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Better Execution Needed to Move SmileDirectClub Stock Higher, Says Morgan Stanley

Is there an opportunity brewing in the dental product market? Morgan Stanley’s Erin Wright estimates it is a segment worth $26 billion and growing at low to mid-single digits a year, with the most growth attributed to specialty segments such as orthodontics and implants and digital solutions.

Within this industry, a more recent disruptive area of the general teeth-straightening segment is the global direct-to-consumer (DTC) clear aligner industry, thought to be worth around $1 billion. And the largest manufacturer in this category is SmileDirectClub (SDC).

Due to a dearth of providers in particular markets as well as an inability to afford treatment, the broader global orthodontics market is still hugely underserved, with most patients lacking adequate access to care. With this in mind, SDC’s business model is based on providing a big chunk of the 500 million patients with malocclusion to “cost-effectively access care.”

While the opportunity in this market is undoubtedly big, Wright believes SDC’s model also leaves it open to “several unique risks related to shifting consumer sentiment and reviews and targeted customer segmentation dynamics.”

Further clouding the picture, to-date the company has only had limited success, and even after a late-2019 “growth target reset” – to a controlled growth rate of +20-30% – it has underperformed vs. Street expectations, causing Wright to question whether the company’s strategy is “sufficiently focused.”

In an effort to improve performance, the company has recently said it plans on exiting certain foreign markets, including Hong Kong, Singapore, Mexico, Netherlands, Spain, Germany, Austria, and New Zealand, while also toning down the workforce. The 5-star analyst notes that the “newer restructuring initiatives” which the company is putting in place potentially offer a “pathway to right-sized ambitions and cost structure.”

For now, however, Wright has initiated coverage of SDC with an Equalweight (i.e., Hold) rating and a $2.30 price target. The analyst, therefore, expects the share price to stay rang-bound in the coming months. (To watch Wright’s track record, click here)

What does the rest of the Street make of SDC’s prospects? The outlook offers a bit of a contradiction; rating wise, most analysts agree with Wright; based on 7 Holds, 2 Sells, and 1 Hold, the stock has a Hold consensus rating. However, some believe the shares are significantly undervalued; as such, the $4.29 average price target suggests the stock will rise ~85% in the year ahead. (See SDC stock forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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