Stock Analysis & Ideas

Align Technologies (NASDAQ:ALGN): A Wide-Moat Innovator That Can Rise Again

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Align Technologies may be in a tough spot going into an economic downturn amid waning demand. That said, the firm’s growing moat and ability to take market share should not go underestimated.

Shares of aligner-based teeth-straightening service provider Align Technologies (ALGN) have suffered a horrific fall from grace. Undoubtedly, Align was one of the early pandemic darlings that surged into the sky too quickly. Investors got too euphoric in the back half of 2020 and 2021, and it did not end well, with most of the losses coming in 2022. Though Align stock is down and out, I view it as a company that can leverage innovation to find its footing again.

During the tech collapse of 2000, many startups and large-cap tech names were wiped out, but a few rose from the rubble. In the 2021-22 tech implosion, I think there will be far more companies that can rise from the ruins en route to new highs. Align seems to be one of the names that can begin rallying again now that the valuation is more than modest.

Despite the violent valuation reset, Align still faces an economic downturn that could weigh heavily on demand. Undoubtedly, aligner treatments are convenient, but they’re costly. As we enter a period of economic slowness, many are likely to delay Invisalign treatment or opt for cheaper alternatives, like those provided by rival firm Smile Direct Club (SDC), which has taken an even harder hit to the chin as a part of the latest tech meltdown, now off 93% from its peak to just $1 and change per share.

Though I view Align as having a competitive edge over its rivals, given its 3D-scanning tech and brand recognition, it’s hard to grapple with economic storm clouds. Big-ticket purchases, even those regarding health, are becoming increasingly difficult to justify. Despite the difficult road ahead, I think most of the damage has already been done. With a modest multiple, I am bullish on ALGN stock.

Align Stock’s Valuation Reset Seems Nearly Complete

Align Technologies stock should have never traded at more than a double-digit price-to-sales (P/S) multiple. While there are powerful technologies under the hood of the firm, it’s in the business of straightening teeth – not exactly an industry that should call for such a pie-in-the-sky multiple. With the stock at 4.9x sales and 31.8x trailing earnings, Align now potentially undervalued. The market could slow down in a recession. However, Align still has many days of high double-digit growth left in the tank.

With so much demand pulled forward in the early days of the pandemic, Align’s “hangover” could drag on for quite some time. Its latest quarter saw a 4% sales contraction year-over-year. Undoubtedly, the trend looks ugly at first glance. However, it is noteworthy that the second quarter was stacked up against an impossible-to-beat quarter a year prior.

The same quarter a year prior was riding on profound tailwinds, making the latest Q2 contraction less devastating than it seemed. Quarter-over-quarter, sales were relatively flat ($970 million versus $973 million in the last quarter).

As we move closer to an economic downturn, Align may be in for a few more quarters of negative growth. However, I do think the firm will be back to its growth days once economic conditions normalize.

Align’s Moat Could Get Wider With Time

Align Technologies may be a boring teeth-straightening company, but it’s a tech-savvy firm whose innovative capabilities are the source of its moat. Align was a first-mover in the transparent aligner market. Although competitors have jumped in, like Smile Direct, Align has done a relatively decent job of holding its own.

Sure, it’s less convenient to visit the dentist’s office for an introduction. However, I think Invisalign offers the absolute best service on the market. Further, its growing database of patient information could make it very hard for rivals to gain ground.

With more than 10 million treatments, Align has intriguing AI technologies that can help patients every step of the way. It may even be able to cut dentists and orthodontists out of the equation as its scanners and software improve with time.

While oversight-free aligners may still be many years away, I think Align’s on the right track. It may be a mistake to underestimate the power of Align’s data-driven technology, as reducing dentist and orthodontist involvement could be a significant boon on margins.

Is ALGN a Good Stock to Buy?

Turning to Wall Street, ALGN stock comes in as a Moderate Buy. Out of 11 analyst ratings, there are eight Buys, one Hold, and two Sells. The average Align Technologies price prediction is $336.55, implying upside potential of 33.4%. Analyst price targets range from a low of $235.00 per share to a high of $410.00 per share.

Conclusion: Align is Well-Positioned for Long-Term Growth

With a recession on the way, Align Technologies finds itself between a rock and a hard place, as its sales are now in contraction mode. After the big bust, though, could come the next cyclical upswing. The orthodontic market is still quite sizeable, and Align will continue improving its technologies in a way to capture more market share while improving margins in the process.

Looking way ahead into the future, I don’t think there’s a firm that can challenge Align – not with its massive, growing data sets and intriguing technologies that can effectively leverage such data.


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