October 7, 2019 / 1:07 PM / 5 months ago

SmileDirectClub tumbles after IPO banks give thumbs up

(Reuters) - Several “buy” ratings from SmileDirectClub’s (SDC.O) IPO banks failed to stop its stock from dropping 5% on Monday, reflecting Wall Street’s deepened distaste for money-losing startups in the wake of WeWork’s botched attempt to go public.

David Katzman, CEO of SmileDirectClub stands with founders Jordan Katzman and Alex Fenkell as the company debuts its IPO at the Nasdaq MarketSite in New York, U.S. September 12, 2019. REUTERS/Lucas Jackson

Underwriters of SmileDirectClub’s Sept. 11 initial public offer, including JPMorgan, Bank of America Merrill Lynch and UBS, launched analyst coverage of the Nashville, Tennessee-based company, with all recommending investors buy the stock.

Most brokerages assigned price targets below SmileDirectClub’s $23 IPO price. Including Monday’s drop, SmileDirectClub has tumbled 40% from that level.

The company, which sells teeth aligners directly to customers, is among several large, money-losing startups whose IPOs this year have been received coolly by investors doubtful about their valuations and business models.

Last month, office-sharing startup WeWork’s parent company was forced to abandon its much-anticipated IPO due to skepticism about its burgeoning losses and corporate governance problems. Endeavor Group Holdings, the U.S. entertainment and talent agency company backed by Hollywood powerbroker Ari Emanuel, also pulled its listing plans.

J.P. Morgan was the most bullish of the new recommendations, with a price target of $31, while Credit Suisse was the least enthusiastic, with a target of $18. Shares traded at $13.95 in early afternoon on Monday.

Analysts at Credit Suisse said SmileDirectClub’s partnerships with drug retailers CVS Health Corp (CVS.N) and Walgreens Boots Alliance Inc (WBA.O) would allow it to expand its footprint.

J.P. Morgan analysts wrote that, “SmileDirectClub’s clear aligners and the direct-to-consumer business model the company employs solve many of the issues in the orthodontics market that have remained unaddressed for several decades – high costs and a significant time commitment.”

Unprofitable companies holding IPOs in 2019 have seen a median return of 0%, compared to a median stock increase of 6% for profitable companies since their IPOs, according to a Reuters analysis.

Uber Technologies (UBER.N), 2019’s most hotly anticipated public listing, has tumbled 32% since its May IPO. Most analysts covering Uber recommend buying its shares, according to Refinitiv.

Reporting by Noel Randewich in San Francisco and Akanksha Rana in Bengaluru; Editing by Nick Zieminski

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