion in liabilities, a red flag that diligent investors would not overlook.

  3. Market Competition and Legal Issues: SmileDirectClub's case underscores the impact of market competition and legal challenges on a company's financial health. Despite its innovative approach, it couldn’t maintain a competitive edge and got tangled in a patent dispute. Retail investors need to factor in such external challenges when evaluating a company's long-term viability.

  4. Founder Involvement: The founders' decision to invest $20 million in the company during its reorganization can be a double-edged sword. On one hand, it signals confidence in the company’s core business model; on the other, it could indicate desperation. Either way, it’s a significant development that retail investors should monitor closely as it could impact the company’s future and, consequently, the stock price.

  5. Market Trends and Consumer Behavior: SmileDirectClub’s initial success and subsequent struggles reveal how market trends and consumer behavior can drastically affect a company. Initially, the company capitalized on a gap in the market by offering affordable dental aligners. However, as the market evolved and competition increased, it failed to adapt. Retail investors should be attuned to such market shifts as they can dramatically affect a company's financial standing.

In essence, SmileDirectClub's situation offers retail investors a comprehensive case study in the complexities of investing in high-growth, disruptive companies. It highlights the need for a multi-faceted evaluation strategy that goes beyond surface-level metrics.

How Can You Use This Information?

Based on the insights gleaned from SmileDirectClub's situation, here are some investing ideas that can be explored across different investing styles:

Value Investing

  • Distressed Assets: Investors might see SmileDirectClub as a value play if they believe the company’s assets are undervalued due to the bankruptcy filing. However, this approach carries a high level of risk and requires deep due diligence.

  • Sector Pivoting: For those interested in the dental or healthcare sector, researching competitors that offer better value based on fundamentals could be a strategy. Look for companies with strong balance sheets, consistent profitability, and a sustainable competitive advantage.

Growth Investing

  • Disruptive Competitors: SmileDirectClub's decline may pave the way for other disruptive startups in the dental care sector. Growth investors might want to identify these up-and-coming companies that have learned from SmileDirectClub’s mistakes.

  • Tech-Enabled Healthcare: The use of technology in healthcare isn't going away. Investors could explore companies that offer tech solutions for healthcare and wellness, as these may offer significant growth potential.

Momentum Investing

  • Short-Term Gains in Competitors: Given the bankruptcy filing, competitors might experience an uptick in their stock prices due to a perceived increase in market share. Momentum investors could capitalize on this short-term trend.

  • Bankruptcy Resolution Impact: Depending on how the market reacts to subsequent announcements about SmileDirectClub's restructuring, there could be momentum trading opportunities. However, this would be extremely speculative and risky.

Thematic Investing

  • Direct-to-Consumer Models: Despite SmileDirectClub's issues, the direct-to-consumer model remains strong in many sectors. Investors might explore companies that excel in direct-to-consumer distribution but have demonstrated a stronger financial footing.

SmileDirectClub's story serves as a compelling reminder of the importance of due diligence, a balanced portfolio, and a keen understanding of market dynamics.

Key Takeaways from the Bankruptcy Filing

  • SmileDirectClub, a next-generation oral care company listed on Nasdaq, recently announced plans for a comprehensive recapitalization transaction. This move aims to strengthen its balance sheet and fuel growth, positioning the company as a leader in international oral care.

  • The founders of SmileDirectClub are committed to investing a minimum of $20 million to enhance the financial health of the company. An additional $60 million could also be invested if certain conditions are met, including the successful conclusion of a marketing process. This investment underscores the founders' commitment to the company's mission and their belief in its new initiatives, such as the SmileMaker Platform and CarePlus.

  • To facilitate this recapitalization, SmileDirectClub has filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of Texas. Despite the ongoing restructuring, the company plans to continue offering its oral care services without interruption. The liquidity from the founders' investment, combined with its regular operating cash flow, should allow SmileDirectClub to meet its obligations to stakeholders throughout the restructuring process.

  • David Katzman, the CEO of SmileDirectClub, expressed optimism about the company's future. He emphasized the transaction aims to align the company's financial structure with its quality and team talent. Katzman also reiterated the company's dedication to offering quality oral care to its over 2 million customers.

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This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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