SmileDirectClub's Woes Add to the Dismal IPO Class of 2019

For SmileDirectClub shareholders, there hasn’t been much to smile about lately.

Last month, the so-called teledentistry company went public, and got its proverbial teeth knocked in. It was one of the worst stock market debuts of the past decade.

Shares took another hit this week after California Governor Gavin Newsom signed a bill that would add more regulations to the emerging sector in the state. At the close of trade on Thursday, shares of SmileDirectClub—which provides direct-to-home teeth-straightening aligners—were trading at a new low of $9.41, down roughly 10% in the days since the bill was signed. The shares ticked down further in early trading on Friday.

But that’s only the most recent financial setback for a company valued at $8.9 billion.

Smile Direct Club has fallen 59.9% since its IPO on Sept. 12 when shares were offered for $23. It closed its first day of trading down 28% to finish at $16.67 and has been on a steady decline ever since.

SDC has the 11th-worst performance of any of the 120 IPOs that have been so far filed in 2019, according to IPOScoop. Wall Street remains high on the stock, despite its performance, with eight analysts issuing buy ratings as recently as the beginning of the month.

The company has yet to turn a profit with losses exceeding $52 million in the six months ending in June. That compares to a $33.8 million loss in the previous year, according to its prospectus. Yet, adjusted EBITDA has increased to roughly $2.3 million after sustaining losses of about $8.5 million during the same time.

“We are focused on the fundamentals of our business—sales, profits, and growth prospects. We are investing in innovation and international growth, and we remain obsessed with our club member experience. We have very strong unit economics, driven by our vertical integration, a large and growing omnichannel presence with 300+ SmileShops in 5 countries, and a web-based platform that drives 5 million unique visitors per month,” Kyle Wailes, chief financial officer of Smile Direct Club, wrote in an email to Fortune.

CEO James Gellert of RapidRatings thinks SDC’s tumble will correct itself in the longterm as long as the company finds a way to profitability. In a note to clients, hopefully, Credit Suisse figures it will be in the black at some point next year.

“Investors are, rightly, adjusting their perception of the company’s long-term prospects now that more information is available to them in the public markets,” Gellert said, via email.

Smile Direct Club is looking to avoid joining the list of companies in 2019 that have underwhelmed investors—think Uber, Peloton, Lyft—by leveraging its position in the untapped field of teledentistry.

The bill won’t jeopardize Smile Direct Club’s ability to do that in California, said Carrie Moore, public relations director for the company. However, it does add more barriers for residents of the state to seek care through more unconventional channels. “It stymies consumer choice,” she said.

The proposed regulations themselves are unusual. They were included in a bill originally intended to reauthorize the Dental Board of California to operate for another five years. Legislation with such specific standards for certain tests are uncommon, said Jessica Berg, dean of the law school at Case Western Reserve University, who specializes in health law.

“It can be fairly controversial for a government to regulate certain health care standards,” Berg said. “Leave it up to the professionals. The Legislature is usually not the best to deal with these things.”

SmileDirectClub’s Moore declined to comment on whether the state would require the company to add X-ray machines to any of its 37 physical locations. She did say the 3D images the company now uses should count under the bill’s requirements even though it’s still a “grey area” if they will or not. As part of the company’s treatment model, patients can also receive an at-home impressions kit that they send in.

Investors seemed to have been shaken by the new legislation, which would require orthodontic patients to get an X-ray before receiving care. The proposed regulations won’t take effect until after more public input has been heard on the topic—a conversation Moore said SDC is ready to be a part of after it called the bill a “thinly veiled attempt to protect traditional dentistry” with “unnecessary hurdles and costs to Californians that need care but struggle to afford it,” according to SDC’s statement on the bill, AB 1519.

The American Dental Association hailed the bill, the first of its kind in the nation, as a victory for consumers. It added legislators in Massachusetts have something similar in the works.

Gellert notes the recent legislation and Smile Direct Club’s performance may act as a deterrent for its competitors, like Candid, to go public in the future.

“Overall, private companies are realizing that the public markets have been reluctant to accept the high valuations of some of these recent IPOs,” Gellert wrote. “Because private capital is still abundant, these companies don’t need the public markets to finance themselves, which may lead to more and more companies deciding that it’s simply not worth it for them to list their shares at this time.”

All eyes will be on Nov. 12 when the company reports quarterly results for the first time. That’s when investors will get a clearer picture on how Smile Direct Club will deal with the California bill and see if there are early signs of profitability.