Several significant headwinds are affecting Align Technology (ALGN), none of which the global medical device company has control over. As a result, the company’s stock has been punished this past year, plummeting over 68% — but it won’t be cheap forever.
The growth potential of Align is massive, and the underlying business is performing better and better each year. So, why is it such a bargain? What are the red flags?
Before dropping a few thousand into this innovative company, here’s what to consider.
It has been a tough year for Align
Align Technology is a medical device company specializing in orthodontic and restorative treatment. Its flagship product, the Invisalign system, is trusted by approximately 13.4 million people worldwide and growing.
Despite growing its top line year-over-year, Align’s stock price dropped because of economic market disruption. Its Q2 earnings missed the mark, and the company ended up in the five worst-performing stocks in the S&P 500 in 2022.
Although the reasons for stock’s falling share price are complex, several major headwinds, including currency exchange rates and COVID restrictions, have been at play. Since much of the company’s revenue comes from international markets, sales collected in foreign currencies and converted to USD affect the company’s dollar-denominated revenues. For example, in Q2, the strong U.S. dollar negatively impacted the company’s revenue by $15.3 million.
Issues surrounding COVID are nothing new and have been a concern for Align since 2020. However, Align is tied to the Chinese market, which implemented a zero-COVID strategy earlier this year. Despite these concerns, Align’s 2021 revenue was up nearly 60%, hitting a record $4 billion.
The current inflationary environment is a serious headwind too, but some market observers, including famed Wharton Professor Jeremy Siegel, believe inflation is plateauing.
Align is a solid company that continues to grow
The risks discussed above are something to consider, but talk of Align’s demise is exaggerated. Currently, market and economic variables are driving down the price of this stock rather than issues surrounding Align’s business model or market share. Once these concerns subside, Align’s stock should rebound once again.
After all, the Invisalign system is widely regarded as the most advanced transparent aligner system in the world, offering a comparable function to braces. In 2021, Align held a 10% share of new patient orthodontics, with its revenue rising by 168% compared to the previous three years.
Align is anything but a one-trick pony. In addition to its unique aligner system, Align sells accessories, imaging devices, and software packages, accounting for 18% of its total revenue. The company has also barely scratched the surface of its large addressable market; Align believes that one-third of the market opportunity is in the Asia Pacific, yet only around 8% of Align’s revenue currently comes from China.
The gap is closing between Align and its competitors
Align’s biggest competitor, SmileDirectClub (SDC), is falling behind.
Unlike SmileDirectClub, patients fitted for Align’s clear aligners typically require in-office interactions. So, during COVID and the restrictions that followed, many thought SmileDirectClub would take a chunk out of Align’s market share. However, this wasn’t the case.
Although this isn’t a reason to automatically count out SmileDirectClub, particularly as it recently announced a manufacturing breakthrough, its company remains high risk. Bankruptcy is still a concern, and the company’s market cap is just under $400 million, compared to Align’s market cap of around $16 billion.
Nothing is a guarantee in the market. However, when comparing these two companies, Align is the clear winner. SmileDirectClub has struggled with negative margins and inconsistent revenue growth, whereas Align is positioned to experience substantial growth as it expands its market geographically.
Is now the time to buy shares of ALGN?
Align’s beaten-down stock is a bargain, but its current price does not reflect the company’s ability to execute its business model in the current competitive landscape. The factors influencing the stock’s current price will likely dissipate in the medium term, and when they do, those that bet on Align should be rewarded.
If you’re a long-term investor looking for a stock with high upside potential, consider ALGN. The average rating from Wall Street analysts is a Buy. And when we ran the numbers, we arrived at a fair market value of $320.67 per share, suggesting upside of 47.2% from current levels.