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Every major analyst loves SmileDirectClub shares even after IPO tanks



Jordan Katzman, co-founder of SmileDirectClub Inc., center, and Alex Fenkell, co-founder of SmileDirectClub Inc., right, look at a monitor during the company’s initial public offering (IPO) at the Nasdaq MarketSite in New York, U.S., on Thursday, Sept. 12, 2019.

Bloomberg | Bloomberg | Getty Images

Wall Street loves SmileDirectClub but the stock’s performance is not something to smile about.

Eight major Wall Street firms initiated coverage of the newly-public teeth-straightening start-up on Monday with buy ratings and rave reviews, despite the stock’s poor debut.

“We are bullish on the story and see a long runway of continued strong sales growth as the company is poised to benefit from a leadership position in a vastly underpenetrated TAM (total addressable market),” said Bank of America’s Michael Ryskin in a note to clients. The firm has a $19 price target on SmileDirectClub.

Shares of SmileDirectClub are down 36% since its initial public offering last month, after tanking 28% on its first day of trading. The online dentistry company’s ranks as the fifth worst debut of the 123 companies to go public this year. UBS said the stock’s recent underperformance spurs from concerns about third-quarter operational issues impacting revenue growth and new regulatory risks in California weighing on sentiment.

“When the company reports 3Q earnings on November 12th, we believe we will get visibility on growth when management can explain the magnitude and duration of the issues,” said UBS analyst Kevin Caliendo.

There is a blackout window following IPOs where major analysts from underwriting firms restrain from writing about the new stocks as to not appear hyping up the shares. It goes back to the rules put in place to create a separation of the investment banking and research units. Now that the blackout is over, analysts are free to write what they want about SmileDirect, though skeptics will say the analysts are still just trying to support shares brought public by their firms.

Profitability woes

The start-up, founded in 2014, sells teeth aligners directly to consumers on its website and in its “SmileShops” starting at $1,895 for a two-year plan. SmileDirectClub shares will open at $14.72 on Monday but Wall Street set price targets for the company from $18 to $31 per share.

“SmileDirectClub’s clear aligners and the DTC 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,” said J.P. Morgan’s Robbie Marcus in a note to clients. The firm has a $31 price target on the stock, the highest on the Street.

While firm’s are betting on SmileDirectClub for its dominant position in an untapped market, SmileDirectClub is not yet profitable. The company posted a net loss of $74.8 million last year, more than double the net loss of $32.78 million in 2017, according to its prospectus.

Credit Suisse estimates the company can reach profitability by 2020, the firm’s research analysts Erin Wilson Wright said in a note to clients.

Wall Street is also betting big on SmileDirectClub’s growth potential. UBS forecasts 50% compound annual revenue growth by 2023.

“We think the US alone could be a $70B market opportunity for SDC,” Caliendo said.

Guggenheim named the stock a Best Idea as the company is in its “early innings of growth, disrupting the traditional orthodontics market by providing a cheaper, more aesthetically pleasing alternative to brackets and wires,” said the firm’s analyst Glen Santangelo in a note to clients.

Shares of SmileDirectClub fell 1.5% on Monday. 

— with reporting from CNBC’s Michael Bloom.

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Digital bank Chime goes dark for millions of customers




Chris Britt, CEO, Chime

Source: Chime

Chime, the leading branchless bank in the U.S., is in the midst of a service outage that has left millions of customers without access to their accounts.

Issues cropped up Wednesday, leaving users stranded at restaurants, parking garages and gas stations, unable to use their debit cards or pay their bills, according to interviews and complaints posted to the bank’s Twitter account.

Card transactions and ATM withdrawals have since been restored, and employer deposits are posting, Chime said Thursday in a statement. But the main touchpoint for Chime’s 5 million users – its mobile app and website – is still down after more than 24 hours.

“I completely acknowledge the fact that we feel like we let” users down, Chime CEO Chris Britt said in a telephone interview. “One of our core values is being member obsessed. Our customers love being connected, they want to know what their balances are in real time. And when people don’t have access to the app, we understand how incredibly frustrating that is.”

The outage, reportedly Chime’s third since July, comes at a sensitive time for the San Francisco start-up.

Chime has been experiencing torrid growth lately, going from 1 million users in mid-2018 to more than 5 million this year. That has put the firm in the vanguard of an industry that is beginning to take off in the U.S. after the rise of so-called challenger banks in the U.K. and Europe. Chime was in the process of raising new funding from investors at a valuation of at least $5 billion, Axios reported earlier this month.

Taking advantage of frustration among bank customers, it has lured users with the promise of zero fees, a two-day advance on paychecks and a seamless experience.

But the thesis of Chime and other startups has been that physical branches were an unnecessary relic of the days when banks gave customers free toasters with new checking accounts. Now, customers are beginning to question whether that thesis rings true anymore.

“I can’t access anything; if I wanted to transfer money out of my savings account, how am I supposed to do that?” said Bruce Banko, who works in customer support in St. Petersburg, Florida. “I tried calling them but I couldn’t get through.”

Banko sent this screenshot of his Chime mobile app:

It’s unclear if the outage will impact Chime’s valuation, and Britt declined to comment on anything to do with his bank’s fundraising effort.

The outage was caused by an issue with the database of payment processor Galileo, according to people with knowledge of the matter. The Salt Lake City, Utah-based software company said it began experiencing an “operational incident” on Tuesday affecting its ability to “support transactions for a small number of our clients and their customers.”

“We are actively working to restore full mobile application functionality, which is currently unavailable or slow to respond,” Galileo said in a statement. “We are committed to actively resolving the situation and returning to normal operations as quickly as possible.”

Galileo announced a $77 million funding round on Thursday, led by Accel. The company connects banks to credit card processors through APIs, and counts Robinhood, Monzo, Revolut, Varo and TransferWise as customers.

Hardest hit

While Galileo serves a constellation of fintech firms, it appears that Chime has been impacted the most. That calls into question the robustness of the firm’s technology stack, or perhaps its reliance on vendors.

Galileo customer Revolut said that “no services were affected”. Varo, another client, said it “experienced a minor disruption in processing” but that these issues are now mostly resolved. Monzo and Transferwise did not immediately respond to CNBC’s request for comment.

Many challenger banks lean on third parties to connect to a payment network. It reduces the complexity of integrating directly with a company like Visa or Mastercard. But that can come with issues around downtime and outages.

“If this third party goes down, then to the user of the app, in this case Chime, the card no longer works,” said Simon Taylor, head of venture at fintech consulting group 11FS. “As companies like Chime hit scale we’re likely to see these outages become more common.”

Service outages were especially common two years ago in the U.K., where challenger banks like Monzo and Revolut gained popularity after the financial crisis. Those outages eventually caused fintech companies to take their payment processing in house, according to Taylor.

Chime and many of its digital banking peers partner with FDIC-insured banks instead of getting a banking license themselves. It’s a popular set up for fintech companies: The banks handle the federally regulated side while start-ups focus on their users’ experience. Chime works with Bancorp Bank, and earns revenue from debit card transaction fees paid by merchants.

‘We feel horrible’

Digital-first “challenger banks” like Chime are the fastest-growing group among financial technology startups. In the second quarter alone, the cohort raised $649 million across 17 venture capital deals, according to the data firm. Funding for Chime and other start-up banks like Monzo and Revolut has eclipsed last year’s record of $2.3 billion.

Britt, Chime’s CEO, declined to say when his service would be back up.

“We’re still working towards bringing full functionality on the app,” he said. “We don’t take any of this lightly. We feel horrible about the experience our members had.”

“My cell phone bill was supposed to deduct from my Chime account yesterday,” Rion Barnes, a contract lawyer living outside Atlanta, Georgia, told CNBC. “I got a notice from my cell phone provider that I need to pay it, otherwise they’ll shut down my account.”

Barnes, who also has a SunTrust account, said that even after Chime restores its service, she has soured on the bank.

“I’m taking my money out,” she said, “and putting it back into in my other account.”

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Surging SUV demand is canceling out the environmental benefit from electric cars




A woman fuels her SUV at an Exxon Mobile gas station in Chicago.

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If worldwide demand for SUVs continues to grow at its current pace, the carbon emissions from these larger vehicles will outweigh the benefits from electric vehicles, a new study from the International Energy Agency found.

The number of SUVs on the road around the world grew from 35 million in 2010 to over 200 million last year, representing 60% of the increase in the global car fleet over the 8-year period.

The surge in popularity is having a big impact on the environment since SUVs are less fuel-efficient than their smaller counterparts.

From 2010 – 2018, SUVs were the second-largest contributor to the global increase in carbon emissions behind the power sector, the study found. This places SUVs ahead of trucks and aviation in terms of carbon footprint. The study also found that 100% of the increase in demand for oil for passenger cars was driven by the popularity of larger vehicles.

“If consumers’ appetite for SUVs continues to grow at a similar pace seen in the last decade, SUVs would add nearly 2 million barrels a day in global oil demand by 2040, offsetting the savings from nearly 150 million electric cars,” the researchers found.

48% of car sales in the United States last year were SUVs, which was the highest percentage worldwide, but other countries are catching up. Large cars can be seen as a status symbol, and sales are rising in countries like China and India where the middle class is growing.

The shift towards bigger, less fuel-efficient cars is somewhat at odds with the auto market generally, where heavy R&D spending is fueling developments in energy-efficient vehicles.

Given the advances in electric vehicles, as well as the knowledge that SUVs are less fuel-efficient, the researchers called the growing number of larger cars and the impact on global emissions “nothing short of surprising.”

WATCH: Why station wagons are much more popular in Europe

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China’s pork shortage could give US farmers a chance to cash in




Pigs raised by farmers are seen at Linquan county on December 5, 2018 in Fuyang, Anhui Province of China.

Visual China Group | Getty Images

BEIJING — China needs more pork imports than ever as the country grapples with an outbreak of a swine disease — and that could become a business opportunity for U.S. farmers if the two countries can reach an agreement on trade.

African swine fever hit Chinese pig farms last year, causing a severe shortage in the meat that is a staple for hundreds of millions of Chinese households.

Prices have nearly doubled, and publicly available data indicate China’s production of pork this year will likely fall a few million tons short of demand.

In December, a kilogram of pork cost about 22.50 yuan, or $1.46 a pound, according to Beijing-based BRIC-Agri Info. By last week, a kilogram of pork had jumped to 42.46 yuan, or $2.75 a pound, according to figures released by the Ministry of Commerce.

At the same time, one of the U.S. demands in ongoing trade negotiations is that China purchases billions of dollars’ worth of American farm products. At the conclusion of the latest round of trade talks last week, U.S. President Donald Trump said China agreed to a “very substantial phase one deal” that includes purchases of about $40 billion to $50 billion American agricultural products. Beijing has yet to publicly confirm the figure.

China to buy US farm products

The phased aspect of the deal is encouraging to the Chinese side, said He Weiwen, executive council member of the China Association of International Trade, which comes under the leadership of the Ministry of Commerce.

According to a CNBC translation of his Mandarin-language remarks, He said the Chinese will show their sincerity by increasing purchases of American agricultural products.

However, there’s a catch. It’s become increasingly clear that Beijing would like to push the U.S. to remove the tariffs it’s applied on billions of dollars’ worth of Chinese goods.

“If China has promised to buy agricultural products, but the U.S. only delays the additional tariffs instead of lifting them, then it doesn’t make much sense to China,“ He said. “This is the crucial point.”

On Thursday, China’s Ministry of Commerce spokesperson Gao Feng emphasized that Beijing would like the U.S. to cancel all additional tariffs in order to reach a final deal on trade. Gao noted that Chinese companies are increasing their purchases of American agricultural products according to market needs and market-based principles, and that the two trade delegations remain in communication with hope of reaching a phased agreement as soon as possible.

“I think there will be talk for more pork purchase,” He said earlier in the week, noting he does not speak on behalf of the Chinese government. “China’s soybean shortage is not that big. China can cope with it by adjusting feed formula.”

Soybeans are used as animal feed in China and a shrinking pig herd is dampening demand for the oilseed.

China’s import of US pork

U.S. pork accounted for about 14% of Chinese imports of the meat in 2017, about the same as the year before, according to CNBC analysis of Chinese customs data complied by BRIC Agri-Info Group.

That proportion dropped to 8% in 2018 as trade tensions escalated, falling as low as 2% in the fourth quarter of last year, the analysis showed. As of May 2019, the data showed U.S. pork recovered a market share of about 8%, still far short of pre-trade war levels.

US market share of China pork imports, % by year

Source: BRIC Agri-Info, China Customs

That gap potentially creates an opportunity for American farmers, such as those from the nation’s largest pork producing state of Iowa.

Pork prices to remain high for now

China’s pork shortage will likely persist for at least a few months, if not longer. On Thursday, China’s Ministry of Agriculture and Rural Affairs said that it expected pork prices to remain at a high level through the New Year holiday and China’s Spring Festival in late January 2020, according to a press conference transcript from financial database Wind Info.

Authorities have also released pork from national reserves in an effort to ease the shortage.

Chris Rogers, research analyst at supply chain data company Panjiva, also pointed out that Chinese imports of U.S. agricultural goods covered by retaliatory duties climbed 317% year-on-year to $8.3 billion in August. “(The rise) suggests Chinese purchases are already being increased aggressively even before the new deal has been signed,” Rogers said.

However, it’s not a given that China’s increased need for pork will result in more purchases from the U.S.

“China will import from all its trade suppliers, including the U.S., but the American price has to be competitive as well,” He said. “There have been cases where the transaction price did not have market competitiveness and the company had to drop the purchase.”

Chinese pork producers such as Muyuan have also seen their share prices soar as traders bet on greater profits.

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